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Lufthansa to Deepen Turkish Tie-Up as Rivals Look East

November 05, 2012

Lufthansa May Try to Deepen Turkish Tie-Up as Rivals Look East

Cologne-based Lufthansa has climbed 34 percent this year, valuing the company at 5.65 billion euros ($7.2 billion). Photographer: Hannelore Foerster/Bloomberg

Deutsche Lufthansa AG (LHA) may seek deeper ties with Turkish Airlines to thwart competition from Gulf rivals and match European peers that already have Mideast partnerships, analysts said after Turkish media reports of talks on a merger.

A full combination could be complicated by European Union rules on ownership and wouldn’t be logical for rapidly growing Turk Hava Yollari (THYAO), as the Turkish carrier is formally known, said Yan Derocles, an analyst at Oddo & Cie in Paris.

Turkish Prime Minister Recep Tayyip Erdogan said he favored a tighter relationship between the Star Alliance members, state- owned Anatolia news agency reported Nov. 3. The two companies may secure a deeper partnership by buying shares in one another, Financial Times Deutschland reported today.

“A merger would be nonsense for Turkish right now,” said Derocles, who has a “neutral” rating on Lufthansa, Europe’s No. 2 airline. “A strong code-share makes strategic sense.” Code-sharing allows airlines to sell tickets on each other’s flights on chosen routes.

Turkish Airlines, a Star Alliance member since 2008, already attaches its code to Lufthansa services to North America, while the German carrier adds its flight number to THY services to the Middle East. Further scope for cooperation might include operations to Asia.

Competitors’ Deals

Air France-KLM Group last month agreed to code-share with Abu Dhabi’s Etihad Airways, while Qatar Airways Ltd. aims to join International Consolidated Airlines Group SA (IAG)’s Oneworld alliance within 18 months.

Turkish Airlines -- which is 49 percent owned by the Turkish state, according to data compiled by Bloomberg -- gained 2.6 percent to 4.29 lira. The stock has doubled this year, valuing the Istanbul-based company at 5.1 billion liras ($2.9 billion).

Cologne-based Lufthansa fell 0.9 percent to 12.19 euros. It has gained 33 percent this year for a value of 5.6 billion euros ($7.2 billion).

German Chancellor Angela Merkel suggested bringing Lufthansa and Turkish closer together when Erdogan visited Germany last week, according to Anatolia.

“During our Germany trip, Merkel offered me this: ‘Let’s get Lufthansa and Turkish Airlines into joint operation,” the premier was quoted as saying by Anatolia. “I said: ‘OK. This is already among our projects and God willing our Turkish Airlines and Lufthansa can take a joint step like that.’”

Smaller Acquisitions

Speaking in Turkish, Erdogan used the word “isletmecilik” to refer to the joint project, which can be translated as either “management” or “operation.” Two Turkish newspapers, Haberturk and Sabah, reported yesterday that a merger between the two airlines is under consideration.

Unlike its competitors, Lufthansa has focused on buying smaller carriers in the past rather than pursuing a merger with a peer. While British Airways merged with Iberia to form IAG in January last year and Air France fused with the Netherlands’ KLM in 2004, Lufthansa has added Swiss International Airlines, Austrian Airlines and BMI -- which it sold this year -- plus stakes in Brussels Airlines and JetBlue Airways Corp. (JBLU:US)

The 86-year-old company spent $7.29 billion on acquisitions in the past decade, according to data compiled by Bloomberg. That compares with $7.26 billion at Air France, the region’s biggest carrier, and $3.6 billion at IAG, the No. 3.

‘Constant Dialogue’

“They are perceived to be somewhat vulnerable to Middle Eastern traffic flows,” Stephen Furlong, an analyst at Dublin- based Davy Holdings, said yesterday. “A deal with Turkish would take a lot of the negatives against Lufthansa off the table.”

Lufthansa and Turkish are discussing cross shareholdings as part of a deeper cooperation, including additional joint ventures, Financial Times Deutschland reported, citing unidentified company officials. A quick resolution of the talks isn’t expected, the paper said.

Lufthansa reiterated its stance that it is in “constant dialogue” with Turkish Airlines to improve and intensify co- operation, Frankfurt-based spokesman Christoph Meier said today.

Turkish Air Chief Executive Officer Temel Kotil said in an e-mail yesterday: “We have a cooperation standing for years with Lufthansa, and we are working on ways to find how we can better serve our passengers, and we are in constant communication on how to develop these.”

Falling Profits

Oneworld’s welcoming of Qatar to the alliance came one month after Qantas Airways Ltd. (QAN) said it would quit a 17-year partnership with British Airways in favor of an accord with Dubai-based Emirates, the biggest Middle Eastern carrier.

Qantas and Emirates, the largest and third-largest by passenger numbers on routes from Australia, intend to coordinate pricing, sales and scheduling. They will also align frequent- flier programs, allowing passengers to earn points on both carriers’ flights. Neither company will buy equity in the other under the deal, which requires regulatory approval.

The Oct. 8 agreement between Etihad, the Gulf No. 3, and Air France is intended to be the first phase of a “much larger strategic partnership,” Etihad said at the time.

Qatar CEO Akbar Al Baker said Oct. 18 that the third- largest Gulf carrier would have considered joining Lufthansa’s Star Alliance over Oneworld if the German company hadn’t proven so hostile to the growth of Mideast airlines. “They have lost in this very lucrative alliance chess game,” he added.

Lufthansa CEO Christoph Franz said March 15 that he was “very concerned” about the ascent of Gulf carriers. “They are serving the strategic goals of the Gulf states, namely the displacement of European air transport hubs into the Middle East, 40 kilometers from the Iranian border,” he said. “We must stand up for our European interests more forcefully.”

Turkish Airlines and Lufthansa both have access to large home populations, differentiating them from Gulf carriers that largely depend on passengers who switch planes at their hubs while en route between other countries.

To contact the reporters on this story: Alex Webb in Frankfurt at awebb25@bloomberg.net; Ercan Ersoy in Istanbul at eersoy@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net


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