For $300 million, Lufthansa takes a 19% stake in the budget carrier—a puzzling investment, save for future U.S. growth opportunities
In a peculiar lifeline from across the Atlantic, Deutsche Lufthansa (DLAKY) is becoming a minority shareholder of cheap-chic JetBlue Airways (JBLU). For JetBlue, the advantage is obvious: $300 million goes a long way for a penny-pinching company facing the same dreary financial landscape as its domestic rivals.
But for Lufthansa, which approached Queens (N.Y.)-based JetBlue about such an investment, the benefits are less immediately apparent. It is paying a 16% premium, $7.27 a share, to the Dec. 12 market price for a 19% stake and will get a board seat. The news sent JetBlue shares soaring 14%, to close at $7.15 on Dec. 13.
What's in It for the Germans?
"It's not clear to us what Lufthansa gains from such a transaction," Morgan Stanley (MS) analyst William Greene wrote in a client note, according to the Associated Press. JetBlue also has $433 million in current debt payable, Greene said, with few options for meeting that from current cash flow. "From our perspective…this investment from Lufthansa improves our balance sheet and increases our financial flexibility moving into next year," JetBlue spokesman Bryan Baldwin said, adding that "this is not something we pursued in response to any perceived liquidity issues."
Much is up in the air in the airline industry these days. Many insiders feel a consolidation wave is coming that will result in mergers among the largest U.S. carriers. Overseas airlines continue to plot their expansion into the U.S., in anticipation of the lifting of restrictions on transatlantic flights in April. What's more, JetBlue shares are down nearly 50% from their 52-week high, making the investment far cheaper and more attractive. "This investment presents Lufthansa with a compelling opportunity to invest in the U.S. point-to-point carrier market as the industry continues to evolve," Lufthansa Chairman and Chief Executive Wolfgang Mayrhuber said in a statement.
Possible Access to JFK
To advance its prospects, Lufthansa would like to boost its U.S. feed traffic into John F. Kennedy International Airport, JetBlue's primary hub, and it faces limited opportunity to do so with its current U.S. partners in the Star Alliance, United (UAUA) and US Airways (LCC). By contrast, JetBlue handles about 29% of the traffic at JFK, more than American Airlines (AMR) and Delta Air Lines (DAL). "Whether there's potential for something beyond a financial partnership going forward, that's certainly something we'd be interested in exploring," Baldwin said.
Meanwhile, the Bush Administration and federal regulators are working on new rules for reducing the overscheduling at major airports such as JFK that led to record flight delays this year. Those changes—which could involve auctioning off landing rights at the most overcrowded airports—could be announced as early as next week. Federal regulators have also mulled whether JFK needs to have the number of flights capped in certain periods to help fix airline traffic flow. If such caps were imposed, in theory JetBlue would be able to sell some of its slots at the airport.
JetBlue already had been discussing a business alliance with Irish air carrier Aer Lingus (AERL). JetBlue also is rumored to be a target of Delta, which has emerged from bankruptcy with an interest in finding a merger partner. In a conference call with analysts on Dec. 13, JetBlue CEO Dave Barger emphasized on several occasions that the Lufthansa deal was just a financial investment for now and did not constitute any kind of strategic alliance in terms of passenger sharing.
He said JetBlue had been considering a number of options for raising capital. Lufthansa approached him late last summer and a deal was worked out. The German company will nominate one board member when the deal closes in next year's first quarter. Present ownership restrictions limit foreign carriers to no more than 25% of the voting stock of a U.S. airline. Barger said he does not expect challenges to the deal from the Transportation Dept. or the Justice Dept.
Asked by one analyst if the deal could be seen as an opportunity for Lufthansa to utilize a new terminal JetBlue is opening next fall at capacity-squeezed JFK, Barger said it was not, since the new terminal could not accommodate the widebodied aircraft Lufthansa uses for its transatlantic flights. "Our goal is still organic growth," he said. Lufthansa is part of the Star Alliance, a consortium of 19 airlines that share passengers. Barger declined to comment on how Lufthansa's investment in a fast-growing, discount airline will play with the German company's U.S. alliance partners.
JetBlue, the onetime industry darling, took a public-relations beating earlier this year after operational snafus left passengers stranded in February, 2007. Company founder David Neeleman was forced to step down as chief executive. As evidenced by the stock market's positive reaction, the deal gives psychological support to a still battered JetBlue. That was something Barger did not dispute. "I look at Lufthansa just as a really smart investor," he told analysts. "What a huge affirmation…of JetBlue."