Airline Anschluss

In my view, there are few carriers that can compare to Lufthansa for both strategic vision and execution. Their move to acquire the Austrian Group is just another in a series of decisions that demonstrating this strength. Unfortunately for Lufthansa something went a little amiss in this latest anschluss, but we do not think it is irreparable.

Ripe for Takeovers; but who can spare the cash?

Everyday more and more carriers are seeking shelter from the stormy marketplace through alliances, investment, and mergers. In just the past few months alone we have witnessed Ryanair’s hostile attempt to takeover Aer Lingus, as well as Italy’s new “Alitalia” emerge from a massive state-sponsored bailout. There has also been unprecedented consolidation in the Russian markets.

What is the source of Lufthansa’s Strength?

While certainly not a secret, Lufthansa goes about its business in such a way as to not court attention. While there has been some negative news for the Lufthansa Group, particularly in terms of their Cargo operations, they are still posting overall respectable €599 M profit today for the combined group which includes wholly owned SWISS, and Germanwings. Have a look at just how diverse the Lufthansa holdings really are.  (Please note, this opens a new window to the Lufthansa site, and the source file is in German- but you can get the idea.)

In February, Lufthansa made public its intention to add struggling carrier Austrian to its portfolio of fully owned subsidiaries. During the months of failed bids which included Russia’s S7, as well as several Gulf funds, Lufthansa carefully put together a deal to see that the integration of Austrian would success

What is wrong at Austrian and how does it affect the consumer?

Austrian suffered from the credit crunch much like any other carrier, and their latest strategy to expand their focus on long-haul connecting traffic did not get them either the load factors or yields that they had hoped for. After months of offers and due-diligence from an array of suitors, nothing materialised other than the deal from Lufthansa who are now offering €4.49 a share.

Even Austrian’s COO has gone on record as saying “the global economic crisis has now reached all markets, demand is collapsing and the outlook offers very little reason to be optimistic. We will continue as an airline, but not independently.” Now Austria’s State Holding Company obtained permission from the EC to keep the airline with a bridging loan flying while the deal with Lufthansa is being finalised.

From our view the integration of Lufthansa and Austrian makes sense. It has a complementary fleet type, the cultural ties are obvious, and Austria as a nation needs a carrier with a more diverse network of connections. Have you ever tried to fly from London to Salzburg? Your choices are fairly limited.

So what went wrong in Europe?

Enter stage right the cries of “foul state support and aid” from SkyTeam carriers who filed a motion with the European Commission to investigate the possibility that this deal could violate laws prevented so called “state support”. Where were these carriers when Italy’s Prime Minister was re-writing Italian Bankruptcy Code and making back end deals that resulted in the Italian State owning all of Alitalia’s debt, while it continues flying? Oh wait, Alitalia was one of SkyTeam’s very own.

Where are we now?

What we have now is a 200M Euro bridging loan that is keeping Austrian afloat, as the immediately slash costs and cut capacity while the issue of Lufthansa and Austrians tie-up is finalised by EU officials. In the meantime, SAS is looking to sell its stake in British Midland (bmi) along with their other holdings such as Spanair in a fight to get cash. Who might be the prime buyer for the bmi shares? I would think Lufthansa would have an interest.

One has to stand in awe of the Lufthansa strategic ability to position themselves in a weak market. From their negotiating majority ownership of British Midland (bmi) to their new investment in Lufthansa Italia the carrier has a strong strategic portfolio that is likely to pay off in the long term. They possess the diversity and required cash to survive this current economic downturn.

TWC’s Carter Stewart says, “If I were playing cards with Lufthansa I would be very conservative. We all know that Lufthansa is holding a winning hand, and unlike most carriers today they have the cash to make the bet. The question for all of us is how and when they are going to play it.”

In our next installment

In our next blog we will have a look at what we think the “Fantasy Playbook” for Lufthansa’s bmi holding could be.