German carrier Deutsche Lufthansa AG is doubling down on a
strategy of improving its prospects through growth at budget unit
Eurowings by adding rented planes from rival Air Berlin PLC and
moving ahead with the takeover of Brussels Airlines.
The board of Germany's largest airline approved the purchase of
the 55% of Brussels Airlines parent SN Airholding it doesn't
already own, the company said in a statement Wednesday. Lufthansa,
which for years has had a call option for the shares, has said it
would make Brussels Airlines part of the Eurowings unit which
operates intra-Europe and intercontinental routes.
Lufthansa also signed an agreement with Air Berlin to lease 40
Airbus Group SE A320 single-aisle planes from struggling Air Berlin
to bolster Eurowings as it tries keep rivals such as Ryanair
Holdings PLC at bay.
Brussels Airlines brings with it an attractive network of
linking Europe with Africa and intra-European routes. Still, the
airline suffered years of losses that led to deep restructuring of
its operations in recent years.
Lufthansa said it expects the transaction to be concluded early
next year, though details of how the call option will be exercised
still need to be negotiated with SN Airholding. Financial details
of the deal will be disclosed at this time, the airline said.
When the German flag carrier bought the initial stake in 2008,
the two sides agreed the purchase of the rest would cost no more
than 250 million euros ($280 million).
The takeover marks a rare occasion for consolidation among
European airlines. The market remains highly fractured,
contributing to a sharp drop in ticket prices this year to the
benefit of consumers but detriment of airline investors.
Consolidation has been hobbled also by ownership rules, which block
foreign takeovers of European Union carriers.
British Airways parent International Consolidated Airlines Group
SA Wednesday said it would deepen cooperation with state-owned
Qatar Airways, the largest shareholder in the European airline
group. British Airways and Qatar Airways are establishing a joint
business agreement to coordinate flight schedules and pricing. The
arrangement aims to generate some of the benefits a merger would
deliver.
Airline executives have said the steep drop in airline share
prices in Europe after terrorist attacks and in the wake of the
U.K. vote to leave the European Union could make more deals
likely.
Brussels Airlines dates back to 2002, when a group of 40
investors decided to revive a national airline a year after its
forebear, Sabena, went bust.
Brussels Airlines suffered a major setback with the March
terrorist attacks in the Belgian capital, which included an attack
on its Brussels Airport hub, shuttering the facility for days. The
airline had to scramble to make alternative arrangements, including
quickly resuming operations from other Belgian airports.
In the aftermath, Lufthansa and Brussels Airlines agreed to
delay action on the takeover to allow the Belgian carrier to focus
on recovering from the tragedy.
The dual transactions come at a difficult time for Lufthansa.
The carrier issued a profit warning in July. This month, Standard
& Poor's cut the carrier's debt outlook to "negative" from
"stable" while retaining the "BBB-" long-term debt rating, or one
notch above noninvestment grade. S&P said it could cut
Lufthansa's outlook in the next one to two years, citing the
challenging business environment and mounting pension deficit.
The moves allow Lufthansa to expand Eurowings more aggressively
than it could otherwise do, said Jonathan Wober, chief financial
analyst at the Centre for Aviation. However, he said, "it does
raise questions about the Eurowings business model and cost base"
since neither Brussels Airlines nor Air Berlin have costs that can
compete with Ryanair or easyJet PLC, Europe's second largest budget
carrier.
Five of the Air Berlin planes will also support Lufthansa's
Austrian Airlines unit. Lufthansa said it expected a final
agreement on the deal, which requires board and regulatory
approvals, before year end. Air Berlin would begin providing the
plane service for the summer season that begins in March.
For Air Berlin, Germany's second largest airline, the decision
to provide planes along with crew for six years to its arch rival
marks a big retreat. The airline also announced plans to cut 1,200
jobs as it focuses on becoming a network carrier with long-haul
flights from its Berlin and Dusseldorf hubs.
Air Berlin said it would evaluate strategic options for its
tourist focused operations.
Years of losses and failed restructuring efforts have left Air
Berlin debt ridden. Net debt at the end of June was €927 million.
Even as other European airlines turned a period of low fuel prices
into healthy profits, Air Berlin continued to lose money.
Air Berlin had tried but failed to make a success out of mixing
intra-European budget service, charter operations, and long-haul
flying. It accumulated 1.2 billion euros in losses since 2012. In
the second quarter when airlines generally make profits, the
airline's loss widened to €89.1 million from €37.5 million in the
year prior.
State owned Etihad Airways PJSC, which owns 29.21% of Air
Berlin, has repeatedly pumped money into the German airline to keep
it afloat. It bought the majority of Air Berlin's loyalty program
almost four years ago and, in 2014, injected another 300 million
euros through a convertible bond.
Write to Robert Wall at robert.wall@wsj.com
(END) Dow Jones Newswires
September 28, 2016 15:35 ET (19:35 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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