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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