In the face of persistent losses Swiss has finally agreed to an offer from Lufthansa, in an acquisition which will, however, see the airline retain a separate identinty within the group.
Swiss management and the bulk of its shareholders agreed to Lufthansa's buy-out proposals at the end of March. The integration, echoing that of the KLM-Air France merger, appears to leave Swiss with a separate brand and own management team as well as the promise of a continued hub presence in Zurich. However, the two airlines also talk of seeking "significant" synergies on revenue and cost amounting to an estimated annual benefit of around €160 million ($210) from 2007.
"This is a good deal for Lufthansa if they get it at the price they want with some of the debt absorbed by the Swiss government," says Nick van den Brul, analyst at Exane BNP Paribas, giving initial reaction to the announcement that a deal was to be struck. He estimates that Swiss is carrying net debt of SFr594 million and an exposure to operating leases of some SFr630 million.
That debt is expected to be a point of negotiation with the government and corporate investors, who hold the bulk of Swiss stock. Lufthansa will now also make an offer to buy the remaining 14% of publicly floated shares. Based on the average share price, analysts estimate that this would cost around SFr70 million ($60 million), nominally pricing the company at SFr500 million.
Credit rating agency Moody's warns that it is likely to move to a formal review of Lufthansa's ratings "with possible negative consequences" given the "slow progress" that Swiss has been making in returning to profitability.
Andrew Lobbenberg, analyst at ABN-Amro, points to the strength the deal would give Lufthansa in central Europe. Access to the strong Swiss business market is also attractive for the German carrier. Lobbenberg says that the move may prompt British Airways to review its strategy in central Europe. A proposed tie-up between BA and Swiss fell apart last year after the latter balked at the prospect of giving BA access to its frequent flyers.
The regulatory price of any Lufthansa/Swiss deal is still unclear, although Brussels has made clear that it supports the principle of consolidation in the European airline sector.
The purchase would see Lufthansa managing three separate hubs, Frankfurt, Munich and Zurich, with Star Alliance partner Austrian Airlines not far away in Vienna. However, van den Brul does not think that a significant downgrading of Zurich's hub status is on the cards. "I think they will rationalise the short-haul side of things and tighten up the feeder network," he says, adding that as well as gaining improved access to the wealthy Swiss market, Lufthansa will be in a much better position to tap into the lucrative North Italian market. Lufthansa already has feed from regional carrier Air Dolomiti in this market, but van den Brul says that the latter could also serve Zurich.
Swiss has struggled to map out a long-term survival strategy since being launched in early 2002 from the ashes of the defunct Swissair with large amounts of state aid. The state and Zurich local authorities hold 50% of Swiss shares, with 36% held by institutional investors and 14% in free float.
COLIN BAKER LONDON
Source: Airline Business
