Lufthansa has signalled that its strategic outlook has shifted to its Central Europe heartland as it puts its 30% stake in UK-based bmi in the shop window and completes the takeover of Swiss.
Speaking at the airline's annual general meeting in Frankfurt in early April, Lufthansa management made clear they are open to offers for bmi, which has widely been seen as a stalking horse for future transatlantic London Heathrow operations for the German carrier.
"We have often said that we are not satisfied with the economic results at bmi," said Lufthansa's chief financial officer Dr Karl-Ludwig Kley. "Results have to be improved. If we get an offer at a very high price we will sell."
Chief executive Wolfgang Mayrhuber added: "You know how valuable Heathrow slots are. If something comes up, we never say no." Kley says that bmi made a negative contribution of €4 million ($5.2 million) to Lufthansa's 2004 result, but this does not include losses from the struggling joint venture involving the two airlines and SAS covering routes from the UK to Germany, Scandinavia and some other European destinations. SAS has also made clear that it would not be adverse to offloading its 20% stake in bmi.
Virgin Atlantic, meanwhile, has made no secret of its interest in buying bmi, which could provide feed for its own Heathrow operation. Virgin Atlantic chief executive Steve Ridgeway said in April that a bmi tie-up "would be logical".
Lufthansa's immediate focus is with Swiss, now that it has agreed to buy the ailing carrier in a convoluted takeover. The complex Swiss shareholder structure, the need to satisfy competition authorities and the burden of renegotiating international traffic rights complicate the transaction.
The Swiss government and corporate shareholders are putting their shares into a trust that will gradually be acquired by Lufthansa as various regulatory hurdles are overcome. The trust will also acquire the shares of the 15% free-float shareholders. Lufthansa anticipates regulatory approval for the merger in the third quarter of this year, but sees traffic rights negotiations only being completed by 2006 "at the earliest", according to Kley.
While the free-float shareholders will receive €46 million, the payout to government and corporate shareholders will be determined by an out-performance option. This will be paid in 2008 and based on the performance of the Lufthansa share price compared against Air France/KLM, British Airways and Iberia. The maximum amount will be €252 million, which will take place if there is a 50% out-performance. "If we do manage 50% out-performance I will be very happy to pay this," jokes Kley. If there is no out-performance, there will be no payout.
Kley estimates that Swiss has debts of €380 million, not including capitalisation of operating leases. "I think operating leases should be regarded more as an asset than a burden," Kley says. Lufthansa does not intend to change the capital expenditure plans of Swiss, which Kley says "are not ambitious" and are slightly below cashflow.
Total synergies of €165 million from the merger of Lufthansa and Swiss are expected by 2008 against integration costs of €101 million. This €165 million is made up of €79 million of cost savings and €86 million of revenue synergies.
COLIN BAKER FRANKFURT
Source: Airline Business
