Lufthansa plots sale of bmi to Virgin
Article found in todays Times.
From The Sunday Times
August 23, 2009
Lufthansa plots sale of BMI British Midland to Virgin Atlantic
German airline may jettison assets after threat of a downgrading by leading credit-rating agencies
Lufthansa took an 80% stake in BMI in June
Dominic O’Connell and Ben Marlow
Lufthansa may try to sell BMI British Midland, the UK airline it took control of in June, as part of a plan to raise funds.
Airline industry and City sources say that the sale of BMI is one of a number of options being considered by the German airline, which has been threatened with a downgrade by Standard & Poor’s and Moody’s, the international credit-rating agencies.
Transport bankers say Lufthansa has held preliminary talks with Sir Richard Branson’s Virgin Atlantic about a sale of BMI or a merger of the two airlines.
A sale to British Airways of some of BMI’s take-off and landing slots at Heathrow, the UK’s largest airport, is also under consideration, while BMI’s regional operations could go to a rival like Flybe, the budget airline that has its headquarters in Exeter. Lufthansa declined to comment.
Stephan Gemkow, Lufthansa’s chief financial officer, confirmed that it was considering a deal in a recent interview with Aviation Week, the trade magazine. “But it takes two to tango. If we find the right partner, we will dare to dance,” he said.
Lufthansa took an 80% stake in BMI in June, buying out Sir Michael Bishop, the airline’s founder. The purchase was the result of a contract struck 10 years ago, when Lufthansa agreed to purchase Bishop’s shares at a prearranged price. As The Sunday Times revealed in May, the German airline tried to reduce the fee by forcing Bishop to take part in a recapitalisation of the company ahead of the sale.
He refused, and began legal proceedings to enforce the contract. The two sides settled on the steps of the courtroom.
Although the exact terms of the deal were not disclosed, it is understood Lufthansa paid £223m for Bishop’s shares, not the £292m required under the contract.
Branson and Bishop frequently discussed combining their airlines to take on British Airways at Heathrow, but were never able to agree terms. Sources at Virgin confirmed that Branson remained interested in a deal, but said Lufthansa had yet to decide what it wanted to do having taken control at BMI.
Industry bankers say the deal could take the form of BMI and Virgin merging — the combined airline would have about 13% of Heathrow’s flights, compared with 41% for British Airways. Such a deal would dilute Singapore Airlines’s influence at Virgin, where it holds a 49% stake.
The merged group would be able to exploit transfer traffic at Heathrow by connecting BMI’s short and medium-haul network with Virgin’s long-haul flights.
However, it is not clear that Lufthansa would want to retain a controlling stake in the merged airline. “I think they want to get their money out, not stay in for the long term,” said one airline source.
This could lead to a break-up of BMI, with some of the airline’s landing slots being sold separately — perhaps to British Airways, which may have to give away some of its Heathrow slots because of competition concerns over a looming tie-up with American Airlines.
Analysts think the Lufthansa board, which meets late next month, has other options at its disposal.
Andrew Lobbenberg, airline analyst at Royal Bank of Scotland, has suggested it could dispose of its holdings in Fraport, the group that owns Frankfurt airport, or Jet Blue, the American budget airline.
Lufthansa shares, which have fallen along with other airline stocks during the recession, have recovered in recent weeks. They closed on Friday at €15Å , up 14% in the past month.
British Airways, which still faces the threat of industrial action later in the year as it tries to negotiate cost-cutting deals with cabin crew, has perked up even more. Its shares closed last week at 188Ëp, up 38% in the past month.