Thursday, July 16, 2009

Lufthansa struggles with Austrian purchase

Lufthansa has been really putting together quite the airline empire over the last few years, acquiring Swiss Air Lines, Italian carrier Air Dolomiti, and German carriers Germanwings and Eurowings outright, as well as purchasing large stakes in British airline bmi and Brussels Airlines (and will own the latter outright by 2011).

It's also trying to wrap up a deal to take over Austrian Airlines in its entirety, although the plan has dragged on for a long time, thanks to roadblocks from the anti-trust unit of the European Commission, which is concerned about a lack of competition on some European routes. Lufthansa has already apparently agreed to more concessions, including dropping flights between Vienna and Frankfurt and Vienna and Geneva, but it's unclear whether or not this will be enough for the EC.

Austrian has been bleeding red ink recently; the airline lost 429 million euros last year, has more than one billion euros in debt, and has already burned through two thirds of a 200 million euro injection from the Austrian government that it received this spring. Its chairman has said that if the Lufthansa deal falls through, the airline would need over one billion euros in new capital. Austrian's future is being increasingly called into question as the prospects for the deal's success look dimmer.

And meanwhile, Lufthansa is also struggling (although not to the same extent as Austrian). The Austrian deal, with a deadline of July 31, is still dragging on and on and becoming ever more expensive, and Lufthansa is looking at ways to lower acquisition costs. It also reluctantly purchased fifty percent of bmi from its founder, Sir Michael Bishop, who for many years held an option that would force Lufthansa to buy his stake. Bishop actually ended up suing Lufthansa back in May in order to make Lufthansa proceed faster with the deal.

But the deals with Austrian, bmi and Brussels have contributed to Lufthansa's increasing financial pressures. The airline today announced that it would roll out a costs-saving initiative called "Climb 2011," which calls for savings of one billion euros ($1.4 billion) per year starting in 2011. The plan focuses on lowering passenger costs as well as shedding 20% of its 2,000 office jobs in its passenger airline core business. Lufthansa has also said that it will defer delivery of some aircraft from 2010.

Depending upon how many further obstacles it receives from the EC, Lufthansa might just decide to axe the takeover of Austrian, especially as the costs of a takeover mount and Austrian's financial situation becomes more and more perilous. Austrian could be looking less and less attractive, especially while Lufthansa digests the the financial burden of taking over bmi and Brussels. With the global airline industry stuck in a deep downturn, Lufthansa needs make sure that it doesn't bite off more than it can chew, and should concentrate on solidifying its core operations - after all, that airline empire is no good if the carrier at the center of things isn't strong.

photo by caribb from Flickr, licensed under the Creative Commons

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