Lufthansa to take control of British Midland

Kevin Done in London and Gerrit Wiesmann in Frankfurt of the Financial Times report that, Lufthansa is taking majority control of BMI British Midland, which will give it the second largest share of take-off and landing slots at London Heathrow airport, behind British Airways.

The deal marks an important step in the restructuring of the European airline industry with the German carrier gaining a leading role at Heathrow, the biggest airport in Europe measured by passenger numbers and the key European gateway for passengers from North America.

The takeover challenges British Airways at its Heathrow global hub. It could trigger an alliance or merger of operations between the German carrier and Virgin Atlantic, the London-based long-haul rival to BA, controlled by Sir Richard Branson.

It will consolidate the role of Star, the global airline alliance led by Lufthansa and United Airlines of the US, as the main challenger to Oneworld, the alliance led by BA and American Airlines, at Heathrow.

The German carrier is taking a leading role in the consolidation of European aviation as it takes advantage of its financial strength in the deepening financial crisis in the airline industry.

Earlier this year Lufthansa took over a 45 per cent stake in Brussels Airlines with an option to acquire 100 per cent in 2011. It is also in negotiations to buy strategic stakes in loss-making Austrian Airways and Alitalia, the latter in competition against Air France-KLM.

Lufthansa said Sir Michael Bishop, BMI chairman, had exercised his put option to sell the group his stake of 50 per cent plus one share.

Lufthansa already owns a stake of 30 per cent minus one share. The remaining 20 per cent is in the hands of SAS Scandinavian Airlines, which has previously indicated it also wishes to sell.

The option agreement was made by Sir Michael in November 1999.

Lufthansa said the option was not expected to become effective before January 12. The two groups were in discussions about the strategic development and future development of BMI

It was unclear last night whether Lufthansa would seek to challenge BA by building up long-haul operations at Heathrow, or through a link with Virgin, which is 49 per cent owned by Singapore Airlines..

The decision by Sir Michael to sell his controlling stake for about €400m (£317m) is a watershed in UK aviation. Sir Michael, 66, led the early drive to liberalise the UK and European industry and to break the dominance of BA. He has controlled BMI since 1978.

Steve Ridgway, chief executive of Virgin Atlantic, which has made several attempts to merge with BMI, said: “We are about to enter the next phase of BMI’s future and a turning point in aviation,” said . “Everyone has speculated that it would make sense for Virgin Atlantic and BMI to combine their long-haul and short-haul networks.”

BMI, which includes a low cost subsidiary BMIbaby and a UK regional subsidiary, warned recently it expected to fall into loss this year.

From its Heathrow base it has been seeking to develop a medium-haul network to the Middle East, central Asia and Africa following its takeover last year of BMed, British Mediterranean Airways, a former franchise carrier for British Airways.

The future ownership of BMI has been followed very closely by British Airways and Virgin Atlantic, the rival UK long-haul carrier controlled by Sir Richard Branson, which have both coveted BMI chiefly for its 11 per cent stake of all the take off and landing slots at Heathrow.

The airport is highly congested and there are no free slots at most hours of the operating day.

Virgin Atlantic, which is 49 per cent owned by Singapore Airlines which is also a member of the Star alliance, put itself forward as a potential partner for Lufthansa at Heathrow to exploit the BMI assets.

Steve Ridgway, Virgin Atlantic chief executive, said: ”Now we are about to enter the next phase of BMI’s future and a turning point in aviation.

“Everyone has speculated that it would make sense for Virgin Atlantic and BMI to combine their long-haul and short-haul networks. There is now a major opportunity to do that and create a new, strongly viable competitor to BA.

“I am sure that Lufthansa realises the future opportunities and this could be a really good example of the right industry consolidation. It would be good for consumers and for UK plc.”

The future of BMI’s small regional subsidiary is also being watched by Flybe, which has emerged as the leading UK regional airline following its takeover last year of BA Connect, the former UK regional operation of British Airways, and is regarded as a potential buyer of BMI Regional.

BMI became the first airline earlier this year to capitalise its holding of take off and landing slots at Heathrow airport in its 2007 accounts, transforming the value of its balance sheet and breaking new ground in airline accounting.

Inclusion of the slots with what the airline called a “conservative” valuation of £770m helped to raise the value of the group’s net assets from £12m at the end of 2006 to £800m at the end of 2007.

BMI holds 11.4 per cent of the highly lucrative take off and landing slots at Heathrow, a position second only to the 41.5 per cent held by BA.

BMI pre-tax profits last year fell from £29.7m to £15.5m. Pre-tax profits on continuing operations and before exceptional items fell by 45.2 per cent from £17m to £9.3m.

Turnover rose by 12.9 per cent from £905m to £1bn largely as a result of the takeover of BMed. Passenger numbers increased by one per cent from 10.5m to 10.6m.

Its profitability this year has been hit by the ending of a co-operation deal with Lufthansa and SAS, agreed at the start of the decade, under which the two carriers have underwritten a large part of the losses on the BMI mainline operation in Europe.

The takeover of BMed was aimed at reducing BMI’s dependence on short-haul European services.

Copyright The Financial Times Limited 2008