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(Anonymous/Associated Press)
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Global Exchange

Lufthansa: shedding excess baggage Add to ...

From the FT's Lex blog





It is not just airline passengers who are being forced to shed their excess baggage.



Lufthansa’s disposal of its British Midland subsidiary to IAG, parent company of British Airways and Iberia, comes not a moment too soon, although at no small price to the German carrier.

It will get £173-million in cash for a business which made operating losses of €154-million in the first nine months of 2011. But Lufthansa will still have to shoulder BMI’s pension scheme deficit, estimated at over £150-million. It will also have to accept a lower price if it cannot sell the low-cost BMI baby arm before the transaction completes. Even so, selling BMI makes sense.



This doesn’t mean that IAG’s chief executive Willie Walsh has got a steal. He faces a costly restructuring challenge at BMI, although earnings accretion is promised within three years. But the big carrot is up to 56 daily slot pairs at capacity-squeezed Heathrow, including valuable early-morning access which can be used to boost IAG’s long-haul services. Those slots alone may be worth around €500-million. Rivals like Virgin Atlantic will fret and competition regulators should scrutinize. But, while the BMI deal lifts IAG’s slot share at the London airport from around 43 to 53 per cent, that is still no higher than European peers at their home bases.



For Lufthansa, cutting its decade-long ties to BMI is imperative. The German carrier has reported noticeably weak figures in recent months. Its October traffic was up just 2.8 per cent while its capacity increased by 8 per cent; its overall load factors declined to 77 per cent. BMI has never really fit into Lufthansa’s network, offering fewer synergies with the airline’s long haul operations than Lufthansa’s other short haul businesses. With BMI’s 2011 losses likely to top last year’s pre-tax figure of £153-million, this had become a cash drain. Consolidation is now the name of the airline game. This is merely a start.

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