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Lufthansa Set To Buy Struggling Austrian Airlines

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Deutsche Lufthansa AG said its supervisory board approved a plan to buy ailing Austrian Airlines AG, potentially pushing Germany’s giant carrier further along one of the most ambitious airline acquisition sprees the global aviation industry has seen in years.


The Austrian government as soon as Friday could approve the deal, which values the national carrier at as much as €377.4 million ($479.5 million) and aims to save it from collapse under mounting financial woes. A deal would require regulatory approval, in part because the Austrian government plans to spend €500 million helping to restructure the airline.

The proposed deal shows that although all airlines face big challenges from global economic upheaval and declining passenger demand, relatively strong carriers are able to capitalize on rivals’ weakness. Lufthansa at the end of September had roughly €3.8 billion in cash and liquid assets on hand. It posted a nine-month net profit of €551 million.

European airlines, including Lufthansa, Air France-KLM SA and British Airways PLC, and U.S. carriers, including Delta Air Lines Inc. and Northwest Airlines Corp., have been pursuing mergers, acquisitions or commercial linkups to boost efficiency and gain heft as the industry heads into a slump.

For Lufthansa, the deal would prevent rivals from getting their hands on a neighboring carrier and close partner. Air France-KLM and Russia’s S7 Airlines had expressed interest in Austrian. Lufthansa and Austrian are both in the Star Alliance marketing group, have a joint venture for flight between their countries and Austrian Air uses Lufthansa’s “Miles & More” frequent-flier plan.

Austria’s privatization agency last month selected Lufthansa for exclusive negotiations to buy the state’s 41.56% stake in Austrian Air. Lufthansa is now proposing to pay only €366,000 for the stake because of Austrian’s financial troubles, but could pay up to €162 million more in the future, depending on the company’s financial performance. Lufthansa also plans to launch a tender to buy out private shareholders for a further €215 million.

Lufthansa’s offer and the prospect of help from the Austrian government could prompt challenges from other carriers, industry officials say.

Still, the offer illustrates how Lufthansa — long considered one of the industry’s most risk-averse big players — has recently shed some of that reserve. In January it bought a 19% stake in cash-hungry U.S. budget carrier JetBlue Airways Corp. and now is establishing a close marketing relationship. Lufthansa in August agreed to buy 45% of the parent of small Brussels Airlines. It also said it will increase its 30% stake in British Midland Airways Ltd. to 80%. Last week Lufthansa announced the creation of an Italian subsidiary that will operate planes the carrier had already planned to base in Milan.

Chief Executive Wolfgang Mayrhuber, who gained experience buying airlines through Lufthansa’s 2005 acquisition of Swiss International Air Lines, says his goal now is to be less of a German icon and instead offer a range of services across many markets. “From a ‘branded house’ we are becoming a house of brands,” Mr. Mayrhuber said recently.

The buying binge is driven by both opportunism and the fear of being overtaken by rivals, Lufthansa officials and outsiders say. The new investments give Lufthansa footholds as far afield as California and Congo. The JetBlue deal, for example, gives Lufthansa a strong partner in the huge New York market. And the British Midland takeover, set to close in January, makes Lufthansa the second-largest holder of takeoff and landing slots at London’s popular Heathrow Airport, after rival British Airways. Brussels Airlines, for which Lufthansa outbid BA, brings access to lucrative West African markets. The deals also close a gap with Air France-KLM, which jumped ahead of Lufthansa in traffic and revenue when Air France in 2004 bought KLM Royal Dutch Airlines. BA, Europe’s other major carrier, is now in merger talks with Spain’s Iberia Lineas Aéreas de España SA and Australia’s Qantas Airways Ltd.

Some analysts worry that Lufthansa may be overreaching. “We are concerned that Lufthansa could be involved in too many deals,” which could cause it to dilute current shareholders by issuing new equity, Citigroup analysts wrote in August. Other outsiders worry that Lufthansa’s management could get stretched too thin.

Mr. Mayrhuber dismisses concerns that he’s simply chasing size. “Size is good, but our balance sheet and profitability remain the priority,” he said after announcing the Brussels Airlines deal.

Lufthansa’s boosters say its executives already have experience managing a portfolio of companies, thanks to its range of aviation-service subsidiaries. These include Lufthansa Technik, an aircraft-maintenance company, and LSG SkyChefs, one of the biggest in-flight caterers.

Still, Lufthansa’s expansion reminds some veterans of a similar growth spurt attempted a decade ago by Swissair, the predecessor to Swiss. The prestigious carrier bought stakes in many smaller airlines that weighed it down and pushed it into bankruptcy liquidation after the terrorist attacks of Sept. 11, 2001.

Hubert Horan, a former U.S. airline executive who worked for Swissair before its collapse and who has criticized many recent airline mergers, says Lufthansa is taking a much more cautious approach than Swissair did. “They’re focusing on profits, looking for immediate benefits from the deals and taking it step by step,” said Mr. Horan, who is now an aviation consultant.

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