Lufthansa’s new CEO faces strat­egy test over M&A plan

The Pak Banker - - Company & Boss News -

FRANK­FURT: Deutsche Lufthansa AG's new chief ex­ec­u­tive of­fi­cer must de­cide whether to con­tinue a pol­icy of re­gional ac­qui­si­tions to be­come Europe's biggest air­line or switch funds to a more am­bi­tious drive for global ex­pan­sion.

Christoph Franz, who takes over Jan. 1, could con­tinue the run of Euro­pean deals by buy­ing SAS AB, the un­prof­itable Scan­di­na­vian car­rier which says it's open to bids in com­ing years. A bolder plan would in­volve pre­empt­ing Air France-KLM Group and Bri­tish Air­ways Plc by in­vest­ing in emerg­ing mar­kets.

"Ac­qui­si­tions out­side Europe would make the most sense," said Hen­drik Le­ber, a fund man­ager at Acatis In­vest­ment GmbH in Frank­furt, which owns 450,000 Lufthansa shares. "Ger­many and its sur­round­ings have a great cus­tomer base, but they have a gi­gan­tic cost dis­ad­van­tage against the Gulf and Asia."

Lufthansa's cur­rent CEO, Wolf­gang Mayrhu­ber, has bought ail­ing lo­cal car­ri­ers Swiss In­ter­na­tional Air­lines, Aus­trian Air­lines, Bri­tish Mid­land and Brus­sels Air­lines since tak­ing charge in 2003. That con­trasts with the strate­gies of Air France, which added a sec­ond global hub with the pur­chase of Am­s­ter­dam-based KLM, the Euro­pean No. 4, in 2004, and Bri­tish Air­ways, which will merge with Spain's Ibe­ria Lineas Aereas de Es­pana SA next month to tap the surg­ing Latin Amer­i­can mar­ket.

Lufthansa's fo­cus on cen­tral Europe stems from a lack of hubs serv­ing large in­di­vid­ual mar­kets like London and Paris, the Euro­pean Union's biggest ur­ban ar­eas, said Jonathan Wober, an an­a­lyst at So­ci­ete Gen­erale SA in the U.K. cap­i­tal who rates the Ger­man com­pany "buy." That forces it to seek ex­tra pas­sen­ger feed for long-haul flights from Frank­furt and Mu­nich, he said.

Cologne-based Lufthansa may an­nounce takeover plans for SAS as early as the first half of 2011 pend­ing talks with the gov­ern­ments of Swe­den, Den­mark and Nor­way, which own half of the Stock­holm-based car­rier, ac­cord­ing to a per­son with knowl­edge of the dis­cus­sions.

Buy­ing SAS would bol­ster Lufthansa's cen­tral-Euro­pean dom­i­nance and of­fer shorter po­lar flights from the Scan­di­na­vian com­pany's hubs to Canada and the north­ern U.S., said the per­son, who de­clined to be iden­ti­fied be­cause the plans aren't pub­lic.

An­dreas Bar­tels, a Lufthansa spokesman, said from Frank­furt that the car­rier didn't want to com­ment on its ac­qui­si­tion plans and that Franz, head of the main pas­sen­ger di­vi­sion since June 2009, wasn't avail­able for in­ter­view.

Lufthansa Chair­man Juer­gen We­ber said last month the air­line is tak­ing a "wai­t­and-see" stance af­ter pre­vi­ous ap­proaches didn't yield a pact. SAS ex­pects a new phase of con­sol­i­da­tion in Europe in two or three years but isn't in any merger talks, act­ing CEO John Due­holm said Nov. 10. Sture Stoe­len, the car­rier's head of in­vestor re­la­tions, de­clined to com­ment on Dec. 20.

Lufthansa is also con­sid­er­ing ex­pan­sion in Italy in com­ing years to com­plete a north­south axis through Europe and force east-west trav­el­ers to use its net­work, ac­cord­ing to the per­son fa­mil­iar with the plans.

"They're right to fo­cus on Europe be­cause it's the mar­ket that of­fers the most syn­er­gies and needs the most con­sol­i­da­tion," said Fred­eric Redel, who man­ages 500 mil­lion eu­ros ($654 mil­lion) at UBS AG's CCR As­set Man­age­ment in Paris.

While buy­ing SAS would add suf­fi­cient traf­fic for Lufthansa to leapfrog Air France-KLM and be­come Europe's biggest car­rier, it would di­vert vi­tal funds away from strength­en­ing the global po­si­tion, said Royal Bank of Scot­land Plc's An­drew Lobben­berg.

Franz, 50, should con­sider seek­ing a stake in the merged car­rier to be formed from Chile's Lan Air­lines SA and TAM SA of Brazil in or­der to se­cure the en­larged com­pany for the Star Al­liance, said Lobben­berg, who rates Lufthansa "buy."

While TAM is a mem­ber of Star, Lan, which is lead­ing the merger, is in Oneworld, a ri­val group that in­cludes Bri­tish Air­ways, so that the trans­ac­tion could leave Lufthansa with­out a Latin Amer­i­can ally. Lan-TAM have a com­bined value of $14.2 bil­lion, ver­sus about $1 bil­lion for SAS; Lufthansa held about $2 bil­lion in cash and cash equiv­a­lents as of Sept. 30.

"It makes sense to ex­pand be­yond Europe be­cause air­lines need to be able to of­fer pas­sen­gers ac­cess to all cor­ners of the world, ei­ther by them­selves or via al­liance part­ners," said Olivier Mueller, an an­a­lyst at Credit Suisse Group AG in Zurich. "Lufthansa should have a foot in the door in Latin Amer­ica, but a deal needs to cre­ate syn­er­gies and be fi­nan­cially pru­dent."

Marco An­to­nio Bologna, TAM's CEO, said Dec. 21 in an e-mail that "de­ci­sions re­gard­ing air al­liances" will be con­sid­ered once the merger is com­pleted in the sec­ond quar­ter of 2011. En­rique Cueto, Lan's chief, didn't re­spond to mes­sages seek­ing com­ment.

The cost of even a 35 per­cent stake in Lan-TAM would leave Lufthansa "quite heav­ily" lever­aged, said Yarek Ara­now­icz, who helps man­age more than 100 bil­lion eu­ros at Lord Ab­bett & Co. in Jersey City and dis­putes the wis­dom of a move in Latin Amer­ica.

Lufthansa, whose only non-Euro­pean hold­ing is a 15 per­cent "fi­nan­cial in­vest­ment" in U.S.-based JetBlue Air­ways Corp., has the high­est junk rat­ing on its debt at Moody's In­vestors Ser­vice and the low­est in­vest­ment level at Stan­dard & Poor's. "They'd have to grow out of their com­fort zone," Ara­now­icz said, adding that lo­cal own­er­ship rules would be prob­lem­atic out­side of Europe and that, in Asia, Lufthansa couldn't hope to com­pete with Hong Kong­based Cathay Pa­cific Air­ways Ltd., Singapore Air­lines Ltd. and Aus­tralia's Qan­tas Air­ways Ltd. -Bloomberg

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.