Lufthansa tie-up Air Berlin Gets Lift After Deal Rumors

The stock of troubled Air Berlin, Germany's second-largest airline, leapt yesterday on rumors that it was negotiating a plane swap deal with Lufthansa. But Germany's flag carrier is warning that significant anti-trust hurdles must be overcome first.
Air Berlin and Lufthansa could soon be heading in the same direction.

Investors, at least, have made their choice clear. Air Berlin's stock jumped by more than 20 percent on Wednesday after Handelsblatt reported on talks between airlines Lufthansa and Etihad, Air Berlin's largest shareholder, on a plane swap deal.

According to reports, Lufthansa boss Carsten Spohr is thinking about taking over Air Berlin routes that do not pass through the hubs of Düsseldorf or Berlin, along with 40 corresponding aircraft. They could be integrated into Lufthansa's budget subsidiary Eurowings.

The companies still aren't commenting on the discussions over Germany’s struggling second largest airline. But according to well-informed insiders, the participants’ views of the prospects of a transaction are mixed.

Sources familiar with Gulf carrier Etihad, which has an almost 30 percent stake in Air Berlin, report that airline officials in Abu Dhabi are very confident that they will come to an agreement with Lufthansa.

Etihad needs to find a solution for troubled Air Berlin, and is running out of options to provide financial support to the investment.

But staff are more reserved at the Frankfurt headquarters of Europe’s largest airline, where experts worry about potential antitrust issues. Their concerns are justified, as evidenced by the situation in Hamburg.

Passengers wishing to fly from Hamburg nonstop to Vienna, for example, currently have a choice of three airlines: Air Berlin, Eurowings and Austrian (also a Lufthansa subsidiary).

After a takeover of the Air Berlin routes, the Hamburg-Vienna route would only be served by the Lufthansa Group. This will hardly please cartel watchdogs. When Lufthansa sought to acquire Austrian in 2009, the company was forced to give up 19 takeoff and landing rights for routes from Vienna to Germany. Cartel watchdogs fear a dominance that allows one airline to control the market and raise prices.

A similar scenario could emerge in a partial takeover of the Air Berlin routes. Lufthansa could relinquish takeoff and landing rights, as it did in the Austrian case. "But then Ryanair would quickly apply for those rights, which, of course, we want to prevent," said Gerald Wissel, aviation expert with Airborne Consulting. The possibility of only leasing aircraft and crews from Air Berlin at first (known as a wet lease) wouldn’t solve the problem, either.

The transaction itself is anything but trivial. The takeover of aircraft and personnel doesn’t mean that Lufthansa also receives Air Berlin's air rights. They belong to the Federal Republic of Germany and are issued by the German Civil Aviation Authority. If an airline no longer uses air rights, they are returned to the government and then re-issued.

If rights become scarce, the agency requests bids and issues rights to companies that the government believes are best suited, from both an economic and general societal standpoint.

One argument that can be used in the process is that jobs are preserved in the long term. This would benefit Lufthansa, since politicians would likely have an interest in keeping German jobs in Germany – especially as budget carrier Ryanair is currently under fire because of its labor agreements with pilots.

As long as Lufthansa does not acquire portions of Air Berlin or continues its operations under the Air Berlin umbrella, the air rights will initially revert to the government. So if Lufthansa merely takes over aircraft and personnel from its rival, it will have to file an application with the Civil Aviation Authority for the associated air rights.

This is why Lufthansa wants to take its time to review the details. "These are problems that can be solved, but also that have to be solved," said a Lufthansa manager.

Insiders also see this as negotiating tactics, because Lufthansa knows all too well that the other side is pressed for time. Etihad needs to find a solution for troubled Air Berlin. James Hogen, head of the Etihad Airline Group, is running out of options to provide financial support to his investment, as he is constrained by European ownership and competition rules. At the same time, he neither can nor wishes to send Air Berlin into bankruptcy, given the humiliation this would entail.

To keep up the negotiating pressure, it has repeatedly been pointed out that British budget carrier Easyjet is also interested in parts of Air Berlin, say sources close to the negotiations. But aviation experts are not convinced, especially as Easyjet founder Stelios Haji-Ioannou, an important investor with a 34-percent stake in the company, recently said that he was strongly opposed to any takeovers.

Meanwhile, officials in Abu Dhabi are also thinking about what will happen to the rest of Air Berlin if the deal with Lufthansa comes to fruition. According to insiders, another long-considered scenario is also playing a role: a closer connection to Italian airline Alitalia, in which Etihad also holds a large stake.

Even after a partial sale, the market is so competitive that it will be difficult for Air Berlin to keep down costs, said aviation expert Mr. Wissel. "This could be achieved through a merger with Alitalia, which would generate cost synergies," he said.


Daniel Delhaes reports on politics, transport and airlines from Handelsblatt's Berlin office. Jens Koenen leads Handelsblatt's coverage of the aviation and space industry. To contact the authors: [email protected], [email protected]