After comments made last week by Lufthansa’s CEO Carsten Spohr, it appears that Lufthansa is putting together a strategy that would allow it to absorb Air Berlin into Eurowings. After years of struggling, and failed subsidies/investments by Etihad, it appears that Air Berlin is on life support and without intervention, could simply fade away.
Spohr, speaking before the Lufthansa Group Annual Shareholder’s Meeting, stated 3 criteria would need to be met before Lufthansa would feel comfortable writing a check for Air Berlin. Specifically he addressed:
- Air Berlin’s debt level of 1 BILLION Euro and a debt ratio of 4.5:1 makes it a VERY EXPENSIVE acquisition if LH were to acquire the liability. Spohr suggested that if Lufthansa were to be interested in acquiring ‘AB’, the debt would have to be assumed by Etihad (Air Berlin stakeholder), or be disbursed by some other means before AB would be welcomed to the LH Group. LH simply would refuse any deal that would involve assuming any of the debt
- Anti-Trust Concerns from the EU would overshadow any thought of the acquisition. Not only on a continental EU level, but also intra-Germany, since an AB acquisition by Lufthansa would leave Lufthansa as the only major airline within Germany. Knowing the EU’s political leanings, it would be foolish to think that they would award a monopoly to Lufthansa. This issue would create an opportunity for RyanAir or EasyJet to swoop in with proposals for Air Berlin which could be disastrous for Lufthansa. After all, who wants RyanAir or EasyJet operating in their neighborhood. Air Berlin joining Lufthansa would also lead to Air Berlin’s exit from OneWorld.
- Before any deal would take place, Air Berlin would also be required to reign in their costs. Progress is being made, but Air Berlin is not near being profitable, and again, Lufthansa has indicated that it does not want to inherit any liabilities should they decided to bid for Air Berlin.
- Assurances would also need to be made for Air Berlin staff. Any merger would almost certainly guarantee a significant amount of staff overlap and with worker protection laws in Germany being the way they are, Lufthansa will not be able to simply layoff unnecessary workers. AB employs approximately 8500 people and accommodations would need to me made for those at risk of losing their jobs as a result of a merger.
Should LH find a way to navigate the regulatory gauntlet, and get others to take the liability left behind by Air Berlin, it would be an obvious coup for Lufthansa. Considering that LH’s main focus over the last 3 years has been to build an LCC product that can take on, and beat the likes of RyanAir and EasyJet at their own game, plugging Air Berlin into Eurowings would catapult LH to the forefront of LCC operations in Europe. The only problem is that Europe’s politics and Lufthansa’s competitors will do everything possible to keep Lufthansa from realizing that success.
Over the past few days, since Lufthansa’s announcement that it was acquiring the 55% stake that it did not already own in Brussels Airlines, I’ve seen a significant amount of negative opinion and commentary coming from various social media outlets. In seeing this disproportional ‘outcry’ against the deal, it prompted me to delve deeper into the ‘Pros and Cons’ of the deal and see where Brussels, along with the rest of the LH Group, go from here.
I reached out to my contacts at Brussels Airlines to gain their insights and compared that to what some of their passengers had shared. Kim Daenen, Media Relations Manager and Spokeswoman for the airline, was kind enough to take time away from her busy schedule to share some thoughts on the way forward for airline…..
Is Brussels Losing Its Belgianity To Lufthansa?
Brussels Airlines will continue to be Brussels Airlines. They fit a unique niche and offer a route map that was lacking at Lufthansa and it is this uniqueness that made them attractive enough to have LH acquire the entire airline . In all the years that Brussels has existing since having Lufthansa and Virgin as their major stake holders, have you seen any of their ‘fingerprints’ on the airline? Of course not. This ‘hands off’ off style is not at risk of being augmented just because Lufthansa Group became the sole shareholder.
In fact, according to Brussels Airlines Kim Daenen, ‘We would have not existed today if LH hadn’t bought 45% shares back in 2008. Thanks to their investments we have grown our long haul fleet from 3 to 10 aircraft. They have been a trustworthy partner.’
Daenen continued to talk about why this deal has made sense for Brussels Airlines in the pat and will continue do make sense going forward: “LH has always had the right to force decisions on us by veto in the board and has never done so in the past 8 years, showing that they respect and trust our management, and they will continue to do so. Look at their other integrations like Austrian and SWISS, they still have their own independence. We are happy that we have moved from being a guest at the Lufthansa Group table, to being a real family member, which will allow us to grow (thanks to synergies and a stronger position in the market, we’ll have more negotiating power now that we’re part of a big group and this will cut costs enormously). For the customer it will only get better. LH Group really is the right partner for us.”
How are Brussels Airlines passengers reacting to the news?
First off, this is not ‘NEWS’. Lufthansa has had the option to purchase the remaining 55% it had not already owned since Lufthansa since making its initial investment in 2008. There is no surprise here. In fact Lufthansa has been talking throughout 2016 that the plan was to complete the acquisition of the remaining shares in Brussels Airlines by year’s end.
Daenen adds, ‘Indeed, people seem to be stirred by the news, although it’s been a long time coming. That shows a lot of love for the brand, so in that respect it’s nice, but what they don’t seem to understand is that for us this was unavoidable. People (in Belgium) are afraid that a Belgian company is disappearing, but we weren’t 100% Belgian before neither. LH was already a 45% stakeholder and Virgin was the other big partner. Still, we kept our “Belgitude” alive and this will not change now with the 100% LH ownership. By the way, Brussels Airlines NV/SA remains a Belgian company, under Belgian law.‘
Does the Brussels Airlines brand go away?
Not at all. The whole idea behind eliminating the successful brand is not realistic. Why break something when it isn’t broken? The decision by Lufthansa to fully acquire Brussels Airlines was to bring a quality brand fully into the LH fold and allow them to continue to thrive. In fact it’s a similar approach to what was taken with SWISS and Austrian. The group is stronger because of the uniqueness and niches that each brand brings to the Lufthansa Group.
Daenen adds ‘Concerning the brand name: this will stay until we think there is a better path to follow. We are not forced to change to Eurowings, but like every good management should do we evaluate what the best solution would be. Like our CEO Bernard Gustin explained to the media yesterday: “A brand is not defined by shareholders, it is defined by the consumer. Brussels Airlines is a strong brand and it will remain unless we see an opportunity to create an even stronger, different identity, but that is an ongoing exercise that we anyway perform. We stay more Belgian than ever. Furthermore it is the values, the spirit and the employees of a company that matter, more than its name.” ‘
Becoming part of Eurowings will make Brussels Airlines a Low Cost Carrier like Ryanair?
No, Brussels Airlines will maintain its level of high quality passenger experience both on the ground and in the air. Just because they may have pricing models that mimic those of LCC’s, thats where the similarities end. Brussels Airlines has successfully adapted its commercial strategy in order to compete with the high low cost competition, so the products are similar to Eurowings.
According to Daenen, ‘ What’s very important to note: we do NOT become a low cost company. The public confuses a low-cost with low service, but actually lo-cost means having a very low cost structure. We already have the lowest cost structure of the entire LHG, because we had to compete with the highest low cost competition penetration in Europe (Brussels market: 40% of seats offered is low cost). Business models had to change and we did, BUT: we will never compromise on service. So we will continue to offer the service we do today. Actually our product is very similar to Eurowings already today.‘
Will Lufthansa’s 100% ownership stake remove Brussels Airline’s ability to operate independently?
Another idea that is not grounded in reality. Lufthansa has a track record of absorbing airlines into the LH Group but not forcing them to give up their identity and turn into white and blue aircraft with a bird on the tail. Look at the success stories at SWISS and Austrian. Neither of these airlines would have a strong chance at survival on their own, but when teamed together they are able to focus on maintaining their identity and operate with a very loose leash from LH. When you are aboard an LX or OS flight, do you see anything that suggests that Lufthansa is the stake holder? You don’t! Do SWISS and Austrian execute their own marketing strategies? Yes.
Will Brussels Airlines continue to be allowed to ‘think’ for themselves and execute initiatives that they feel are best for them? Of Course!
What does being a wholly owned unit of Lufthansa Group mean to Brussels Airlines?
It means that they will further benefit from the Economies of Scale when it comes to operational efficiencies.
Being a full member of the LH Group, they will benefit from improved cost structure when it comes to thing such as fleet expansion, fuel expenses, and effective integration of their IT platforms. The impact on the balance sheets will be a net positive from an operating perspective.
Daenen adds: ‘The synergies will allow us to invest more in digitalization, better services, better onboard product, fleet renewal (imagine negotiating with a lessor as Brussels Airlines vs. as a Lufthansa Group member. Second example: IT investments can be done for the entire group, instead of for every company separately).’
How does this affect Brussels Airlines’ Star Alliance membership?
Brussels Airlines will continue to be a Star Alliance member exactly in the manner that it has been up to this point. Passengers will be able to continue to earn and redeem miles for flights operated by Brussels Airlines.
In an announcement from Frankfurt earlier today, Lufthansa has announced that it has entered into a codeshare arrangement with Etihad geared towards making it easier for the airlines to expand their reach.
The expansion of the relationship between the 2 carriers continues to evolve after LH agreed to lease a substantial part of Air Berlin’s fleet to help AB stave off further financial turmoil. Etihad is a major stakeholder in Air Berlin and they were very supportive of the arrangement which allows AB to refocus their efforts. That deal was finalized today as well.
The codesharing relationship starts in January 2017 and will cover Etihad’s 2 daily flights between Frankfurt and Abu Dhabi and their 2 daily flights between Munich and Abu Dhabi. What this means is that there will be an Lufthansa flight number (LH xxx) assigned to the Etihad operated flights, so that Lufthansa passengers can book travel on those specific Etihad flights directly from LH.com or through their travel agents.
In turn, Etihad will will assign their flight numbers to Lufthansa operated flights that operate from Frankfurt to Rio de Janeiro and Bogota. This allows Etihad to book their passengers directly onto these LH flights.
Please note that flights operated by Etihad will not earn any miles towards Miles & More balances, or any other Star Alliance Frequent Flyer program.