Lufthansa’s Executive Board was set to give their recommendation today on whether or not the Supervisory Board should vote to acquire the remaining stake of Brussels Airlines that LH does not already own. Over the last few weeks, momentum had been growing that the deal would be announced in April, but not we’ll need to wait til September at the very soonest to see what is decided. Currently, LH owns a 45% stake in the airline and has until 2017 to exercise its option to buy the remaining 55% from SN Airholding.
The reason given for this delay is to allow Brussels, and Belgium at large to recover after the recent bombings at the airport and metro stations. On the surface, it looks like a valid reason but in my opinion I think there may be other reasons that go beyond sympathy.
Since announcing the potential buy up of SN, Lufthansa has made it no secret that it is looking for other partners as it tries to boost its Eurowings LCC (Low Cost Carrier) division. In addition to the SN deal, which still seems most likely, LH has approached SAS as well as Thomas Cook’s ‘Condor’ to see if there is any desire from these airlines to join Lufthansa Group. Lufthansa has simply said that exploratory conversations had taken place but no decisions had been made.
In my opinion, I don’t think LH tapped the brakes on the SN deal because of the terrorist attacks. As tragic as the events were, it was not a direct strike on Brussels Airlines and thus would have changed the tenor of the deal with Lufthansa. In addition, the SN deal was nothing new. LH has obviously been aware all along what the timeline would be for the deal and since it is already a 45% stake holder, it would be a simple accounting transaction that would close the deal for the remaining 55%.
What I think is happening is that LH sees a very fragmented LCC market in Europe, with far too many players involved which leaves only a few successful LCC operators such as EasyJet and Ryanair. LH sees opportunities to bolster its line up with potentially larger market players such as SAS or Condor as compared to SN and they simply are going through their due diligence to confirm they don’t miss a better opportunity elsewhere. With the sovereign ownership group of SAS being motivated to sell the airline, and Thomas Cook wanting to get rid of Condor who is saddled with 800 million euro in debt, LH might be able to get a fantastic bargain and at the same time at something new to the group, while still maintaining the SN stake.
Ultimately however, I truly feel that LH will take the path of least resistance and bring the rest of Brussels Airlines into the fold.
Just my 2¢……
Over the past several days, you’ve seen my posts about Lufthansa looking to acquire or ‘tie up’ with a partner in an effort to execute a quantum leap in its Low Cost Carrier unit, Eurowings.
Up til now, Lufthansa has approached the ownership of SAS to discuss the potential of a tie up so that SAS could meld into the Eurowing unit and focus on the LCC business with its world-wide network. SAS ownership, primarily comprised of Sweden, Norway, and Denmark is keen on the idea since the sovereign ownership has been looking to unload their share of SAS back into private hands. The other option, and the one that seems most likely, is Lufthansa’s acquisition of the remaining stake of Brussels Airlines, of which LH already owns 45%. LH has until next year to exercise the option, but it appears as though the decision can be made in the coming weeks.
The newest option is the idea of acquiring Condor from the Thomas Cook Group. Condor, for you avgeeks, was originally founded by a group that included Lufthansa in 1955. LH originally was a 25% stake holder until 1959 when it acquired the entire airline. Lufthansa began selling shares of Condor to Thomas Cook in 2006, and was completely divested of Condor in 2009.
This recent develop has Lufthansa discussing the option of either a tie-up or a complete acquisition of Condor and their 46 aircraft. Predictably, LH and Thomas Cook have both declined comment on the topic.
However, a deal with Condor would not be without its of baggage. Condor is currently saddled with 800 million Euro of debt and reported a loss of over 10 million Euro for their most recent fiscal quarter. Should Lufthansa look to actually acquire Condor outright, it would probably simply take over the debt obligations and pay Thomas Cook next to nothing for the ‘privilege’. Thomas Cook would most likely be content to rid themselves of the liability.
So why is Lufthansa meeting with all of these potential partners?
My theory and opinion, is that Eurowings is not doing as well as expected and their planned growth trajectory has been revised downward. Certain routes launches have been delayed and it appears that the fleet is not growing as quickly as it needs to in order to gain market share. Though LH executives speak optimistically of Eurowings, I can’t help to think that they are doing this because they have to, but have their reservations about the prospects for it. With a tie up or acquisition, it would immediately add a substantial amount of aircraft and expand the Eurowings timetable dramatically, instantly making them a serious competitor for Euro LCC’s such as Ryanair and EasyJet.
What do I think happens?
I think LH is shopping around just to execute a bit of due diligence before it acquires the remaining stake of Brussels that it doesn’t already own. Brussels Airlines is profitable and is already well integrated into the LH Group, so it obviously offers the path of least resistance. What I’m wondering is what will the SN employees have to say should Lufthansa relegate them to the LCC market, offering low fares along with low frills. Brussels is known as a very solid airline because of their outstanding Business Class product on long haul flights and a very strong route network in Europe and Africa. I wonder how that changes should the Eurowings culture moves in.
Back in 2009 when Lufthansa completed the purchase of a 45% stake in Brussels Airlines, it also retained the option to purchase the remaining 55%. This option is set to expire in 2017, however the decision from Lufthansa is due in the next several weeks according to Lufthansa’s CFO, Simone Menne, who suggested this timeline during Lufthansa’s earnings conference last week. The major stipulation for the exercise of the option was that Brussels needed to demonstrate profitability on its own before LH would acquire the rest of the carrier. In 2015, Brussels finally did demonstrate a profitable year which has now put in motion the process for Lufthansa to potentially acquire the rest of ‘SN’.
What doe this mean for Brussels Airlines?? A lot……
Should LH acquire the balance of ‘SN’, it is widely speculated that Lufthansa would fold Brussels into its Eurowings ‘low cost carrier (LCC)’ and literally would jump to the number 3rd largest ‘LCC’ in Europe, behind only Ryanair and Easyjet which have been a perennial fly in the ointment for Lufthansa. It would also mean that Eurowings would grow exponentially overnight with routes throughout Europe, gain additional routes in North America and inherit a strong presence in Africa where Brussels has spent considerable effort growing its network.
Should this come to pass as I’ve described, I believe it would would have an accretive impact on Lufthansa Group. It’s no secret that Eurowings has had its share of growing pains recently due to small size of its long haul fleet. Adding SN’s existing fleet, staff, and timetable would go a long way in stabilizing Eurowings and make it an important hedge in Lufthansa’s portfolio as LH continues to battle the ‘LCCs’ in Europe. However, anytime consolidation is discussed, there is always the risk of overlap of staff and resources which could result in a re-sizing of SN so that it fits better into the Eurowings template.
The next 90 days could prove interesting…….