In news reported on Monday, Lufthansa confirmed that it has executed an agreement in principle to enter negotiations with Virgin Atlantic regarding the disposition of BMI.

A Lufthansa spokeswoman confirmed the news stating that the agreement was signed at the end of November and they hope to announce a finalized deal for BMI in the coming weeks, with the transaction closing sometime in Q1 2012.

The Virgin offer appears to be in the GBP£50 million or USD$78 million range. The competing offer from IAG (Parent company of British Airways and Iberia) is thought to be twice that.

I am relieved to see Virgin finally step up and make a bid for the BMI assets. The most valuable of these assets are the approximate 9% of landing slots that BMI currently holds at London’s Heathrow. British Airways is by far the dominant Heathrow player and Virgin for years has been vocally critical about what it felt has been an unfair playing field in the British aviation market. This opportunity finally give Virgin a chance to have a tangible impact on British Airways in a way that had not been possible before.

Even though most of BMI will be worth little to Virgin, the landing slots are priceless. Landing Slots can not be manufactured unless airports expand with terminals and runways, and we know for a fact London Heathrow is not in a position to add either. I look at Virgin’s attempt to buy BMI similar to a move in Chess where sometimes pieces are sacrificed initially in order to be able to capture the more significant pieces later. If I’m Virgin Atlantic, I do what ever it takes to make sure those landing slots land in my hands.

The Chess metaphor applies to Lufthansa as well. If I am Lufthansa, I may not necessarily look at the largest bid as the best one. If a sale is made to IAG, the landing slots fall into the hands of the One World alliance thus further reducing the already weak presence of the Star Alliance in the UK. If I am Lufthansa, I may very seriously consider accepting the offer that lets the the Landing Slots “stay in the family”.

Over the years, Virgin Atlantic has been looking to join an alliance. Considering that Star Alliance member Singapore Airlines already owns a substantial stake in Virgin Atlantic, selling the gates to Virgin would pave a very easy road for Virgin Atlantic to be welcomed into the Star Alliance family and give the Star Alliance significant representation in the UK markets.

Virgin Atlantic has made this an interesting chess match to watch, and I’m sure that there will be other suprising gambits that will come out of this before all is said and done.

BoardingArea