In what was basically a poorly kept secret until just a few days ago when Carsten Spohr suggested that Lufthansa would be interested in Alitalia, Lufthansa today confirmed it has submitted its proposal.
In it, Lufthansa is offering upwards of 500mm Euro to buy Alitalia out of bankruptcy. The 500mm offer is asking for all of Alitalia’s aircraft, employees and airport slots around the world. However, LH said it would have to let 6,000 of the 12,000 Alitalia employees go should it be successful in acquiring the Italian national carrier.
Will it happen? Most likely not.
Though at first blush the LH offer is compelling and agrees to take on all of Altalia which is something that the Italians want to happen vs. Alitalia being blown up into bits and acquired by multiple suitors, it is expected that the group handling the administration of Alitalia will decline the bid. That has been made obvious by the fact that a November 5, 2017 deadline set by Rome to find a suitor for Alitalia has been extended to April 30, 2018. This extension does not inspire confidence that Lufthansa’s bid is being taken seriously.
I believe the proposal will fall on deaf ears in Rome since it suggests that 6000 Alitalia employees will lose their jobs, and with the Italian Gov’t in control of the sale such a deal would be bad politics considering that Italy itself is in a state of flux with its ruling parties and can ill afford to upset their constituency. The proposal also suggests that short and medium haul routes would be gutted from the timetable.
Speaking of politics, there is no love loss whatsoever between Rome and Berlin thanks to the EU’s (primarily Germany) handling of most things on the continent. The migrant crisis is front and center in Rome and Italy feels it is being asked (unfairly) to bear the burden of Merkel & Company’s failed experiment, but I digress. So it would most likely pain Italy and Italians to see Germany of all countries (or an agent of it) come in to try and rescue Alitalia. As the say goes, “thanks but no thanks”. Italians are a prideful people and this just doesn’t seem like something they will sign off on.
In addition to the Lufthansa offer, EasyJet has also submitted a bid demonstrating its interest. However their bid is asking for only parts of Alitalia and as I mentioned earlier, Rome wants this to be an ‘all or none’ deal. There are also 3 to 4 private equity firms that have expressed interest in Alitalia but their details have not been made very obvious as yet.
While the process of finding a buyer continues, Rome has agreed to throw good money after bad and has announced that it has given Alitalia another 300mm Euro to continue operations. This after the Italian government floated Alitalia a 600mm Euro loan earlier this year to help finance the debacle. I’m sure that Italians are pleased that they’ve spent nearly 1 Billion Euro just this year alone to keep the birds in the air.
Apparently there’s no end in sight to this soap opera…..
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.
Yesterday I shared the news breaking from the Italian media regarding a potential blockbuster deal that would join Lufthansa and Etihad.
Fortunately, it appears that the sides were not in any serious conversation regarding combining themselves into some strange Eur-Abic airline.
Unsubstantiated rumors from the Italian yellow press (specifically Il Messaggero) suggested that Etihad was prepared to take as much as a 40% stake in LH. Maybe ‘Il Messaggero’ just needed the page hits for their website revenue so they threw something out there to gain some attention.
This time, sources I deem reliable quashed such a notion as unrealistic due to the obstacles involved in such a combination.
At least I was on the record from yesterday’s post casting my own doubts and not running any ridiculous ‘What If’ scenarios that were running rampant on the Interweb.
In reports coming from Italian media (Italian newspaper Il Messaggero) this morning, it appears that Lufthansa and Etihad are discussing a merger that would combine the 2 airlines.
As of now, the discussions are said to revolved around 2 options. One being Etihad taking a 40% stake in Lufthansa and the other being a complete merger of the 2 carriers.
This news is just reaching the wires and has not been substantiated by either side, so there may be more smoke than fire to this development. However, LH and Etihad have been working closely together when dealing with Air Berlin, so it should come as no surprise that their conversations may have expanded to included a larger relationship.
There is a myriad of regulatory hurdles that would have to be cleared in order for any serious deal to take place. These regulations limit foreign ownership of a European carrier as well as other restrictions, so it may not be as easy to accomplish as the press would like you to believe!