Lufthansa Buys Into JetBlue's Business

Germany's biggest airline, Deutsche Lufthansa AG, said Thursday it is paying $300 million for a 19 percent stake in JetBlue Airways Corp., whose stock has lost about two thirds of its value since an operational meltdown last Valentine's Day.

The move, which could be a precursor to an eventual takeover if U.S. laws are changed, comes as the euro has risen significantly against the dollar, making U.S. companies seem like bargains for European buyers.

The cash would provide a welcome infusion for New York-based JetBlue which has been struggling.

JetBlue CEO Dave Barger called the deal a "significant endorsement of JetBlue's franchise from one of the most respected leaders in global aviation."

He said that the agreement "reaffirms our belief in JetBlue's disciplined growth plan and will also improve our balance sheet and give us greater financial flexibility as we move into 2008."

William Greene, an analyst at Morgan Stanley & Co., said in a research note that JetBlue has $433 million in current debt payable "but will be hard-pressed to fund from cash flow from operations or cash on hand."

In a statement, Lufthansa said it would acquire about 42 million newly-issued shares from the JetBlue for $7.27 per share, a 16 percent premium over Wednesday's closing price.

A Lufthansa nominee will be appointed to JetBlue's board of directors once the deal is concluded. JetBlue said the deal does not require approval from its shareholders.

The deal provides for an "operation cooperation," but the companies said no specific areas of cooperation have been identified.

"This investment presents Lufthansa with a compelling opportunity to invest in the U.S. point-to-point carrier market as the industry continues to evolve," said Lufthansa Chief Executive Wolfgang Mayrhuber.

Officials planned to comment further during a conference call later Thursday afternoon.

Lufthansa will benefit more than JetBlue from the deal, said Ray Neidl, an analyst at Calyon Securities in New York.

"Lufthansa gets (passenger) feed at (New York's John F. Kennedy International Airport), which they need," Neidl said.

The deal left some analysts scratching their heads.

"It's not clear to us what Lufthansa gains from such a transaction," Greene said. "It may be that Lufthansa wishes to ensure access to JFK and by taking a stake in JetBlue, Lufthansa ensures that it will have slots if the FAA reimposes (flight caps) at JFK."

JetBlue sells a single class of seat, whereas Lufthansa sells three classes, noted Bob Mann, an airline consultant in Port Washington, N.Y. Lufthansa may have a hard time convincing its first-class customers to jump from their large seats to JetBlue's economy-class seats, regardless of JetBlue perks like free DirecTV, Mann said.

"I am struggling with why this (makes sense)," Mann said.

Lufthansa already has code-sharing agreements with UAL Corp.'s United Airlines and US Airways, Mann noted. JetBlue's reservation system, meanwhile, doesn't accommodate code-sharing, or the process of letting passengers move seamlessly from one airline to another, he said.

But these problems could be easily fixed, Neidl argued.

A JetBlue stake also puts Lufthansa in the driver's seat for any potential longer-term takeover of JetBlue. Lufthansa is barred from such a takeover under current laws restricting foreign ownership of domestic airlines to 25 percent, but lifting the 25 percent cap was a key demand of European negotiators during talks earlier this year on an "Open Skies" deal, which was reached in March.

The Bush administration proposed lifting the cap, but backed down in the face of opposition from U.S. airlines and labor unions, who feared its impact on jobs. Several members of Congress also opposed the proposal.

The Open Skies agreement, which is scheduled to take effect March 30, 2008, will allow airlines to fly from anywhere in Europe to the United States and vice versa. Currently, for example, London's Heathrow airport only grants access to four U.S. airlines.

But the agreement doesn't allow European Union airlines to fly between U.S. cities, giving a carrier such as Lufthansa an incentive to hook up with a U.S. airline.

Lufthansa, whose last acquisition was the airline Swiss, recently decided not to bid on Italian airline Alitalia SpA. Mayrhuber has said Lufthansa is looking for acquisition candidates.

JetBlue shares rose 90 cents, or 14.4 percent, to $7.15 in trading Thursday in New York. That is about 58 percent below their high for the past year. That is a far steeper drop than the American Airline Index average of a 36.75 percent decline.