Lufthansa's Bmi Buy Would Make it BA's Biggest Rival

Last Updated Oct 29, 2008 2:47 PM EDT

Lufthansa looks set to exercise its right to buy Bmi (which used to be British Midland International). Majority shareholder Sir Michael Bishop is expected to sell his 50 per cent stake plus one share to the Frankfurt-based carrier for an estimated £318m.

Bmi is relatively small, but it holds 12 per cent of the sought after landing slots at Heathrow, Europe's busiest airport. It also operates a mid-haul carrier, BMED, to Africa and the Middle East.

But the big lure for Lufthansa is the Heathrow slots. Another of Bmi's shareholders, Scandinavian Airlines (SAS), owns Heathrow slots worth an estimated £770m and is rumoured to be interested in offloading its 20 per cent stake in the UK airline.

Lufthansa and Bmi already co-operate on landing slots as members of the Star Alliance of airlines. But owning Bmi would make it the second most powerful carrier at Heathrow, after BA. This makes the deal of particular interest to BA's arch rival, Virgin Atlantic.

Virgin Atlantic's chief executive Steve Ridgway's keen to combine its international network with Bmi's Europe-wide routes to create "a more effective competitor to BA".

It has offered to combine its operations with Bmi, although it's unclear precisely how the deal would take shape. The benefits for Lufthansa of an alliance with Virgin are tied to the Virgin's brand power and international clout. But does Lufthansa need this if it has the Heathrow slots?

The German airline already has a strong European network that it looks set to bolster through acquisitions -- it was in the frame to take over Italian airline Alitalia, and bought Swiss International Airlines and, more recently, a 45 per cent stake in Brussels Airlines.

Even with disappointing third quarter results -- a 75 per cent drop in net profit to 149m euros, with operating profit down nearly 54 per cent to 279m euros -- Lufthansa's chairman, Wolfgang Mayrhuber, has said he views the current economic environment as "a constructive situation" that offers the airline "opportunities for consolidation". Where it stops, only the Competition Commission can say.