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TUI says it will form a low-cost airline with Lufthansa

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Jan 29, 2008

FRANKFURT — German travel and transport group TUI and airline Lufthansa are working on creating a new low-cost carrier, the TUI Travel subsidiary said on Tuesday.

The partners have signed a letter of intent for a merger of TUI Travel, Hapag-Lloyd and Hapag-Lloyd Express with Lufthansa units Germanwings and Eurowings, a statement said.

Albrecht Knauf, who is a partner with Lufthansa in Germanwings and Eurowings, is to hold a significant stake in the new entity, it added.

Reports separately said TUI and Lufthansa would each own 40 percent, with Knauf holding the rest.

If the deal gets off the ground, the combined carrier would transport about 30 million passengers a year, behind Lufthansa's 56.4 million but right on the tail of Germany's leading low-cost airline, Air Berlin.

Fast growing Air Berlin was designated as a target of the merger.

"This project is a logical consequence of consolidation initiated by Air Berlin," which has bought three rivals even as it renews its fleet of aircraft, HypoVereinsbank analyst Uwe Weinreich said.

Lufthansa does not want Air Berlin to become the dominant German actor in the lucrative niche market, which includes foreign rivals Ryanair and EasyJet, as well as the rail operator Deutsche Bahn on domestic routes.

Opposition was expected from the powerful pilot's union Cockpit, which fears a new airline could undermine pay conditions for its members.

Lufthansa could transfer some pilots to the new group and save on labour costs in the process, some analysts said.

The German airline said Tuesday that it had agreed to a 5.5 percent pay raise with Cockpit representatives the day before.

The accord concerns around 4,400 pilots, who would also receive a one-time bonus equivalent to one-quarter of their monthly salary. The accord runs to March 2009, a statement said.

"The agreement takes into account our company's good financial situation at prsent," Lufthansa executive Stefan Lauer was quoted as saying.

Meanwhile, TUI could be the main beneficiary of new carrier combine, analyst Weinreich said.

Its air transport unit has struggled while the general tour operator activities were profitable.

TUIfly, which has had trouble filling its planes, has already announced cutbacks for the northern hemisphere's summer 2008 season.

The parent company said it hoped to finalise a deal with Lufthansa by mid-2009. Lufthansa declined to comment on a timetable.

Investors appeared to agree a merger was particularly good news for TUI and its shares jumped nearly five percent to 14.75 euros in afternoon Frankfurt trading. Lufthansa was up 1.30 percent to 16.35 euros after getting a boost from news of the pilots' pay accord.

The DAX index was up 0.88 percent overall.

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TUI says it will form a low-cost airline with Lufthansa



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