In a hotel conference room in Tokyo, the heads of some of the world’s biggest airlines – Lufthansa, United, All Nippon and SAS – were discussing their biggest headache. How could they get more flights into Heathrow?
The council of war took place in October 1999. All those present were part of the Star Alliance, an airline group spoiling for a fight with Oneworld, a rival led by British Airways.
The Star executives wanted to invade BA’s home turf, but were unsure how to do so. Heathrow’s runways were full. The only way to secure more flights was to cosy up to an incumbent airline.
There was an obvious target; BMI British Midland which, under the canny direction of chairman and majority shareholder Sir Michael Bishop, had become Heathrow’s biggest player after BA.
Bishop, however, was playing hard to get, and had begun flirting with another alliance, Skyteam.
Jurgen Weber, chief executive of Lufthansa and the chief architect of the Star group, decided to make Bishop an offer he couldn’t refuse. BMI would join Star, and in return Lufthansa and its European partner SAS would underwrite any losses the British airline made, and buy him out within nine years at an agreed price.
Last week the pigeons that took flight in Tokyo finally came home to roost. Bishop took Lufthansa up on its offer and handed it his controlling stake in BMI. The German group is expected to take over the British airline, and with it 11% of flights at Heathrow, early next year.
Although the sums involved have not been confirmed by either airline, it is understood Lufthansa will pay Bishop £317m, putting a total value on BMI of more than £600m – a decent price at a time when the airline industry is heading into recession.
For a long-awaited deal with the potential to transform European aviation, it came with little fanfare. Lufthansa made no special announcement, but buried Bishop’s decision in the small print of its third-quarter results.
“You would think they weren’t particularly pleased it had finally happened,” said one rival airline executive.
And despite years of predictions that Lufthansa and Star would follow the 1999 plan, and use BMI to build a sizeable presence at Heathrow to attack BA, it was unclear last week exactly what the Germans would do with their new toy.
Some insiders believe that rather than BMI being the platform for a grand expansion, it may be quietly broken up.
“The plan was always to get hold of the take-off and landing slots at Heathrow, which were viewed as priceless. But now events have caught up with the plan. BMI is losing money and the industry is staring recession in the face. I think Lufthansa will take its time working out the best way forward,” said one analyst.
There are several options. Lufthansa could stick with plan A, and take on BA with a full range of services from Heathrow, with domestic and European services feeding long-haul flights – in particular across the Atlantic to America, where BA makes most of its profits. The BMI brand would stay in place, just as Lufthansa kept the “Swiss” name in place when it took on Swissair.
This strategy’s Achilles heel is that Lufthansa and Star would still be smaller than BA at Heathrow (Star would have a combined share of nearly 20% of Heathrow’s runway slots, compared with BA and its partners’ 48%), and offer less of the frequency and spread of network that makes business trav-ellers choose one carrier over another.
Building up Heathrow might also detract from Lufthansa’s own domestic hubs at Frank-furt and Munich, and burn up cash when airlines are trying to conserve it.
Lufthansa could merge BMI with Sir Richard Branson’s Virgin Atlantic, perhaps taking over Singapore Airlines’ 49% stake in Branson’s company.
Virgin has made no secret that it is open to suggestions, with chief executive Steve Ridgeway last week making a public statement about the attractions of such a deal – a move taken by some as an indication that there were no serious talks under way.
“If there was a deal in the offing, you wouldn’t hear a thing from them,” said one source.
Branson has tried to do a deal several times with BMI in the past, arguing that the combined airlines would create a serious rival to BA. However, the talks have always foundered over price, with Branson and Bishop unable to agree on the valuations of their respective companies.
Another option would be a more modest challenge, choosing selected routes from Heathrow – such as New York – on which to sap BA’s strength. At the same time, Lufthansa could sell off the slots that were surplus to requirements, although this would be a gradual process that could take several years.
If Lufthansa wanted to capi-talise on its investment quickly and put a big chunk of the BMI slots up for sale, the obvious buyer would be BA. “No other airline can easily digest a big new position at Heathrow. Lufthansa might see a way here to get half of BMI’s Heathrow slots in effect for nothing, by selling the other half,” said one source close to the talks.
BMI’s operations outside Heathrow – BMI Regional and a low-cost airline called BMI Baby – appear certain to be sold. The most likely buyer is FlyBe, the fast-growing Exeter-based airline that is owned by the Walker Trust.
It bought BA’s regional business last year and could, if Lufthansa was inclined, also take over some of the routes at Heathrow.
Last week airline executives and transport bankers were talking about another, more intriguing possibility. Might Lufthansa continue its march into London with a takeover of BA itself?
While there is no indication that Lufthansa has considered making such a move, BA is regarded as vulnerable.
Its own plan for a merger with Spain’s Iberia has run into the sand, hampered by the British airline’s bombed-out share price – it closed the week at 136p, down from a one-year high of 450p – and its mounting pension deficit.
Lufthansa’s directors, led by chief executive Wolfgang Mayrhuber, may be mulling whether, having established a bridgehead in Britain, they should push for an even larger prize.