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Airline mergers, the way forward

By Lu Haoting (China Daily)
Updated: 2009-06-01 11:24

Lufthansa planes are seen on the tarmac at Frankfurt International Airport in Frankfurt, Germany.[Bloomberg News]

What is the benefit of merging two airlines?

"You have two restaurants and one kitchen," said Arved von zur Muehlen, managing director for Greater China of Lufthansa German Airlines Group, which merged with Swiss International Air Lines three years ago.

"As a passenger, you can choose either restaurant. You can even have the main course in the German restaurant and the dessert in the Swiss restaurant. One way you fly Lufthansa and on the other fly Swiss. We have only one cashbox," said Muehlen, who is also in charge of Swiss' sales and marketing in China.

By offering more choices to customers, the merger has allowed Lufthansa to become more competitive, driving up its passenger traffic despite an industry downturn caused by the global economic slowdown, Muehlen said.

"Industry consolidation will continue," Muehlen predicted.

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Lufthansa's next targets are Austrian Airlines and Brussels Airlines.

The German carrier made a public offer to purchase the stock held by all free-float shareholders of Austrian Airlines AG in February. More than 85 percent of the shareholders of Austrian Airlines had accepted the offer by last month.

Lufthansa also plans to take a 45 percent stake in Brussels Airlines, which may later be increased to 100 percent.

Muehlen declined to say how his Chinese operations would adjust to the two mergers as the two deals are currently undergoing regulatory reviews by the European Commission.

Analysts said consolidation is expected to pick up speed this year as airlines resort to mergers to fend off the economic downturn. Consolidation helps airlines cut costs as it allows airlines to share resources.

Lufthansa's major European rivals such as Air France-KLM and British Airways have also showed great interest in consolidation.

Air France-KLM, Europe's largest airline by revenue, finalized a deal on May 20 with Delta to operate as one airline over the North Atlantic. Air France and KLM merged in 2004 and Delta bought Northwest Airlines last year, which paved the way for a four-way partnership. The pact between the two largest airlines on each side of the ocean involved sharing revenues and costs on more than 200 trans-Atlantic flights.

Air France-KLM completed its purchase of a 25 percent stake in Alitalia earlier this year. It has also submitted a non-binding offer for Czech Airlines, while British Airways said last year that it planned to merge with Iberia, the Spanish flag carrier.

Core market

While some airlines cut their capacity amid falling traffic demand, Lufthansa increased its from 50 to 56 flights per week in the summer schedule starting from March 29 in the Chinese market.

"China is a strategic core market for us. The development of the Chinese market in the long run is very positive," said Muehlen, who is also chairman of the German Chamber of Commerce in China, which has over 1,100 corporate members on the Chinese mainland.

"We don't see any of our members leaving China. Everybody says this is a strategic market and has a good future although there are some problems now. For an airline this is a very encouraging outlook because we follow where these businesses go," Muehlen said.

The Chinese market currently accounts for 25 percent of Lufthansa's revenues in the Asia-Pacific region and has experienced robust growth in recent years.

Lufthansa started to fly between Nanjing and Frankfurt and between Shenyang and Munich via Seoul last year, which allowed the airline to serve five gateways on the mainland, including Beijing, Shanghai and Guangzhou. The German carrier is the only foreign airline to fly to five Chinese mainland cities.

Talking about the impact of the A/H1N1 flu outbreak, Muehlen said Lufthansa had some cancellations from Chinese passengers as some group travelers postponed their trips and were waiting until the situation became clearer. But he said the airline has generally maintained stable seat load factors as the cancellations were made up with demand from European passengers. Currently, 30 percent of Lufthansa's passengers are Chinese.

"I strongly believe the situation will relax in June," Muehlen said.

Rising concerns over the flu outbreak could have a significant impact on air traffic demand, said Giovanni Bisignani, director-general and CEO of the International Air Transport Association (IATA).

"It is still too early to judge what impact the flu will have on the bottom line. But it is sure that anything that shakes the confidence of passengers has a negative impact on the business. And the timing could not be worse given all of the other economic problems airlines are facing," Bisignani said.

International passenger air traffic demand fell 11.1 percent year-on-year in March, according to IATA figures. The organization represents some 230 airlines that comprise 93 percent of scheduled international air traffic.

IATA said earlier that international air travel demand to and from China is expected to contract by between 5 and 10 percent over the year due to the economic downturn in the country's major trading partners such as the United States and Europe.

Deutsche Lufthansa AG, the airline's parent, reported revenue of 5 billion euros in the first quarter of this year, down 10.3 percent year-on-year. It posted a net loss of 256 million euros in the first three months of this year, against a net profit of 44 million euros in the same period last year.