Doubts cast over British Midland float

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The Independent Online
DOUBTS ARE growing in the City of London about whether Sir Michael Bishop, the chairman, will proceed with a flotation of British Midland, the country's second-biggest scheduled airline, following its entry into the Star Alliance group of carriers.

Announcing the link-up last week - and the sale of a 20 per cent stake in British Midland to Lufthansa of Germany - Sir Michael, who retains a controlling 60 per cent stake, indicated that a public offering was now the most likely option. Advisers suggested that British Midland would come to the stock market within the next 18 months.

However, analysts believe that a far more likely outcome remains a sale of the airline to Lufthansa which, together with United Airlines of the United States, spearheads the Star Alliance.

One leading airline analyst said that it would suit British Midland to appear to be remaining independent while regulatory approval is being sought from the competition authorities in Brussels for the Star Alliance entry.

However, he said that British Midland would always be much more valuable to Lufthansa than it would to private stock market investors because of the price an airline would pay to acquire its runway take-off and landing slots at London's Heathrow airport.

British Midland controls 14 per cent of all the runway slots at Heathrow airport, second only to flag carrier British Airways, which has a 38 per cent share. In total the 10 member airlines of the Star Alliance control 27 per cent of Heathrow's slots.

British Midland is currently valued at pounds 457m, based on the pounds 91.4m that Lufthansa paid to the Scandinavian airline SAS, another Star Alliance member, to buy its 20 stake.

Advisers argue that were the British airline to be sold it would fetch a far higher price because any buyer would have to pay Sir Michael a premium for gaining control of the airline group.

However, were Sir Michael to opt for a flotation, he would have to sell the airline on a multiple of more than 50 times last year's earnings to achieve a valuation of pounds 500m.

Pre-tax profits at British Midland fell by 34 per cent last year to pounds 11m on sales of pounds 560m, despite passenger numbers rising to a record six million.

British Midland expects its profits to improve this year because of a recovery in the UK domestic and outbound market and improved business- class traffic.

However, some analysts claim that all the company's profits are being generated by its engineering and ground-handling divisions, and that its actual airline passenger operations are losing money.