Lufthansa takes ailing BMI under its wing in €400m deal

Virgin Atlantic pitches for tie-up with carrier to rival BA's alliance with American

Lufthansa is buying BMI for €400m (£314m) and Virgin Atlantic is pitching for a partnership with the newly expanded group as consolidation in Europe's battered aviation sector continues apace.

Alongside yesterday's trading statement reporting a 75 per cent drop in third-quarter profits, the German national airline said that it is taking its stake in BMI – formerly British Midland – up to 80 per cent. In a deal expected to be completed in January, Sir Michael Bishop, the chairman of BMI, is exercising an option to sell his 50 per cent plus one share stake. The option, and the price of the holding, was established in 1999 when Lufthansa bought 30 per cent of the company.

Lufthansa is also expected to bid for the remaining 20 per cent of the company, held by Scandinavian Airlines (SAS), which is also up for sale itself.

Hot on the heels of Lufthansa's announcement, Virgin Atlantic started making positive noises about a combination that would create Europe's biggest airline. "Everyone has speculated that it would make sense for Virgin Atlantic and BMI to combine their long-haul and short-haul networks," Steve Ridgway, the chief executive of Virgin Atlantic, said. "There is now a major opportunity to do that. I am sure that Lufthansa realises this could be a really good example of the right industry consolidation." BMI's attraction is that it holds some 12 per cent of the take-off slots at Heathrow, second only to British Airways. Such slots are hard to come by and extremely expensive, selling for more than £10m per pair.

Since the implementation of the Open Skies agreement relaxing the restrictions on transatlantic flights from the London hub, the competition for Heathrow slots has become even fiercer. By taking over BMI, the German carrier has taken its slots up to around 15 per cent. "It is a move that makes great strategic sense for Lufthansa," Douglas McNeill, an analyst at Blue Oar Securities, said. "Because the two airlines have worked together for some time, there are unlikely to be sudden wholesale changes, but there may be some re-shaping of the network going forward in terms of frequencies or destinations served."

The main benefit of a tie-up with Virgin would be the carrier's transatlantic destinations, and the fillip of the UK group's better-known brand. For Virgin, a Lufthansa deal would act as insurance against the threat of British Airways' proposed alliance with American Airlines, against which Virgin is a ferocious antagonist. "Virgin can see that life in the transatlantic market may get tougher," Mr McNeill said. "The BA/AA tie-up is a threat... if is lobbying efforts are not successful."

As economies around the world slip towards recession, airline consolidation will increase. Ashley Steel, at KPMG, said: "Although other sectors are receiving unprecedented financial help from governments... policymakers need to put aside their national interest concerns about airlines and accept that some carriers will have to merge in order to survive."

Sir Michael Bishop A budget airline pioneer

The chairman of BMI started in the airline industry in 1963 with Manchester-based Mercury Airlines, which was taken over by British Midland Airways the following year. By 1972, Sir Michael was managing director and five years later he was appointed chairman after raising £2.5m and leading a management buyout. He is widely credited with laying the foundations for the modern budget airline phenomenon, not least through a series of battles with the government to increase competition on domestic and international routes. Not to be outdone, he launched the no-frills BMIbaby carrier in 2002. Alongside his lead role in expanding British Midland from 2003, Sir Michael was the chairman of Channel 4 television for four years in the 1990s, and he remains the chairman of the board of trustees of the D'Oyly Carte Opera Company.