Deutsche Lufthansa AG said its Eurowings discount arm will enter a new phase of growth as the wholesale transfer of dozens of jets from Air Berlin Plc and Brussels Airlines NV doubles the size of its fleet and sidesteps union opposition to expansion.
Lufthansa’s twin moves to buy Brussels Air, which has 49 jets, and take over 35 from Air Berlin will re-energize Eurowings and allow it to play a role in European airline consolidation, Karl Ulrich Garnadt, the Lufthansa board member with responsibility for Eurowings, said in a briefing Thursday.
“These are groundbreaking decisions,” Garnadt said. “We started with Eurowings to safeguard our home markets and seek growth opportunities, and then we set up a foreign base in Vienna and began long-haul operations. Now with Wednesday’s decisions, the third phase will begin.”
While Eurowings is key to Lufthansa’s push to pare expenses, Chief Executive Officer Carsten Spohr has struggled to win union acceptance for his plan to expand the discount arm by awarding it short-haul routes operated by the group’s full-service carriers, with crew shortages, training delays and technical issues also hindering the transfer. That’s made acquisitions and other outside deals a more attractive option for expansion.
Garnadt said the pace of market growth in Europe is also slowing, leading to overcapacity that will ultimately spur mergers, adding that the accord with Air Berlin, involving the six-year lease of Airbus Group SE A320-family short-haul jets and crews, puts Lufthansa ahead of the game.
“The speed at which we can grow with our existing airlines is limited,” he said. “This deal means we can grow faster.”
Spohr has said he wants to make Eurowings Europe’s third-biggest discount airline after Ryanair and EasyJet, and the two deals will propel it toward that goal. A Eurowings fleet of 180 planes would already rank at No. 3 among no-frills specialists, though that excludes the impending delivery of large numbers of jets at carriers such as Norwegian Air Shuttle.
Lufthansa shares traded 2.7 percent lower at 9.78 euros as of 3:37 p.m. in Frankfurt. Air Berlin was down 6.9 percent at 69 euro cents after earlier gaining 6.5 percent. Brussels Air isn’t listed.
The Belgian acquisition is the more straightforward transaction, with Lufthansa exercising an option acquire the 55 percent of the carrier it doesn’t yet own.
Brussels, which has 29 A320-series jets, 11 regional aircraft and uses nine Airbus A330 wide-bodies mainly for flights to west and central Africa, will be folded into Eurowings, Garnadt confirmed, though there will be no changes until 2018 and the exact branding has yet to be decided. The airline has the most competitive flying costs among Lufthansa group carriers, he said.
Air Berlin, by contrast, “does not feel like a compelling attractive investment case,” according to Damian Brewer, an analyst at RBC Capital Markets.
The unprofitable carrier, which is cutting 1,200 jobs and will also move a chunk of its fleet to a new leisure unit, said it will receive 1.2 billion euros ($1.35 billion) over he course of the six-year accord, though Garndadt said the figure hasn’t been determined. Lufthansa has also yet to decide where to fly the planes, he said, and can’t discuss that with its German rival to avoid collusion.
“The deal looks like a lifeline to ensure Air Berlin remains in operation, preventing a harsher, better-capitalized competitor from filling a void that might otherwise open up,” Brewer said in a note.
Lufthansa’s Austrian Airlines unit will also get five A320s from Air Berlin, and is additionally purchasing two more plus a single Boeing Co. 777 wide-body.