Lufthansa takes control of bmi

Lufthansa signalled its intention to take on British Airways at Heathrow yesterday after the German flag carrier said it would acquire bmi, the airport's second largest airline.

Sources close to the transaction also indicated that an agreement with Virgin Atlantic was possible after the carrier controlled by Sir Richard Branson made a public plea to be involved in the deal. Lufthansa is expected to take control of bmi, formerly known as British Midland, after bmi chairman Sir Michael Bishop triggered a put option that requires the airline to buy out his majority stake.

The German airline said it saw "great potential" in running an enlarged operation out of Heathrow and brushed off concerns that it would damage the competitiveness of its services out of Frankfurt airport .

Sir Michael sold a 30% minus one share stake in bmi to Lufthansa in 1999, reducing his holding to 50% plus one share and including a put option that required Lufthansa to buy his stake in a window that opens next January. Lufthansa's announcement prompted the intervention of Virgin Atlantic chief executive Steve Ridgway who issued a statement reminding the German carrier of his airline's long-standing interest in a deal with bmi.

"Everyone has speculated that it would make sense for Virgin Atlantic and bmi to combine their long-haul and short-haul networks. There is now a major opportunity to do that and create a new and even more effective competitor to BA," said Ridgway. A deal with Virgin Atlantic is an "option", according to sources close to the talks, but the transaction between Sir Michael and Lufthansa cannot be finalised until mid-January under the terms of the shareholding agreement.

Virgin Atlantic, which is Heathrow's fourth largest carrier behind third-placed Lufthansa, is seeking strength in numbers as BA and American Airlines push ahead with a proposed partnership. BA and AA are members of the oneworld airline alliance and have requested regulatory clearance to form a three-way entity with Spain's Iberia. Virgin Atlantic, however, is not even a member of an alliance and would be expected to join bmi and Lufthansa in the Star Alliance group as part of any deal.

Andrew Lobbenberg, an analyst at the Royal Bank of Scotland, said bmi would have to be restructured as part of any deal because it has a low-fares division, bmibaby, and a regional operation that are unlikely to interest Lufthansa. Bmi reported pre-tax profits of £15.5m last year, down from £29.7m, on turnover that rose by 13% to £1bn, helped by the contribution of Bmed, the former BA franchise it acquired in 2007. Bmi's main asset is its mainline operation, which owns 12% of the slots at Heathrow and operates flights to Europe, the US, Africa and the Middle East. Lufthansa is expected to use those slots as a springboard for challenging BA on one of the most lucrative routes in the airline market - Heathrow to New York.

"I would be surprised if BMI Regional and Baby played a part in Lufthansa's thinking. The option of combining bmi's Heathrow operations with Virgin and bringing the combined entity into Star Alliance is one that should be given serious consideration," said Lobbenberg.