London: British Airways owner IAG has agreed to buy Lufthansa’s British unit bmi to boost growth prospects at its London Heathrow hub, it said on Friday, as it reported results showing the pressure airlines were under from higher fuel costs.
IAG reported a 31% fall in third-quarter profit, better than expected and outperforming peers, but highlighting the need for airlines to seek growth where they can.
British Airways CEO Willie Walsh. Photo: Bloomberg.
British Airways and Iberia parent IAG said it had reached an agreement in principle with bmi’s German owner for the sale of the loss-making unit -- the second-largest carrier at Heathrow -- with any deal subject to due diligence and regulatory clearances.
“We’re confident we can make a success of bmi and will look to expand our network, particularly our long-haul network through this deal,” IAG’s chief executive Willie Walsh told reporters, adding that IAG did not yet have exclusivity on any deal but believed its offer was more attractive than others Lufthansa had received.
Rival UK carrier Virgin Atlantic said it had made a bid for bmi and was still “working with Lufthansa”.
IAG said it expects the purchase agreement to be signed in the coming weeks and for a transaction to be completed in the first quarter of 2012.
Reuters on Thursday reported a deal between IAG and Lufthansa over bmi was imminent. Analysts believe a deal would be worth around £300 million.
With 9% of the take-off and landing slots, bmi is the second-largest carrier at Heathrow, Europe’s busiest airport. A deal offers IAG the opportunity to grow at Heathrow, which is operating at full capacity after plans to build a third runway were scrapped.
“If the deal goes through, it will be a long term strategic positive for IAG if they can build up further market share at Heathrow,” said Davy Stockbrokers analyst Stephen Furlong.
“In terms of the results, they are disappointing in that you see the fuel costs are not being offset by revenue.”
IAG shares were down 4% at 161.1 pence by 02:05 pm, valuing the business at around £2.1 billion ($3.3 billion).
IAG’s BA is the largest carrier at Heathrow with a 43.1% share of the slots -- ahead of Virgin in fifth with 3.1% -- and has most to gain if it can snap up bmi slots.
Walsh said he was confident the bmi deal would be cleared by regulators because IAG’s holding at Heathrow is small compared with rivals at other European hubs -- Lufthansa holds two-thirds of the slots at Frankfurt, while Air France-KLM has 59% at Charles de Gaulle in Paris and 57% at Amsterdam’s Schiphol.
IAG, Europe’s second-biggest airline group by value behind Lufthansa, said operating profit in the three months to the end of September fell to €363 million ($499 million) from last year’s third-quarter profit of €528 million.
IAG’s fuel bill rose by a quarter to €1.39 billion in the period and weak demand at Spain’s Iberia offset strong trade at British Airways.
“Rising fuel costs are the biggest challenge to the industry in the short-term along with potentially weaker demand in 2012,” said Walsh.
The company had been expected to report a third-quarter operating profit of €350 million, according to the consensus analyst forecast supplied by IAG.
“We are confident of a higher level of profitability in the fourth quarter of this year, even after the negative impact of the high fuel price. We expect to deliver a 2011 operating profit of around double the year 2010 profits,” said Walsh.
The company reported a 2010 operating profit of €225 million. It is expected to post an average operating profit of €562 million for 2011, according to a Thomson Reuters poll.
Walsh added that the airline had seen softening demand in October, with premium and non-premium traffic up 1.9% - a slower rate of growth than in prior months.