Deeper code-sharing likely result of Lufthansa-Turkish talks speculation, not merger

Deutsche Lufthansa AG may seek deeper ties to Turkish Airlines to thwart competition from Gulf rivals and match European peers that already have Mideast partnerships, analysts said after Turkish media reports of talks on a merger.

A full combination could be complicated by European Union rules on ownership and wouldn’t be logical for rapidly growing Turk Hava Yollari, as the Turkish carrier is formally known, said Yan Derocles, an analyst at Oddo & Cie in Paris.

Turkish Prime Minister Recep Tayyip Erdogan said he favored a tighter relationship between the Star Alliance members, state- owned Anatolia news agency reported Nov. 3. Air France-KLM Group last month agreed to code-share with Abu Dhabi’s Etihad Airways, while Qatar Airways Ltd. aims to join International Consolidated Airlines Group SA’s Oneworld alliance within 18 months.

“A merger would be nonsense for Turkish right now,” said Derocles, who has a “neutral” rating on Lufthansa, Europe’s No. 2 airline. “A strong code-share makes strategic sense.” Code-sharing allows airlines to sell tickets on each other’s flights on chosen routes. Turkish Airlines, a Star Alliance member since 2008, already attaches its code to Lufthansa services to North America, while the German carrier adds its flight number to THY services to the Middle East. Further scope for cooperation might include operations to Asia.

Shares Gain

Turkish Airlines — which is 49 percent owned by the Turkish state, according to data compiled by Bloomberg — gained as much as 5.7 percent, the most since June, and was trading 5 percent higher as of 10:11 a.m. local time. The stock has doubled in price this year, valuing the Istanbul-based company at 5.3 billion liras ($3 billion).

Cologne-based Lufthansa rose 1.1 percent and later traded little changed at 12.32 euros. It has gained 35 percent this year for a value of 5.7 billion euros ($7.3 billion).

German Chancellor Angela Merkel suggested bringing Lufthansa and Turkish closer together when Erdogan visited Germany last week, according to Anatolia.

“During our Germany trip, Merkel offered me this: ‘Let’s get Lufthansa and Turkish Airlines into joint operation,” the premier was quoted as saying by Anatolia. “I said: ‘OK. This is already among our projects and God willing our Turkish Airlines and Lufthansa can take a joint step like that.’”

Smaller Acquisitions

Speaking in Turkish, Erdogan used the word “isletmecilik” to refer to the joint project, which can be translated as either “management” or “operation.” Two Turkish newspapers, Haberturk and Sabah, reported yesterday that a merger between the two airlines is under consideration.

Unlike its competitors, Lufthansa has focused on buying smaller carriers in the past rather than pursuing a merger with a peer. While British Airways merged with Iberia to form IAG in January last year and Air France fused with the Netherlands’ KLM in 2004, Lufthansa has added Swiss International Airlines, Austrian Airlines and BMI — which it sold this year — plus stakes in Brussels Airlines and JetBlue Airways Corp.

The 86-year-old company spent $7.29 billion on acquisitions in the past decade, according to data compiled by Bloomberg. That compares with $7.26 billion at Air France, the region’s biggest carrier, and $3.6 billion at IAG, the No. 3.

‘Constant Dialogue’

“They are perceived to be somewhat vulnerable to Middle Eastern traffic flows,” Stephen Furlong, an analyst at Dublin- based Davy Holdings, said yesterday. “A deal with Turkish would take a lot of the negatives against Lufthansa off the table.”

Lufthansa is in “constant dialogue” with Turkish Airlines to improve and intensify co-operation, Frankfurt-based spokesman Klaus Walther said yesterday, while declining to comment on whether a merger is a possibility. “Everything that is in the interest of our customers” is conceivable, he added.

Turkish Air Chief Executive Officer Temel Kotil said in an e-mail yesterday: “We have a cooperation standing for years with Lufthansa, and we are working on ways to find how we can better serve our passengers, and we are in constant communication on how to develop these.”

Lufthansa is eight months into a savings plan that aims to trim annual costs by 1.5 billion euros by 2015. As part of the program, the company is folding own-brand European services outside the Frankfurt and Munich hubs into low-cost unit Germanwings after concluding that it can no longer afford to subsidize short-haul flights with profits from intercontinental trips, head of passenger airlines Carsten Spohr said Oct. 12.

Earnings Boost

Both Air France and Lufthansa posted third-quarter earnings gains that beat analyst estimates on Oct. 31 as their respective efficiency plans took effect. Lufthansa’s profit jumped 6.2 percent to 648 million euros, boosted by a 15 percent gain at the passenger airlines unit. It expects companywide annual profit to fall below last year’s 820 million euros.

Turkish Airlines had net income of 193.1 million liras in the three months to June, beating the average estimate of 113.9 million liras from analysts. It had posted a 170.6 million-lira loss in the year-earlier period. Sales jumped to 3.8 billion liras from 2.8 billion liras.

Airline-industry profits will fall by more than half this year to $4.1 billion, according to the International Air Transport Association, whose members account for 84 percent of air traffic. That’s still $1.1 billion more than previously predicted, as capacity curbs and mergers boost profitability.

Oneworld’s welcoming of Qatar to the alliance came one month after Qantas Airways Ltd. said it would quit a 17-year partnership with British Airways in favor of an accord with Dubai-based Emirates, the biggest Middle Eastern carrier.

Pricing Coordination

Qantas and Emirates, the largest and third-largest by passenger numbers on routes from Australia, intend to coordinate pricing, sales and scheduling. They will also align frequent- flier programs, allowing passengers to earn points on both carriers’ flights. Neither company will buy equity in the other under the deal, which requires regulatory approval.

The Oct. 8 agreement between Etihad, the Gulf No. 3, and Air France is intended to be the first phase of a “much larger strategic partnership,” Etihad said at the time.

Qatar CEO Akbar Al Baker said Oct. 18 that the third- largest Gulf carrier would have considered joining Lufthansa’s Star Alliance over Oneworld if the German company hadn’t proven so hostile to the growth of Mideast airlines. “They have lost in this very lucrative alliance chess game,” he added.

Lufthansa CEO Christoph Franz said March 15 that he was “very concerned” about the ascent of Gulf carriers. “They are serving the strategic goals of the Gulf states, namely the displacement of European air transport hubs into the Middle East, 40 kilometers from the Iranian border,” he said. “We must stand up for our European interests more forcefully.”

Turkish Airlines and Lufthansa both have access to large home populations, differentiating them from Gulf carriers that largely depend on passengers who switch planes at their hubs while en route between other countries.

–Editors: Chris Jasper, Paul Verschuur.

To contact the reporters on this story: Alex Webb in Frankfurt at [email protected]; Ercan Ersoy in Istanbul at [email protected]

To contact the editor responsible for this story: Chad Thomas at [email protected]