Lufthansa, Turkish Airlines Expand Tie-Up

Manila Bulletin
November 7, 2012
By Alex Webb and Ercan Ersoy (Bloomberg)

Deutsche Lufthansa AG may seek deeper ties with 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. The two companies may secure a deeper partnership by buying shares in one another, Financial Times Deutschland reported today.

“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.

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.

Turkish Airlines – which is 49 percent owned by the Turkish state, according to data compiled by Bloomberg – gained 2.6 percent to 4.29 lira. The stock has doubled this year, valuing the Istanbul-based company at 5.1 billion liras ($2.9 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.’”

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.

“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.”