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Paul Holmes · Lounge Wizard Joined: 12 Apr 2005 Posts: 1012

Russian move on Austrian a boon for Lufthansa
Thu Sep 18, 2008 11:23am EDT
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By Boris Groendahl and Alexandra Schwarz

VIENNA (Reuters) - Germany's Lufthansa (LHAG.DE: Quote, Profile, Research, Stock Buzz) appears to be the preferred and most natural buyer of Austrian Airlines (AUAV.VI: Quote, Profile, Research, Stock Buzz) -- but not the one that will pay most or is the likeliest to accommodate wider Austrian interests.

A possible solution to that dilemma for the Austrian government has emerged in the form of Russia's S7 -- if Austria is ready to take the political risk involved.

Austrian government holding agency OeIAG has whittled away unworthy bidders for its 42-percent controlling stake in loss-making Austrian over the past month to draw up a shortlist of three possible buyers this week: Lufthansa, S7 and Air France-KLM (AIRF.PA: Quote, Profile, Research, Stock Buzz).

The trio is now delving into Austrian's books to come up with binding offers by October 21.

Bankers and advisers involved in the deal say OeIAG and Austria's finance ministry have made clear in informal talks that they believe Lufthansa is the only serious contender. OeIAG denies it has a preference for the German carrier.

On top of its long-standing relationship with Austrian -- the two share codes and have a lucrative joint venture that operates flights between the two countries -- Lufthansa appears like a safe haven in a time of turmoil in the airline industry.

The prospect of a smooth handover to a culturally compatible buyer outweighs concerns Lufthansa may sideline Vienna Airport and re-route flights to its Frankfurt and Munich hubs, and may cut costs aggressively.

But those bankers and advisers also say that Austria's courtship is one-sided.

Lufthansa, which agreed to buy Brussels Airlines last week and which sources say is more keen on Alitalia (AZPIa.MI: Quote, Profile, Research, Stock Buzz) or SAS (SAS.ST: Quote, Profile, Research, Stock Buzz) than on Austrian, is trying hard not to appear overly excited by the prospect of an Austrian buy.

"Their message is, 'Don't take us for granted'," says one banker who is looking at the deal but does not have a mandate.

TWO BIRDS WITH ONE STONE

A key reason is that Lufthansa has the least to gain, another banker looking at the deal says.

"Lufthansa is already today realizing maybe 80 percent of the possible benefits through its close cooperation (with Austrian) in the Star Alliance," says this banker who also does not have a mandate.

Lufthansa's main interest in the sale is to make sure Air France does not win the bid and moves Austrian into rival Air France-led alliance Skyteam, those bankers and airline analysts say.

Thus a sale of Austrian to S7, Russia's biggest domestic airline that is seeking to expand abroad and is not part of an airline alliance yet, would catch two birds with one stone from Lufthansa's point of view.

If the deal would be followed by S7 joining Lufthansa's Star Alliance and preserve the German-Austrian joint venture, Lufthansa could keep most of its benefits from its cooperation without exposing itself to a messy restructuring and a deterioration of its balance sheet with indebted Austrian.

Smelling its chance, S7 has stepped up its lobbying in Austria. Chief Executive Vladislav Filev has traveled to Vienna several times in the last few weeks to dispel doubts.

"They really want this deal," says one source close to Austrian's non-executive supervisory board.

But with Russia's relations to the West deteriorating after last month's war in Georgia, Filev's charm offensive cannot easily overcome the Austrian government unease about the risk of exposing its airline to a political crisis that may still have unpredictable consequences.

"It wouldn't be a bad solution at all," the first banker said. "But whether the political background allows it, is the big question."

(Editing by David Cowell)