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Lufthansa shares knocked by Eurowings expansion deals
September 29, 2016 / 9:46 AM / a year ago

Lufthansa shares knocked by Eurowings expansion deals

BERLIN, Sept 29 (Reuters) - Shares in Lufthansa fell to a four-year low on Thursday on concerns its plans to boost its low-cost Eurowings brand by leasing Air Berlin planes would neither lower costs nor head off larger rivals.

Lufthansa has said it wants to turn Eurowings into Europe’s third low-cost airline behind Ryanair and easyJet . The lease deal announced on Wednesday along with Lufthansa’s decision to buy the rest of Brussels Airlines will provide planes for that expansion.

Analysts said, however, that a deal to lease Air Berlin planes and crews for short-haul routes next summer would likely increase costs and seemed to be more of a defensive move to stop Ryanair and easyJet gaining a foothold in Germany at the expense of Air Berlin, which has been losing money for years.

“It’s far from clear that this expansion will help Lufthansa to secure greater profitability,” independent aviation consultant John Strickland said. “Ryanair in particular has an order book exceeding 300 aircraft and Lufthansa is likely to still feel increasing competitive heat as a result of this.”

Lufthansa shares fell to a four-year low of 9.725 euros on Thursday and were down 2.2 percent at 0917 GMT. Shares in other European airlines also slipped on Thursday after OPEC agreed to curb crude oil output.

The German airline, which has been battling with its pilot unions about cost cutting plans at Lufthansa, is aiming to put Eurowings on a par with easyJet when it comes to costs.

The so-called wet lease deal for 40 planes and crew does throw a financial lifeline to Air Berlin, however, which said it expected payments over the six-year deal to exceed 1.2 billion euros ($1.4 billion).

Shares in the loss-making airline, which is 29 percent owned by gulf carrier Etihad Airways, were worth almost 20 euros apiece back in 2007 but now trade for under 1 euro. They climbed 1.2 percent on Thursday, outperforming other airlines.

“We struggle to see how contract terms could simultaneously deliver an acceptable positive return for Air Berlin while also delivering a suitably competitive cost base for Eurowings,” Liberum analyst Gerald Khoo wrote in a note.

Lufthansa said on Wednesday the deal would be agreed at “competitive market rates” while Air Berlin’s CEO Stefan Pichler said it would only strike such a deal if it was attractive.

Eurowings CEO Karl Ulrich Garnadt is due to hold a press conference at 1000 GMT on Thursday.

RBC analyst Damian Brewer said he was “perplexed” by the wet lease deal, saying Lufthansa could instead lease planes on the open market and crew them with new staff at market rates.

Michael Gierse, fund manager at Lufthansa shareholder Union Investment, said the lease deal would put Eurowings in key markets to help block easyJet and other rivals.

“But it will only delay them and not prevent them completely,” he said.

$1 = 0.8912 euros Editing by David Clarke

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