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Lufthansa aims to become European leader with AUA

German airline Lufthansa on Friday signed a deal for the purchase of loss-making Austrian Airlines, a move that will make it Europe’s biggest airline as the sector struggles with the economic downturn.  

In a first step, Lufthansa agreed to buy Austrian state holding company OeIAG’s 42% stake in Austrian Airlines (AUA) but plans to take it over completely for up to €377 million ($482 million) once Brussels approves the tie-up.

Airlines are in upheaval around the world, battling wild swings in fuel prices and falling demand as a global recession looms. Lufthansa is vying with Air France KLM and British Airways to emerge as European industry leader. “We are creating a European airline alliance for the long term and helping make sure Europe’s interests are catered to,” Lufthansa Chief Executive Wolfgang Mayrhuber told a news conference after the signing in OeIAG’s Vienna headquarters. “We need to find solutions for the fragmented European market,” Mayrhuber said.

Mayrhuber said he considered the risk of the European Commission blocking the deal to be “close to zero.” He said Lufthansa did not now plan to cut jobs at AUA, but expected to raise cost savings of about €40 million and additional revenues of €40 million a year.

AUA adds to a string of regional airlines the German carrier is buying: Brussels Airlines, Britain’s bmi, and its German partner Eurowings. It is also competing with Air France for an alliance with Alitalia. BA this week revealed it is in talks with Australia’s Qantas after earlier this year starting talks with Spain’s Iberia, which are still ongoing. Ryanair is trying to buy Irish flag carrier Aer Lingus.

November traffic numbers published on Friday confirmed the bleak state of the industry. Scandinavian airline SAS reported a 13% drop of revenue passenger kilometers, while Aer Lingus traffic sagged by 9%. Airline industry body IATA has warned commercial aviation could lose more than $5 billion this year.

The Austrian government had to accept only a nominal price for its AUA stake -- it may get more if AUA meets future earnings targets -- and had to assume €500 million of AUA’s debt to make the deal happen. Credit rating agencies Standard & Poor’s and Moody’s both cut the outlook for Lufthansa’s credit rating on Friday, partly because the AUA deal increases Lufthansa’s leverage. Both noted, however, that the deal was attractive for Lufthansa.

AUA shares continued to rise, trading up 3% at €3.82 by 1508 GMT on Friday, still short of the €4.44 takeover bid Lufthansa has promised. Lufthansa traded 2% lower at €10.15. (Reuters)