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Lufthansa, Low-Cost Leaders Cautious on Replacing Air Berlin

Aug. 22 (Bloomberg) -- Deutsche Lufthansa AG said routes dropped by budget rival Air Berlin Plc are unlikely to be a good fit for its network, while leading discount operators Ryanair Holdings Plc and EasyJet Plc have no plans to add German bases.

The three carriers said they’ll still examine opportunities that may arise as Air Berlin scraps 7,500 flights in the second half, and Lufthansa’s Germanwings GmbH low-cost unit aims to take over some destinations served from Cologne-Bonn airport.

“The routes that appear to be being taken out aren’t routes Lufthansa is going to rush for,” Stefan Lauer, head of the carrier’s airlines based outside of Germany, said in Vienna. “It looks as if a lot of them will be routes from smaller German centers to the Mediterranean, and that’s not our network.”

Air Berlin is scrapping unprofitable services, cutting frequencies and reducing its presence at regional airports to focus on bases in Berlin, Dusseldorf, Vienna and Palma de Mallorca. Bloxham Stockbrokers analyst Joe Gill said discount carriers in particular will probably bide their time to see how far Air Berlin’s retreat goes before making significant moves.

Lying in Wait

“I wouldn’t assume that the capacity cuts that Air Berlin has announced are themselves the opportunity; I think it’s a much deeper opportunity than that,” Dublin-based Gill said by phone. “Ryanair is waiting in the shadows to do a deal with anybody if it can get the right metrics with airport costs.”

Air Berlin closed almost 16 percent higher at 2.84 euros in Frankfurt, paring the drop this year to 23 percent and valuing the company at 242 million euros ($348 million). Lufthansa and EasyJet both fell 1.2 percent, while Ryanair added 0.8 percent.

Air Berlin most likely rose in anticipation of improved earnings as it cuts capacity and seeks a successor to Chief Executive Officer Joachim Hunold, according to Juergen Pieper, an analyst at Bankhaus Metzler in Frankfurt who rates the company “sell” and predicts the stock will fall to 2.20 euros.

“It’s really a gamble, given the negative fundamentals and the negative environment,” Pieper said. “The company needs a strategy and it’s difficult to see any positives.”

Tax Barrier

Lufthansa spokesman Boris Ogursky said Europe’s second-biggest airline needs to consider whether cities being dropped fit with the network. “I wouldn’t say anything as concrete as that we are interested in Air Berlin’s routes,” he said.

Germanwings would like to operate Air Berlin routes from Cologne, its own base, to cities in Morocco, Tunisia and Italy, benefitting from “very different” costs, spokesman Heinz-Joachim Schoettes said. There have been no talks as yet, he added.

Among services being terminated are those from Dusseldorf to Bilbao, from Vienna to Madrid and from Palma to the German town of Saarbrucken and to Murcia on the Spanish mainland. Still, most cuts are at the business-focused City Shuttle unit, including Hanover to London Gatwick, Munster to London Stansted and Stuttgart to St Petersburg, Air Berlin said Aug. 18.

While Ryanair added winter services from Frankfurt and Munich to Alicante in Spain on the day before Air Berlin’s statement and the resignation of Hunold, it has generally cut German capacity since a new aviation tax was implemented, spokesman Stephen McNamara said.

“Until the German market becomes competitive I can’t see any big increases in capacity by Ryanair,” McNamara said from Dublin. “Some Air Berlin routes may seem attractive but the tax is going to be a problem, especially during the winter.”

Balearic Routes

Europe’s biggest discount airline expects to carry about 8 million passengers in the region’s largest economy this year, down from 11 million in 2010, the spokesman said.

Bloxham’s Gill said that deeper cuts to Air Berlin’s network to the Balearic Islands would present the best openings for Ryanair, which currently has German bases at Frankfurt-Hahn, Bremen and Dusseldorf and flies from eight airports in the country, serving a total of 160 destinations.

EasyJet, Europe’s second-biggest budget operator, has no immediate plans for operations on the abandoned routes, though it views Germany as an important market and would like to expand there in the long run, spokesman Paul Moore said today.

“We’re not going to do anything in the short term in response to Air Berlin’s capacity reduction,” Moore said. EasyJet currently has one German base, in Berlin.

Lufthansa, EasyJet, Ryanair and Germanwings are among carriers looking at the situation in the wake of Air Berlin’s withdrawal, Financial Times Deutschland said today, citing spokespeople and managers at the companies.

BMI, SAS

Lufthansa separately remains open to disposing of U.K. unit BMI if a sale makes sense “in the total picture,” Lauer told reporters in Vienna, where the German company, owner of Austrian Airlines, named an Airbus SAS A380 superjumbo after the city.

BMI, the second-biggest slot holder at London’s Heathrow airport, has been hit “particularly hard” by a traffic slump prompted by unrest in the Middle East, and Lufthansa doesn’t exclude any options for the division, the executive said.

Cologne-based Lufthansa is not currently considering a move for SAS Group as the Nordic carrier’s government investors look to dispose of stakes, said Lauer. “We are busy enough with the companies that we’ve bought in Europe,” he said. “I don’t think this is the time to think about anything else.”

To contact the reporters on this story: Alex Webb in Frankfurt awebb25@bloomberg.net; Steve Rothwell in London at srothwell@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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