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A Marriage of Convenience

Lufthansa Proposes To Swiss, Again

By Dinah Deckstein

The planned take-over of beleaguered Swiss, Switzerland's national flag carrier, by Lufthansa marks not only the second time the German company has courted its southern competitor, but also a radical change of its corporate culture. CEO Wolfgang Mayrhuber is climbing out of his predecessor's shadow, but he's also taking a major risk.

Tuesday should be a great day for Wolfgang Mayrhuber. Late in the evening, the Lufthansa CEO will celebrate his 58th birthday with close friends. And if all goes as planned, the company's board will also grant him a new five-year contract.

That's just the icing on the cake. This year, Mayrhuber went shopping for his own birthday present: the small but attractive Zurich-based airline Swiss. Back in October, Mayrhuber, an Austrian, met with the chairman of Swiss's board of directors, Pieter Bouw, to court the financially stricken competitor. If both supervisory boards approve the merger deal, Swiss's flights could be merged into the Lufthansa's global flight plan starting this fall.

Under the deal, smaller Swiss shareholders would receive a buyout package based on the company's stock price during the last 30 days of trading, estimated at a total of €60 million ($79 million). The companies are still discussing whether or not larger shareholders -- including the Swiss government, Nestle and Novartis among others -- should receive any compensation.

At the same time, Swiss's German buyer wants to take over the airline's debt and leasing obligations of about €700 million. Financially, the takeover would be no problem for Lufthansa: In June, Mayrhuber and his colleagues raised €750 million in fresh capital. The deal could also strengthen Swiss's long-term perspectives for survival. Since it's creation out of the financial ashes of Swiss Air in 2002, the company has lost close to 1.81 billion Swiss francs ($1.57 million).

It's unusual for the merger of two airlines to be engineered as meticulously and discretely as the marriage of convenience planned between Lufthansa and Swiss. Indeed, the fact that the news of the deal was leaked to the media angered some Lufthansa managers, who are still reeling from their experiences the last time Lufthansa tried to merge with Swiss a year-and-a-half ago. That deal collapsed in part because of indiscretion, inflated demands and hubris on the part of some of Mayrhuber's managers at Lufthansa.

Under pressure from Lufthansa's chief financial officer, Karl-Ludwig Kley, the company at the time demanded that Swiss's shareholders pump an additional €320 million ($422 million) into the company. Swiss's surplus aircraft were supposed to be brought under the control of a separate management company so as to protect Lufthansa's bottom line and credit rating. Swiss board members were indignant about the demands, saying the company's financial situation hadn't deteriorated that badly yet.

But Lufthansa's managers clearly took to heart some lessons from their experiences in 2003. This time around, the corporate consultants and PR advisors remained on the sidelines -- at least initially. Instead, Mayrhuber, Bouw and new Swiss CEO Christoph Franz negotiated the details of the transaction without anybody else's involvement. Unlike the first attempt, there is no demand for shareholders to pony up more money.

And unlike the plan in 2003, much of Swiss's long-haul network would remain intact, which the Swiss need to ensure the steady flow of money into what is one of the world's most important banking centers. Instead, Lufthansa is expected to make cuts to Swiss' regional routes.

Still, Swiss will lose some of its autonomy -- under the deal, the Zurich company would have to cede important responsibilies like future route planning and the processing of frequent flyer data to Lufthansa in Germany. In some cases, jobs would also likely be lost at companies that serve as suppliers to Swiss -- if Lufthansa subsidiaries can pick up the slack.

What looks -- at least on the surface -- like a garden variety merger of two competitors could actually prove to be a major coup for Mayrhuber. In the three years since he was named deputy to his mentor, Juergen Weber (he took over the helm a year later), many have been watching, puzzled, to see in what direction he would take Lufthansa.

Mayrhuber's poker game

Of all the managers of German blue chip companies, few keep as low a profile as the head of the 90,000-employee strong Lufthansa. It's nearly impossible to get an appointment with the youthful looking executive. An that represents quite a change for a company that, in Weber, long had a leader who represented Lufthansa's public image.

A Mayrhuber coup in Switzerland would show people outside the company the degree to which Weber's pupil has since emancipated himself from his predecessor. Indeed, since his rise to the top, he has broken numerous rules that were long considered sacrosanct under Weber -- even if neither would ever officially admit it.

When he was still running the company, for example, Weber held the philosophy that takeovers in the airline business make little sense. Instead he preferred cooperative agreements and alliances.

Now, of all things, Lufthansa wants to take over a company that would have grave difficulties surviving on its own and is still considered by many to be oversized. If the takeover succeeds, Zurich would become a third major hub for Lufthansa after Frankfurt and Munich. But in the past, Weber believed the company should have only one hub for connecting flights.

There have been other recent indicators that Weber's successor does not shy away from slaughtering sacred cows. Largely unnoticed by the public, Mayrhuber has sold a half-dozen of the company's interests built up by Weber -- including its US catering business, its facilities management business and its shares in the Amadeus computer reservation system -- in order to make the company less vulnerable to fluctuations in the airline passenger business.

Having determined how vulnerable offshoots like the catering subsidiary LSG or the tour operator Thomas Cook are when demand in important markets collapses, Mayrhuber has instead chosen to refocus the company on its core businesses.

Mayrhuber even wants to get rid of Lufthansa's shares in British Midlands, once Weber's pet project. Weber bought shares in the airline in 1999 because he wanted to get access to London's Heathrow Airport, which is still virtually shut off to any newcomers.

At the same time, Mayrhuber is also markedly raising the airline's quality. In Frankfurt and in Munich, the airline will soon offer 3,000 top customers exclusive check-in terminals. And those who have access to enough pocket change will, starting at the end of March, be able travel to their business or holiday destinations on private jets rented through Lufthansa's new partner, NetJets. Whether this will do anything for the company's bottom line, however, is questionable; most frequent flyers want one thing: to take off as quickly as possible.

Cost-cutting insufficient

Sources at Lufthansa say Mayrhuber is planning other strategic moves to correct some of the decisions of his predecessor. In December managers at Lufthansa subsidiary Thomas Cook, half-owned by the airline and half-owned by retailer KarstadtQuelle, called on top investment banks to make offers in a bidding competition. The target was potentially lucrative: the company is planning to sell its holdings in the vacation resort chain Aldiana and its Indian and Canadian businesses.

The company's new management came to the conclusion, the highly classified bidding documents stated, "that the difficult situation can't just be solved through cost-cutting measures."

Thomas Cook managers have already found a potential buyer for Aldiana -- competitor TUI. Ironically, Weber and former Karstadt CEO Walter Deuss once hoped Thomas Cook would one day outflank TUI.

But that's all in the past now. Within the industry, people have been playing bets recently about how long it would be before Mayrhuber offloads the rest of the travel empire, which was created by the merger of travel operators Neckermann and Bucher with the charter airline Condor. Lufthansa isn't the only company looking ahead to the future -- Karstadt also desperately needs cash in order to reorganize its retail business.

Another Mayrhuber plan could also create a furore -- it's not planned for a few more years, but preparations are set to begin in spring for the acquisition of majority shares in Lufthansa's regional subsidiary, Eurowings, and, along with it, the budget airline Germanwings. Currently, Lufthansa holds a 49 percent share in the companies. He was reluctant to buy shares in the company four years ago because he thought the budget airline business was a fad, and he only did so under pressure from other members of the board. At the time, federal cartel authorities only permitted Lufthansa to buy a minority interest in Germanwings out of fears the purchase would further strengthen the company's dominant market position.

The opposite has happened: the budget carriers continually add new routes and break passenger records and Lufthansa has been losing its sovereignty over the German skies. In today's market environment, it would be a lot easier for Lufthansa to take majority control of Germanwings. And in April, Mayrhuber's team is expected to feel out the cartel authorities about a full acquisition of the subsidiary in the not too distant future.

But first the Lufthansa CEO has to bring the planned merger with Swiss to a successful conclusion. And that won't be anywhere near as easy as some of the actors are trying to make it seem.

And the main barriers to the takeover won't be the regulatory authorities whom Mayrhuber plans to officially inform this Tuesday, but rather the self-confident Swiss.

In interviews and letters to the editor, politicians and executives have fulminated that the purchasing price, allegedly €60 million, is way too low. "Swiss is worth far more," prominent Swiss consultant and watch-maker Nicolas Hayek angrily told the tabloid Blick in an interview, dismissing the deal as "too cheap."

Others are getting more active, some financially. On Friday, two prominent lawyers from the Swiss city of Zug placed ads in dailies seeking investors for a planned Swiss holding company that would save the flag carrier from Lufthansa's talons. The entry price for investors starts at €6,450. The would-be buyers, who have also advised the half-brother of top terrorist Osama bin Laden, have criticized Swiss managers for not seeking a competitive bid from another company.

Then, of course, there are the communal politicians in Bern and Zurich, cities that together hold 30 percent of Swiss' shares. If they buckle under public pressure against the merger, Mayrhuber's recently high-flying ambitions could come crashing back down.