Analysis: Is BA's purchase of BMI a good deal?

Analysis: Is BA's purchase of BMI a good deal?

Lufthansa’s sale of BMI to International Airlines Group (IAG) threatens reduced regional connections to Heathrow whatever guarantees provided by British Airways’ parent.

It signals the end of Bmibaby and the BMI brand, and is a severe blow to Virgin Atlantic.

The deal will mean job losses and the closure of BMI’s Castle Donington base and leaves a question mark over the future of BMI Regional, based in Aberdeen.

However, it is a great deal for BA and makes sound sense for Lufthansa. IAG chief executive Willie Walsh said: "It gives IAG an opportunity to grow at Heathrow [and] . . . to launch long-haul routes." He suggested that would mean new services to China, South Korea, Indonesia and Vietnam.

Regional airports will see fewer links to Heathrow, although Walsh pledged: "We will maintain a comprehensive domestic schedule, including Belfast."

BMI toiled to rival BA

BMI has struggled for several years as the sole UK rival to BA to operate short and long-haul services, despite the global power of owner Lufthansa.

Having campaigned under founder Sir Michael Bishop to gain access to the US from Heathrow, BMI dropped the idea when the opportunity finally arose with Open Skies in 2008 after finding it could not do so profitably. Instead, it refocused eastwards on the Middle East and central Asia.

Unfortunately, events outside its control – a high oil price, the world financial crisis and recession – left it haemorrhaging cash.

Walsh conceded jobs will go "given the scale of BMI’s losses", but argued: "IAG’s purchase will protect more jobs than if the airline had been closed." He has a point: Lufthansa had already cut back BMI services and 800 jobs went in 2010. The carrier pulled a Heathrow-Glasgow link last March.

The clock is ticking for BMI Regional. It is the subject of talks between Lufthansa and regional aviation investors. Walsh has made clear: "BMI Regional and Bmibaby are not part of our plans."

Deal is a ‘steal’

The deal is likely to go ahead, possibly with IAG required to surrender some Heathrow slots and to give guarantees on routes.

Regulators may not be too troubled by IAG’s control of 53% of Heathrow slots. Lufthansa controls 66% at Frankfurt and Air France 59% at Paris Charles de Gaulle, although these airports are not constrained. However, regulators will look closely at competition on Heathrow routes.

Virgin Atlantic is left isolated in an increasingly consolidated industry. Chairman Richard Branson insisted the deal "screws the travelling public" and urged competition authorities to block it. That looks unlikely, although the deal could be delayed.

Analysts suggest IAG got a "steal" at £172 million, having tipped BMI to go for nearer £300 million. The slots alone were valued at £400 million. They also suggested Lufthansa had "got rid of its biggest problem". The deal makes further acquisitions by IAG this year unlikely. As Walsh said: "We have work to do with BMI."

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