BA-Iberia owner to buy up Lufthansa's BMI airline

IAG, the holding company for the merger of British Airways and Iberia, said Friday it had reached an agreement in principle to acquire Lufthansa's loss-making British Midlands (BMI) unit.

The announcement was made in parallel with the release of the airline group's earnings for the third quarter, which showed a 33.5-percent drop in operating profit to 363 million euros as fuel costs remained high.

IAG did not give a price for the possible purchase of BMI, but the deal is expected to come in at around 300 million pounds (349 million euros). "The sale and closing of the deal remain subject to conditions including a binding purchase agreement, further due diligence and regulatory clearance," IAG said in a statement. It said it expected the purchase agreement to be signed in the coming weeks and for the deal to be completed in the first quarter of next year.

IAG's main interest in BMI, which made a loss of 154 million euros in the first nine months of the year, is the 8.5 percent of available slots it holds at London's Heathrow airport.

The acquisition of BMI would increase IAG's share of the landing and take-off slots at London's biggest airport to 53 percent in a deal that is likely to attract the attention of the anti-trust authorities.

IAG rival Virgin Atlantic also presented an offer for BMI, and on Friday said it was "still working" with Lufthansa, which in turn said IAG had presented the "most attractive prospect for the future of BMI."

"British Airways' hold over Heathrow is already too dominant and we are very concerned - as the competition authorities should also be - that BA's purchase of BMI would be disastrous for consumer choice and competition," Virgin said.

Chief Executive Officer Willie Walsh said IAG plans to use the acquisition of BMI to expand its own long-haul network, particularly on routes to Asia and Latin America. "It's a great story for IAG, a fantastic story for the UK economy and great for consumers because it's clear BMI in its current form is unsustainable," Walsh said on a conference call with analysts. "The losses encountered in recent years have been massive."

"The Heathrow slots are the fundamental attraction of BMI," Bloomberg quoted John Strickland, an aviation analyst at JLS Consulting in London, as saying. "This is a one-shot chance and it will give British Airways room for growth in the short and medium term."

BA and Iberia's total combined revenues in the period July-September were up 2.2 percent from a year earlier at 4.49 billion euros as net profit declined 26.2 percent to 283 million due to a 25-percent increase in fuel and oil costs.

"High fuel costs continue to have a significant impact on our business," Walsh said in a statement. "The main challenge for 2012 will be to offset increased fuel costs as our hedges unwind against a background of potentially weaker demand."

In the first nine months of the year IAG's profit after exceptional items and tax climbed to 338 million euros from 10 million a year earlier. Revenues in the period were up 11.6 percent at 12.263 billion euros

IAG said it expects to deliver full-year operating profit of around double the previous year.