September 29, 2016 / 12:46 PM / a year ago

Lufthansa shares knocked by Eurowings expansion deals

BERLIN (Reuters) - Shares in Lufthansa (LHAG.DE) fell to a four-year low on Thursday on concerns its plans to boost its low-cost Eurowings brand by leasing Air Berlin (AB1.DE) planes would neither lower costs nor head off larger rivals.

Lufthansa has said it wants to turn Eurowings into Europe’s third low-cost airline behind Ryanair (RYA.I) and easyJet (EZJ.L). The wet lease announced on Wednesday along with Lufthansa’s decision to buy the rest of Brussels Airlines will provide planes for that expansion.

Analysts said, however, that a deal to lease Air Berlin planes and crews for short-haul routes next summer seemed to be more of a defensive move to stop Ryanair and easyJet gaining a foothold in Germany at the expense of Air Berlin, which has been losing money for years.

“It’s far from clear that this expansion will help Lufthansa to secure greater profitability,” independent aviation consultant John Strickland said, adding Lufthansa would still feel pressure from Ryanair.

Lufthansa shares were down 2.99 percent at 9.75 euros 1229 GMT, having touched 9.725, its lowest level since September 2012.

Shares in other European airlines also slipped on Thursday after OPEC agreed to curb crude oil output in a move that could mean higher fuel costs for carriers.

Ryanair said it could grow more quickly because retrenching by Air Berlin would result in fewer flight choices from Germany.

“The German airports will then be trying to encourage Ryanair to open more routes. So I think it’s likely to speed up our growth in Germany,” Ryanair CEO Michael O‘Leary said at an event in Copenhagen.

Michael Gierse, fund manager at Lufthansa shareholder Union Investment, said the lease deal would put Eurowings in key markets to help block easyJet and other rivals.

“But it will only delay them and not prevent them completely,” he said.

    The so-called wet lease deal for 40 planes and crew throws a financial lifeline to Air Berlin, which said it expected payments over the six-year deal to exceed 1.2 billion euros ($1.4 billion).

    Shares in the loss-making airline, which is 29 percent owned by Gulf carrier Etihad Airways, were worth almost 20 euros apiece back in 2007 but now trade for less than one euro each.

    Lufthansa board member Karl Ulrich Garnadt, in charge of the Eurowings division, declined to confirm the 1.2 billion euro figure cited by Air Berlin, saying that final terms still needed to be agreed.

    RBC analyst Damian Brewer said he was “perplexed” by the wet lease deal, noting Lufthansa could instead lease planes on the open market and crew them with new staff at market rates.

    Garnadt said the wet lease deal offered a quicker opportunity to grow. Lufthansa would ensure the terms fitted its requirements for Eurowings, where it aims for a cost base similar to that of easyJet, he said.

    Additional reporting by Peter Maushagen and Nikolaj Skydsgaard; editing by David Clarke and Jason Neely

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