Lufthansa talks to SAS, Brussels Airlines to spread Eurowings - sources

By Peter Maushagen

FRANKFURT (Reuters) - Lufthansa (LHAG.DE) is in talks with the owners of Scandinavian carrier SAS (SAS.ST) and Brussels Airlines to expand the number of destinations it flies to and grow its low-cost Eurowings business, people close to the German airline said.

Two sources said on Wednesday Lufthansa had been in talks with the owners of SAS since the autumn, which could lead to Lufthansa taking a stake in SAS - half owned by Denmark, Norway and Sweden - or some other kind of partnership, they said.

"SAS could be docked onto budget platform Eurowings," one of the people said.

Lufthansa launched Eurowings last year in a fresh attempt to crack the low-cost market and compete with the likes of Ryanair (RYA.I) and easyJet (EZJ.L). It has said it aims to use it to bundle various subsidiaries and brands.

One of the sources also said it was "as good as certain" Lufthansa would present a deal to buy the 55 percent in Brussels Airlines it does not already own at a supervisory board meeting on April 27.

People familiar with the industry said a full takeover of SAS by Lufthansa was unlikely, while taking a minority stake would potentially come with a board seat and direct influence on the Scandinavian company's strategy.

"Lufthansa wants to build Eurowings, but it does not want to take on any restructuring risk," one of those people said.

Brussels Airlines, meanwhile, is attractive for Lufthansa because of the business traffic which flows through its hub in the Belgian capital, where many European Union institutions are based.

Liberum analyst Gerald Khoo said the Belgian carrier also had a strong African network, especially beyond North Africa, where Lufthansa is not as well set up.

AFRICA ATTRACTION

Airline consolidation in Europe is far behind North America, where a decade of mergers have shrunk the industry to a handful of companies and boosted profitability of carriers. Alaska Air (ALK.N) announced this month a deal to buy Virgin America (VA.O) for $2.6 billion (£1.8 billion) in cash.

According to an analysis by CAPA-Centre for Aviation, the top twenty airline groups in Europe account for 75 percent of seats, the same share as the top six groups in North America.

SAS, repeatedly the subject of takeover speculation, expects to swing to a profit this year and has said it wants to play an active role in consolidation in Europe.

Shares in SAS were up 6 percent at 1421 GMT.

"Lufthansa has previously hinted at Eurowings being a vehicle for consolidation of low cost airlines, but it is not immediately apparent how that would fit with the full service models of Brussels Airlines and SAS," Liberum's Khoo said.

Lufthansa, which is due to hold its annual shareholder meeting on April 28, said it had been a partner with SAS since airline cooperation group Star Alliance was founded and as a result was in continuous talks with the Scandinavian carrier. "Anything else is speculation," a Lufthansa spokesman said.

SAS declined to comment.

The Brussels Airlines talks were reported earlier on Wednesday by German daily Sueddeutsche Zeitung.

Lufthansa bought 45 percent of Brussels Airlines for 65 million euros (£51.5 million) but retained an option to acquire the rest by 2018, with the total price for the takeover coming to as much as 250 million euros, depending on the carrier's performance.

Lufthansa Chief Financial Officer Simone Menne said last month the German airline would like to "come to a conclusion" on Brussels Airlines this year, with progress eyed in the second quarter.

(Additional reporting by Arno Schuetze, Victoria Bryan and Mia Shanley; Writing by Maria Sheahan; Editing by Alexander Smith and Mark Potter)