Lufthansa, Swiss to Cooperate?

Sources close to the matter said Lufthansa and Swiss executives were meeting in Zurich Friday for advanced talks that could eventually lead to a merger later this year.

Banking sources quizzed by the Swiss financial newswire AWP said that a takeover of Swiss by Lufthansa was "practically a done deal." Both airlines declined to comment. But Lufthansa and Swiss have long been seen as potential partners.

Previous merger talks between the two in 2003 failed because of strong resistance in Switzerland to such a deal. As a result, Swiss tried -- ultimately unsucessfully -- to join British Airways' Oneworld alliance.

Pertinently, Swiss chairman Christoph Franz is a former Lufthansa executive.

Swiss needs partner

Lufthansa for its part has always insisted that it has never closed the door completely on a deal with Swiss, as long as the terms and conditions were right.

And while Swiss, the successor company to former flag carrier Swissair which went bust in 2001, has managed to narrow its losses, experts say the airline is unlikely to be able to survive on its own in the long term.

Financial Times Deutschland reported on Friday that Lufthansa had now come to the conclusion that the time was right to buy Swiss, which is currently in better financial health than it had been in 2003, at a lower price.

Swiss narrowed its full-year loss of 140 million Swiss francs (€90.3 million, $121.6 million) last year from 687 million Swiss francs a year earlier and it hopes to break even at operating level this year.

Lufthansa's door remains open

Lufthansa also declined to comment, but a spokesman reiterated the airline's position that it had never shut the door completely on a tie-up.

Sources said the talks in Zurich on Friday were follow-up negotiations after Lufthansa chief executive Wolfgang Mayrhuber (photo) and his Swiss counterpart Franz had outlined the broad brush-strokes of a merger at a recent meeting held in the secrecy of a remote mountain-top chalet.

The negotiations were expected to lead to a cooperation between the two carriers beginning in the second or third quarter of this year and then possibly to a fully fledged merger later, the sources added.

Swiss will survive

The business daily Handelsblatt said Lufthansa had agreed to maintain the Swiss brand on condition the Swiss airline implement additional belt-tightening measures and transfer control of its route network to Frankfurt.

Analysts said Lufthansa's second attempt to gets its hands on Swiss might be more successful.

"Airlines are under pressure to consolidate because of overcapacity," said Merck Finck analyst Robert Heberger. "There are still too many airlines and low-cost carriers are

ruining prices. Lufthansa is one of the stronger players in a generally weak sector. Airlines are still suffering from the fallout of Sept. 11, 2001. And then there are rising kerosene prices, which carriers like Swiss have not hedged against very much."

Greater synergies

Alhough Lufthansa has steered clear of big acquisitions in the past, opting instead for code-sharing agreements under the umbrella of its Star Alliance grouping, greater synergies would be gained in the case of Swiss from a straight-forward takeover, the analyst argued.

"Lufthansa would have access to Swiss's Zurich hub and it would be better able to fill its Airbus A380 jets with Swiss customers," Heberger said.

NordLB analyst Martina Noss agreed.

"Strategically, a merger would make sense, not only in terms of synergies, but Lufthansa would also be buying a rival whose routes in southern Germany and in Switzerland overlapped with its own," she said, adding that she was maintaining her "buy" recommendation the stock.

Still a sick patient

But Heberger was more skeptical.

"Swiss is still a sick patient," he said, adding that he has a "hold" recommendation on the stock. "And then there are the political considerations. I can imagine there would be resistance to a deal given the national pride of the Swiss."