Takeover Spree

Air Berlin has squashed rumors of being a takeover candidate by going on a buying spree, gobbling up two German rivals -- and eying a third. It's nipping at Lufthansa, but still lags way behind Germany's largest airline.

Within one year, Air Berlin, Europe's third largest low-cost airline, has greatly expanded its route system by acquiring dba, a domestic carrier, and LTU, which operates charter and scheduled flights from Düsseldorf to far flung destinations in the Americas, Asia and Africa.

Then on Thursday, Sept. 20, Air Berlin announced its expansion drive to take over Condor, a rival charter airline which offers long haul flights from major German cities to popular holiday destinations worldwide.

Different brands for different markets

Air Berlin is also aggressively undercutting Lufthansa by offering one-way service from Düsseldorf to New York at 129 euros ($182) starting in November. Lufthansa's lowest fare on the same route is currently 333 euros roundtrip.

A fresh coat of paint with the Air Berlin logo will appear on refurbished LTU jets heading to lucrative business destinations such as New York, Los Angeles and Shanghai, in keeping with the company's tradition of serving European capitals and major cities.

The LTU brand, however, will also remain, as it is already established moniker for holiday spots such as Montego Bay and the Canary Islands, company spokeswoman Angelika Schwaff said.

From budge to business class

Founded in 1978 by a former Pan Am pilot in the then divided German capital, Air Berlin started as a budget charter airline with two jets. It was bought by German investors after reunification and is now the 10th largest air carrier in Europe, which has been floated publicly since spring of 2006.

The acquisition of Condor, which is subject to approval from the German cartel office, would expand the Air Berlin group's fleet by 35 jets to a total of 166 aircraft with another 25 wide-body Boeing 787 Dreamliners on order.

Unlike its chief low-cost European no-frills rivals Easyjet and Ryanair, Air Berlin is more upscale and is cleverly targeting the traditional Lufthansa customer in the business segment of the market, according to Martina Noss, an analyst who follows the German travel industry for Norddeutsche Landesbank.

"They will be offering premium business class with more service and comfort, and will be able to use their vast domestic network from dba to feed into the long-haul LTU flights," Noss said. "It's a smart move to focus on the much more profitable business segment."

But it will take time to streamline the three very different airlines that serve nearly 100 -- sometimes overlapping -- destinations, she added.

Still the Air Berlin group, which carried nearly 20 million passengers last year, is valued at 854 million euros on the stock exchange and is a distant second to German behemoth Lufthansa. One of Europe's largest airlines, Lufthansa has a market capitalization of 9.5 billion euros, and carried 53.4 million passengers in 2006.

Condor: the last mile for LTU's long hauls

The addition of Condor, which offers a popular and exotic array of holiday destinations, would complement LTU's long-haul flight network, Air Berlin CEO Joachim Hunold said at a press conference on Thursday.

The charter airline would be purchased in two phases. In February 2009, Air Berlin would acquire a 75.1 percent of Condor in a share swap with British-German travel group Thomas Cook, which will hold just under 30 percent of Air Berlin. The deal is expected to be worth over 500 million euros, depending on the airline's stock price in the next 17 months.

The second phase would come a year later when Air Berlin would exercise purchase options to acquire the remaining 24.9 percent stake in Condor from Lufthansa. Airline analysts said they did not expect Lufthansa to oppose the deal since Air Berlin, even with Condor, would not pose a significant threat to its core business.

Segment specific

Air Berlin is a prime example of increasing consolidation in the airline industry, where most major carriers are offering a bit of everything tailored to all market segments, according to Eric Heymann, an aviation and transport analyst at Deutsche Bank's research group.

"There's hardly any airline which offers only scheduled services or any purely low-cost charter airline anymore," he said. "Various business models are converging, with airline companies offering a broad range of services for all types of travelers."