by Simon Morgan
FRANKFURT - Plans by German flag carrier Lufthansa to buy its ailing partner Swiss will speed up consolidation in the European airline industry as scheduled carriers join forces to battle their low-cost rivals, analysts here said on Monday.
Analysts and investors alike appeared to like the idea of a German-Swiss tie-up with shares in both carriers taking wing on the stock exchange on Monday.
In Frankfurt, Lufthansa shares shot up to an intraday high of 11.48 euros, a gain of 0.31 euros or 2.78 percent from the closing price on Friday.
And in Zurich, Swiss shares soared 18 percent to an intraday high of 12.30 Swiss francs.
Both shares had come off their highs in profit-taking by early afternoon.
Following a great deal of merger speculation recently, Lufthansa and Swiss International Air Lines finally announced late Sunday that they were indeed in "constructive" takeover talks.
The idea was to integrate Swiss -- the successor company to former flag carrier Swissair which went bust in 2001 -- into the wider Lufthansa group, the German airline said a statement.
Pending the necessary regulatory approval, Lufthansa would initially submit a public offer to buy the Swiss shares currently traded on the stock exchange.
Lufthansa did not name a concrete price, but said it would be "based on the average share price of the recent weeks".
With around 14 percent of Swiss`s share capital or 7.35 million shares currently in free float, that part of the transaction could therefore cost Lufthansa 60-70 million Swiss francs (40-50 million euros, 54-67 million dollars).
It was not clear what sort of deal Lufthansa would offer Swiss`s other major shareholders, who include the Swiss state and Swiss banks UBS and Credit Suisse.
But experts suggested they might be prepared to offer their shares to Lufthansa for a symbolic price if the German airline promised to drop its demands for them to put up some of the restructuring costs.
Lufthansa and Swiss have long been seen as potential bedfellows.
Previous merger talks between the two in 2003 were scuppered by strong resistance in Switzerland, after which Swiss tried -- ultimately unsucessfully -- to join British Airways` Oneworld alliance.
Since then, Lufthansa 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.
In the past, Lufthansa has tended to steer clear of big acquisitions, opting instead for code-sharing agreements under the umbrella of its Star Alliance grouping.
But in the case of loss-making Swiss, greater synergies would be gained from a straight-forward takeover, analysts argued.
"Strategically, a tie-up would make sense," said NordLB analyst Martina Noss.
Lufthansa would be able to get its hands on the hub of Zurich, as well as on Swiss`s valuable business clients, and it would be taking over a rival with overlapping routes, she said.
Exane-BNP Paribas analyst Nick van den Brul said that a merger would also be beneficial to loss-making Swiss.
"It`s not expensive for Lufthansa and it provides prospects for Swiss," he said.
HVB analyst Uwe Weinrich agreed.
"Lufthansa will act as some sort of life insurance policy for Swiss," which managed to narrow its losses last year, but still ended the year in the red, he said.
Indeed, it would be good for the industry as a whole, and coming on top of the Air France/KLM merger last year, the European airline industry would continue to consolidate.
Pierre-Yves Savidan, airline expert with management consultancy BIPE, said that a key advantage for Lufthansa would be the hub of Zurich.
"Zurich could become a second regional for Lufthansa after Munich, or it could even serve as its intercontinental hub if a third runway is not built in Frankfurt," Savidan said.
Lufthansa has promised to maintain Swiss as an independent brand underneath the Lufthansa umbrella.
"It`s a quality brand," Savidan said. And at a time when Lufthansa was increasingly targetting high-paying customers, the Swiss image could prove an attractive crowd-puller.
Sal. Oppenheim analyst Jan Herbst also saw a tie-up as a good idea.
"Lufthansa would be the leading player in central Europe," he said.
"Even if Swiss succeeds in returning to profitability, it will not be able to keep its stand-alone position long-term. Time is therefore on Lufthansa`s side," Herbst said.

03/14/2005 13:17 GMT