* IAG, Lufthansa reach agreement in principle for bmi sale
* IAG expects deal to be complete in Q1 2012
* IAG Q3 operating profit 363 mln euros vs 528 mln euros
* Premium traffic growth slows in October
* IAG shares down 3 pct
By Rhys Jones and Kate Holton
LONDON, Nov 4 British Airways owner IAG
has agreed to buy Lufthansa's UK unit bmi in a bid to squeeze
more growth from its capacity constrained Heathrow hub and
expand services to emerging markets in Asia and Latin America.
The agreement came as IAG reported a sharp fall in
third-quarter profit, hit by higher fuel costs, highlighting the
need for airlines to seek growth where they can.
BA and Iberia parent IAG on Friday said it had reached an
agreement in principle with Lufthansa for the sale of
loss-making bmi with a deal likely to be completed in the first
quarter of 2012, subject to due diligence and regulatory
With 9 percent of the take-off and landing slots, bmi is the
second-largest carrier at Heathrow, Europe's busiest airport.
Buying bmi offers IAG the opportunity to grow at Heathrow, which
is operating at full capacity after plans to build a third
runway were scrapped.
"It is clear that bmi in its current form is unsustainable
but we're confident we can make a success of it," IAG's Chief
Executive Willie Walsh told reporters.
"We will particularly look to expand BA's long-haul network
... it will allow us to connect Heathrow and the UK to emerging
markets, particularly in Asia and Latin America."
Bmi comprises three underperforming businesses: a carrier
serving Europe, the Middle East and Africa; bmi regional,
serving the UK; and low-cost unit bmibaby.
Analysts believe the IAG deal, which is for the main carrier
and bmibaby, would be worth around 300 million pounds ($479
million). The regional unit will likely be sold to a UK investor
Walsh, who would not disclose any financial details, added
that IAG did not yet have exclusivity on a deal but said IAG's
offer was more attractive than others Lufthansa had received.
Rival UK carrier Virgin Atlantic said it had also made a bid
for bmi and was still "working with Lufthansa". Reuters on
Thursday reported a deal between IAG and Lufthansa over bmi was
IAG shares were down 3 percent at 164 pence by 1045 GMT,
valuing the business at around 2 billion pounds.
"If the deal goes through, it will be a long term strategic
positive for IAG if they can build up further market share at
Heathrow," said Davy Stockbrokers analyst Stephen Furlong.
"In terms of the results, they are disappointing in that you
see the fuel costs are not being offset by revenue."
A Lufthansa spokesman said he was "confident the planned
transaction (with IAG) will be successful" because IAG had
offered "the most attractive prospect for the future of bmi".
IAG's BA is the largest carrier at Heathrow with a 43.1
percent share of the slots -- ahead of Virgin in fifth place
with 3.1 percent.
Walsh said he was confident the bmi deal would be cleared by
regulators because IAG's holding at Heathrow is small compared
with rivals at other European hubs -- Lufthansa holds two-thirds
of the slots at Frankfurt, while Air France-KLM has 59
percent at Charles de Gaulle in Paris and 57 percent at
"Regulatory rules are not set by (Virgin Atlantic founder
Richard) Branson -- they are set by competent authorities," said
IAG, Europe's second-biggest airline group by value behind
Lufthansa, said operating profit in the three months to the end
of September fell to 363 million euros ($499 million) from last
year's 528 million euros. It was just ahead of the 350 million
euros analysts had expected.
IAG's fuel bill rose by a quarter to 1.39 billion euros in
the period and weak demand at Spain's Iberia offset strong trade
at British Airways.
It expects to report a full-year operating profit of roughly
double the 225 million euros in reported in 2010. It is expected
to post an average operating profit of 562 million euros for
2011, according to a Thomson Reuters poll.
IAG's European rivals have found it more difficult to
overcome high oil prices and sluggish demand.
Lufthansa last week reported results battered by high fuel
costs and slashed plans to expand capacity next year, while Air
France-KLM has refused to comment on reports that the company is
poised to issue a "significant profit warning" next week.
"Rising fuel costs are the biggest challenge to the industry
in the short term along with potentially weaker demand in 2012,"
said Walsh, adding that growth in first and business class
traffic, the most profitable part of its business, slowed in