FRANKFURT Germany's Lufthansa (LHAG.DE) is in talks to buy Scandinavia's loss-making SAS (SAS.ST) as it hunts for bargains among airlines hit by crippling fuel costs and economic weakness, sources familiar with the matter said.
"Exclusive negotiations are being held," one of the sources told Reuters, adding that SAS had approached Lufthansa about a possible deal in May.
The sources stressed that a takeover of SAS, which is 50 percent owned by the Swedish, Norwegian and Danish governments and over 7 percent by the Wallenberg family, was not a foregone conclusion.
"Whether this leads to a deal remains open," said another source with knowledge of Lufthansa's strategy. "It's not fully clear yet where this will go."
SAS confirmed in a statement on Friday that it was evaluating "various structural possibilities for the group", but a spokesman declined to say whom the carrier was talking to.
"It must be emphasized that no decision has been taken," SAS said.
Norway's Trade and Industry Minister Sylvia Brustad told Reuters SAS was mulling an ownership change: "We are aware that SAS is considering whether it is an advantage to bring in other owners."
A spokesman for Lufthansa declined to comment. The Danish government said it backed a sale to a private operator.
Shares in SAS, which were temporarily suspended after Reuters reported Lufthansa's interest, surged 15 percent to 55.25 Swedish crowns on the news. Lufthansa stock rose 0.6 percent to 15.04 euros.
Before Friday's surge, SAS shares had risen around 18 percent in the past three months, but over the past year had tumbled over 60 percent, making them the worst-performing European airline stock over that period.
Global airlines are set to post losses of $5.2 billion this year and $4.1 billion in 2009 as high oil prices and a global financial crisis weigh, the International Air Transport Association has said, describing the situation as "bleak".
Italian flagship carrier Alitalia AZPIa.MI is already in the hands of a bankruptcy commissioner.
Lufthansa is seen as one of the major consolidators in Europe, along with Air France KLM (AIRF.PA) and British Airways BAY.L, in an industry that is struggling to cope with record oil prices, weakening economies and the financial crisis.
By buying out their weaker rivals at a knockdown price, the stronger airlines hope to save costs by cutting jobs and delivering economies of scale.
There are other benefits in a deal with SAS, which is a partner with Lufthansa in the global Star Alliance. A tie-up would strengthen the airlines' dominance of routes between Germany and Scandinavia and provide feeder traffic for Lufthansa's hubs such as Frankfurt.
The German carrier, Europe's second biggest, is looking at a number of other possible partners, including Alitalia, Poland's LOT and Austrian Airlines AUAV.VI. It also plans to take a 45 percent stake in fledgling carrier Brussels Airlines with an option to buy all of it.
Any acquisition could be discussed at the next meeting of Lufthansa's non-executive supervisory board on September 24.
The agenda for the meeting includes a slot for "further financial investments", another source said.
Buying SAS would push the German airline closer in size to Air France KLM, measured in passenger traffic. SAS had a market value of around 830 million euros ($1.16 billion) as of Thursday, a seventh of Lufthansa's.
SAS, whose Spanair division last month suffered a fatal crash in Madrid, is undergoing a further round of cost cuts to stem losses.
"If negotiations between SAS and Lufthansa lead to a concrete purchase agreement, we would not expect the German company to pay a significant premium above the current share price," said Jyske Bank analyst Karsten Sloth in a note.
Lufthansa could make savings at the carrier by stripping out its old regional fleet and replacing MD-80s with more fuel-efficient Airbus planes, analysts said, though the carrier would likely face tough negotiations with unions in Scandinavia, which have a strong influence on the airline.
Competitor British Airways plans a transatlantic tie-up with Iberia IBLA.MC and American Airlines AMR.N, taking advantage of the U.S./EU "Open Skies" agreement earlier in the year. Air France KLM, meanwhile, has also looked at buying Alitalia.
(Reporting by Angelika Gruber, James Regan and Philipp Halstrick in Frankfurt; Additional reporting by Simon Johnson and Adam Cox in Stockholm, Peter Levring and Kim McLaughlin in Copenhagen, Joergen Frich and Aasa Christine Stoltz in Oslo; Editing by Knut Engelmann/Andrew Callus)