Lufthansa takes over Brussels Airlines in Eurowings expansion

BERLIN (Reuters) - A deal to take over Brussels Airlines will help Lufthansa's LHAG.DE Eurowings budget business to double in size next year, part of the German group's response to fierce competition in the European aviation market.

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Lufthansa said on Thursday it was exercising an option to buy the remaining 55 percent of Brussels Airlines for 2.6 million euros ($2.7 million). That adds 51 planes to the Lufthansa group and expands its network in Africa, where the Belgian company flies to many sub-Saharan destinations.

A source has previously said that the purchase price was relatively low because Lufthansa has loaned 45 million euros to Brussels Airlines.

Low-cost airlines Ryanair RYA.I and easyJet EZJ.L have grown rapidly to dominate the European short-haul market over the last decade, forcing rivals to bring down costs.

In the last year, security concerns, Brexit and falling ticket prices have made life increasingly tough for European carriers.

“I’m convinced we will see a lot more consolidation in years to come, the strong ones will get stronger and bigger,” Lufthansa CEO Carsten Spohr told reporters, describing competition as fierce.

Spohr said the acquisition of Brussels Airlines meant Lufthansa Group, which also includes Swiss International Air Lines and Austrian Airlines, would have up to 700 aircraft next year, with up to 180 as part of Eurowings.

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Lufthansa said Brussels Airlines also had an attractive cost base, having brought its non-fuel unit costs down by almost 10 percent over the last three years.

“Only airlines with a competitive cost structure will fit into our group,” Spohr said. The core Lufthansa brand is also trying to cut costs and is embroiled in a protracted dispute with its pilots.

Lufthansa Group currently has around 600 aircraft, with another 40 set to come next year from a lease deal with Air Berlin.

Liberum analyst Gerald Khoo, who has a “Sell” rating on Lufthansa cautioned that scale wouldn’t automatically deliver lower costs or a better financial performance.

“It is concerning that the Lufthansa Group is chasing scale and trying to occupy territory in order to make it harder for easyJet and Ryanair. But at best, that can only be a delaying tactic,” he told Reuters.

The deal continues a spate of consolidation seen in the market recently, with tour operator TUI TUIT.L and Etihad forming a new European leisure airline from TUIFly and Niki.

Reporting by Victoria Bryan; Editing by Maria Sheahan and Keith Weir