Lufthansa and Etihad – could be good news for Virgin Australia

In late Dec-2016 Etihad and Lufthansa surprised the airline industry by announcing a codeshare agreement on specific routes. A month later, the Italian daily newspaper Il Messaggero has speculated Etihad could now be looking to invest in Lufthansa - a considerable leap from the cooperation agreement announced just before Christmas 2016.

The Italian newspaper reported, without citing sources, that executives from both Etihad and Lufthansa have for several weeks been considering the possibility of Etihad buying a 30-40 % stake in Lufthansa through a sale of new shares to the Abu Dhabi based airline, as a precursor to a merger.

The Il Messaggero speculation has already been denied, with a source familiar with Lufthansa's plans being quoted by Reuters as saying:

"A financial stake is out of the question at the moment."

The use of the words "at the moment" could be significant, but the rumour still is denied by Etihad CEO, James Hogan. The idea of closer ties between the two major airlines, while not likely to be imminent, rings true.

At the time of the codeshare announcement in Dec-2016 James Hogan, President and CEO of Etihad Aviation Group stated:

"It is very clear to us at Etihad Airways that Lufthansa is a like-minded, forward thinking organisation with which we can do strong, meaningful and mutually beneficial business".

Carsten Spohr, Chairman of the Board and CEO, Lufthansa Group shared that sentiment:

"…. We will consider extending our cooperation in other areas."

So, the idea of a closer commercial relationship between Lufthansa and Etihad is not a wild concept.

Etihad is a 21% shareholder in Virgin Australia and codeshares actively with it, so Etihad's current and future partnerships have particular relevance in the Australian market. Etihad other Partner members like Alitalia and Air Berlin also now codeshare with Virgin, reflecting the importance of the relationship.

If this were to extend also to Lufthansa, with its leading role in Star Alliance, the partnership relations become even more complex - any changes are likely to impact Lufthansa Star partner Air New Zealand.

Etihad and Lufthansa initial partnership arrangements: 16-Dec-2016

Source: Etihad and Lufthansa

For our report on the Etihad and Lufthansa codeshare agreement announced in Dec-2016, please click here.

A changing environment for both Lufthansa and Etihad

The commercial environment both Lufthansa and Etihad find themselves in has profoundly changed in recent years. Whereas previously Lufthansa adopted a defensive approach towards its main competitors, including within Star Alliance, there is now a changing wind at the German airline's management as they seek new growth platforms independent of Lufthansa's strong unions whose strikes have crippled the airline and damaged the airline's reputation for reliability.

Lufthansa is also feeling the impact of the ongoing rise of competitors easyjet and Ryanair, with their increasing focus on corporate travellers and lower cost base, as a threat it cannot contain. Any future growth of those two low cost carriers in Germany will have a direct impact on Lufthansa that can't simply be curbed by further co-operation with loss making fellow German carrier, and Virgin Australia partner, airberlin.

Etihad too is feeling the threat of the LCCs in Europe as Ryanair grows its network in Italy in direct competition with Alitalia, in which Etihad holds a 49% stake.

Turkish Airlines, once a Star Alliance ally is now a proclaimed competitor of Lufthansa. While continuing to feel the impact of geo-political instability at home and in surrounding regions, the airline remains a continuing and growing threat to both Etihad and Lufthansa, particularly given its fleet of over 270 operating aircraft and network spanning over 300 destinations. The geographically advantageous position of the airline's Istanbul hub as a 'gateway' to Europe is well placed to serve its sixth freedom connecting passengers from Europe, Middle East and North Africa who connecting with the airline's long haul network to North America, Africa and Asia (with Australia often touted as a future destination). It is also able to do this with a lower cost base and greater frequency than several of its Gulf and European competitors, including Lufthansa and Etihad.

New potential routes under a Lufthansa Etihad partnership

Etihad Asia-Pacific destinations not served by Lufthansa Group: 2017

Source: Centre for Aviation and OAG

Further cooperation between Etihad and Lufthansa would give the German carrier access to 21 destinations in Etihad's Asia Pacific network which the German carrier does not currently serve using its own aircraft.

Such an expansion, however, would likely open up the potential for future conflict with existing Star Alliance partner Singapore Airlines. Lufthansa currently several cities in South, South East and Central Asia as well as Australia under codeshare agreements with Singapore Airlines. The same applies for Air China with whom Lufthansa codeshares to Chengdu.

An agreement with Etihad does not make cancellation of those agreements with Singapore Airlines and Air China a fait accompli, but it would result in significant duplication which wouldn't make sense in the medium or long term. Etihad would also likely want to ensure a degree of exclusivity in how Lufthansa channels its passengers to those destinations.

Where there could be less controversial synergies is in relation to frequent flyer programs. Aligning with Etihad would also give Lufthansa access to Etihad Partners frequent flyers, including Alitalia and Virgin Australia. It could lead to further codeshares with those carriers allowing for increased feed into each airline's respective hubs. It would also open the door further to Etihad joining Star Alliance. Despite such a move facing likely opposition from certain Star Alliance members, and direct competitors, including Turkish and Singapore Airlines, it would also be a coup for the alliance. With Qatar Airways in oneworld, Emirates would be left as the only Gulf carrier going it alone - albeit with a deep partnership with Qantas.

Bringing Lufthansa closer to the ANZ market would offer new options

A closer relationship between Etihad and Lufthansa would be good news for the Australia / New Zealand market.

In Australia / New Zealand four of the 21 destinations flagged for potential Lufthansa expansion (Sydney, Perth, Brisbane and Melbourne) are currently served by the German carrier through an existing agreement with Singapore Airlines.

For Star Alliance, further cooperation between Lufthansa and Etihad on their services to Australia would be a boost to Star's network in Australia, particularly in relation to frequent flyer redemption opportunities and offer an alternative to Singapore Airlines, with whom Lufthansa currently codeshares to Australia.

A big potential winner would be Virgin Australia. Through its major shareholder Etihad, Virgin Australia could potentially gain access to Lufthansa's European network, which dwarfs that of current codeshare partner airberlin.

Virgin Australia in Star Alliance would change the Australia-NZ market profile for foreign airlines

As with Etihad, it could also make Virgin Australia a step closer to entry into Star Alliance which, given its recently announced partnership with Air Canada and ongoing relationship with Singapore Airlines, is beginning to seem more and more plausible. Joining the world's largest airline alliance would give Virgin Australia renewed strength to take on heavyweight Qantas head on. That would not be top of mind at present for Etihad and Lufthansa, but even with the recently announced Etihad-Lufthansa partnership, this becomes one step closer.

At present Virgin is the refuge for non-oneworld airlines wanting to codeshare behind Australian gateways, but a closer relationship with Star would make those relationships a little more fragile.

All of this is mere speculation though as both carriers deny the rumor. No announcement has been made…at the moment. The world will be watching.