Lufthansa demands proof of BMI's long-term liquidity

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Lufthansa is unsurprised by UK carrier BMI's resorting to court action to enforce a takeover by the German airline, but insists it will not proceed with the acquisition while there are unanswered questions over the state of BMI's finances.

While Lufthansa is still interested in the UK operator, chief financial officer Stephan Gemkow tells ATI that BMI has become a "less attractive" option as details of its financial position emerge.

Lufthansa confirms it has received the notification of legal action undertaken by BMI's majority shareholder, chairman Sir Michael Bishop's partnership BBW, and its legal team is reviewing the documentation.

But a senior source familiar with the acquisition process claims the development is "not a surprise" and that Lufthansa has been anticipating Bishop's court action, following the impasse over whether or not BMI meets contractual takeover terms.

Lufthansa is insisting that BMI must be able to demonstrate sufficient liquidity to operate for 12 months, says the source, while the UK Civil Aviation Authority's assessments only cover a three-month period.

"We don't have any proof that the 12-month liquidity parameters are met," says the source. BBW maintains that the conditions of its original contract with Lufthansa, on which the takeover is being founded, have been met.

While Lufthansa is pressing BBW to contribute to a hefty capital injection, the source indicates that there are other, still undisclosed, issues which have yet to be resolved before the acquisition proceeds.

The German airline wants the matter cleared up "as soon as possible", the source adds, pointing out that "time is also running" for BMI. He says that, as a 30% shareholder of the UK carrier, which would rise to 80% through the takeover, Lufthansa has an interest in protecting its investment and is not trying to weaken BMI by "playing" with delays.

The Civil Aviation Authority's three-month liquidity requirement is part of European Union operating licence regulations and applies to start-up airlines, a measure designed to avoid the immediate collapse of new carriers.

Although declining to comment on BMI's status, a spokesman for the CAA points out that the authority is obliged to maintain financial oversight of licensed airlines. This is a "flexible" procedure, he says, which takes into account the broad financial state of a carrier - examining long-term business plans and projections in cases of a merger - but which is not based on enforcing a fixed period of liquidity.

BMI's poor financial performance became evident after it revealed a £100 million loss for the full year 2008, following the expiry of a long-term co-operation agreement with Lufthansa and SAS Group of which BMI had been a beneficiary.

SAS Group still holds 20% of BMI but the company has already declared that it will divest the shareholding and is unlikely to contribute capital to the carrier.

Lufthansa insists it still wants BMI as a carrier - rather than just for its valuable London Heathrow slots - but believes its network strategy, as well as its regional and budget operations, will have to undergo a rigorous review.