Picture emerges in German airline jigsaw

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After months of on-off discussions,the shake-out of Germany's airline industry appears to have reached a plateau afterAir Berlin's tie-up with hybrid carrier TUIfly. The appetite for further consolidationis unclear.

While several German airlines have gradually gravitated towards the nuclei of Lufthansa or Air Berlin, talks upon talks have sought to find a combinationfor those which remained uncommitted.These drawn-out talks, which came to prominence 18 months ago, notably centred on a possible link between Lufthansa-affiliated Eurowings, Germanwings and TUIfly, and a merger between Air Berlin and Thomas Cook's Condor.

Air Berlin had already acquired charter operator LTU and, when German competition authorities signalled dissatisfaction with a proposed integration of Condor, the proposed tie-up collapsed.Condor then defected to join the equally-frustrated parties trying to thrash out a TUIfly-Germanwings deal.

Consolidation Timeline

2007

Sep: Air Berlin agrees to take over Condor in share swap deal with Thomas Cook

 2008

Jan: Lufthansa, TUI Travel open talks on Germanwings, Eurowings and TUIfly merger

July: Air Berlin abandons plan to acquire Condor

Aug: Condor joins Germanwings/TUIfly merger talks

Sep: Condor pulls out of talks on Germanwings/TUIfly merger

Oct: TUIfly-Germanwings merger talks end.

 2009

Jan: Lufthansa takes full control of Eurowings and Germanwings

Feb: Lufthansa sells remaining minority stake in Condor to Thomas Cook

Mar: Air Berlin confirms looking at options for LTU, including possible divestment. Air Berlin/TUIfly seal cross-ownership agreement

Thomas Cook says the strategy to find a Condor partner wasright butthe financial assessment "didn't stack up".Condor brought a profitable platform to the bargaining table, but the tour operator claims that Air Berlin and TUIfly were in a weaker financial position and this imbalance ultimately convinced it to withdraw from the discussions after just a few weeks.

While Condor has opted to stand alone, wholly-owned by Thomas Cook, and Lufthansa has similarly broughtEurowings and Germanwings entirely under its control, Air Berlin and TUIfly seem to have unlocked the outstanding part of the consolidation puzzle with a 19.9% equity exchange and wet-lease pact.

TUI Travel will pay up to €68.2 million ($90 million) for its stake in Air Berlin, while Air Berlin will invest €36.3 million for an equivalent share in TUIfly. A 10-year wet-lease agreement will split TUIfly's fleet, handing 17 aircraft and some 100 TUIfly city routes, comprising about 45 destinations, to Air Berlin.

Air Berlin says the takeover of this "profitable portfolio", with 5.3 million passengers and "close to no overlap" with its current network, will allow it to develop a presence in Cologne and Stuttgart, both Germanwings bases, and give it greater access to the Italian market.

Air Berlin expectsto generate synergy savings of €20 million from the takeover, through network adjustments and purchasing savings in the short-term, and reductions in overcapacity and overheads in the longer term. TUIfly's transferred business, it says, will "contribute directly to our profitability".

Tour operator TUI Travel says its TUIfly operation lost €35 million last year and hiving off the scheduled flights will "de-risk" its business and "eliminate" the problem. It will operate the TUIfly holiday business separately, with its remaining 21 aircraft, and believes the Air Berlin agreement will help "reduce tour operator margin dilution" caused by overcapacity. The deal, subject to competition clearance, is due to take effect from October with TUIfly city services switching to Air Berlin this winter.

As Condor and TUIfly have moved to keep their tour operations separate, there is a question over the future of Air Berlin's LTU division in the face of the current weakening travel market and apparent pilot union tension.Air Berlin admits divestment of LTU is among options being considered, but it declines to indicate whether it has made contact with any potential partners.

German tour division TUI Deutschland believes it has an "adequately-sized" company in TUIfly and sees "no need" to consolidate further. "We've done our homework. For now, this is it."

For its part, Thomas Cook believes the region's airlines have room for additional restructuring. "We would welcome any further consolidation in the German market," it says. "We don't feel there's been enough."

While the UK's main players have been acting "responsibly", Thomas Cook says there is "still a lot of excess capacity" in its German business. But it does not feel pressure to revisit a Condor tie-up, saying it has "made a commitment" to personnel to remain stable for the time being.