Podcast: Analyzing The Potential Sale Of A Stake In Lufthansa Technik

Lufthansa Technik is looking for a second shareholder and expects to make a decision by mid-year. Why is it considering this and who could it be?

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Rush transcript

Lee Ann Shay:

Welcome to this latest MRO podcast. In this episode, we'll be talking about Lufthansa Technik potentially selling a stake of its company this year.

I'm Lee Ann Shay, Aviation Week's Executive Editor for MRO and Business Aviation. And I'm here today with my colleagues, James Pozzi and Jens Flottau. James is our MRO Editor for EMEA, and Jens is our Executive Editor for Commercial Aviation. Welcome, James and Jens. Thanks for joining me.

For starters, there's been a lot of speculation the last couple years that Lufthansa Technik could spin off a stake. Jens, why is the Lufthansa Group considering this, and why now?

Jens Flottau:

Well, the short answer is because it needs money. You have to remember that it just got out of the COVID crisis, obviously, like most airlines. And it has a huge investment need in front of it. It needs to replace its fleet, it's aging. There's a lot of wide bodies that need to be retired. So, it's basically looking for money.

It did get government aid during the pandemic, like many other airlines. That has been paid back, but that has been replaced by commercial bank loans. So, it's got a lot of debt, it's got a lot of investment coming up, and needs to find additional resources, financial resources. One way of getting additional money is selling a stake in Lufthansa Technik.

Lee Ann Shay:

That seems pretty straightforward. On March 7th, Soeren Stark, the Lufthansa Technik CEO, said that the MRO is looking for a second stakeholder with quote "complimentary capabilities" end quote, opposed to say gaining a particular investment amount. So, this takes out private equity type of investors. James, how do you interpret this?

James Pozzi:

Well, that's an interesting one, Lee Ann, because you mentioned private equity investors, and obviously a lot of the speculation over the last year or so was pointing towards private equity. You're right, Lufthansa Technik has Soeren Stark [inaudible 00:02:17] did say, and the quote was, "that they "were looking for a second shareholder with complimentary capabilities that has the potential to make us even stronger." So yes, that doesn't point to a private equity company at all.

It's a bit of a mystery really as to who would be the other, or the investor into the MRO. Doesn't seem to be much of a belief that it'll be another MRO company. So, there won't be company, almost like a mega merger or a coming together of two large MRO players, from what I've gathered on that. So, you'd have to look maybe at investors potentially from maybe the US in another form of investment, or maybe even looking towards Asia.

There's been a bit of kind of speculation around that, the Middle East and Asia, that of course there's a lot of investors in those regions that are looking to grow their global MRO share. And they would like to be shopping in the market for stakes in companies. That's something that can't be ruled out either.

And another interesting one would be OEMs. Of course OEMs, some of their... depending on which OEM it is, some of their aftermarket plans that existed pre-COVID look very different now. Of course, you wouldn't really expect it to be anyone in the engine space, of course. And over in the airframe space, based on their current position, you wouldn't really see someone like Boeing being involved there. But Airbus are an interesting one, obviously a fellow European company. That could be something that could be looked at potentially.

It's all kind of guesswork at the moment, but it's very interesting in which part of the market will actually get on board with Lufthansa Technik as an investor or a partner, and kind of buy that stake. So, very much up in the air and kind of open to speculation at the moment. Very, very intriguing proposition indeed.

Lee Ann Shay:

So, going back to kind of like the regional comments that you just made, James, Mr. Stark did say that Lufthansa Technik would like to grow in the Americas and Asia-Pacific. Do we think that that could maybe hint at a potential investor? Or, based on European regulations, would it be easier to have a European purchaser?

James Pozzi:

Based on what I've seen so far, I wouldn't rule anything out really. I wouldn't be surprised if the money did come from the US, personally. There seems to be a lot of appetites there to invest. And we've seen American financial institutions, or certainly investment firms, such as private equity that we mentioned earlier, investing in European companies in the MRO space a bit more frequently over the last few years. And certainly, the enthusiasm to do that, despite the kind of fluctuating fortunes of the commercial aftermarket, hasn't really dampened. So, there's certainly still an appetite there.

So, I wouldn't be surprised if it did come from the US or North America. But, there would be relatively easier if it was from within Europe. Yeah, I wouldn't be surprised to see some investment from outside of Europe, personally.

Lee Ann Shay:

So, James, you had mentioned that you didn't think it would be a engine OEM. I'm just curious, why do you think that?

James Pozzi:

Well, I don't really see where... see the purpose of that. For example, throwing names out, the Rolls-Royce or GE. I just don't see where that would be heading. I think those kind of companies may look to particularly grow their aftermarket networks through specific engine specialist partners.

Obviously, we would remember Lufthansa Technik has such a vast portfolio across all their spaces with airframe components, et cetera, modifications, and all kinds of business. So, I think maybe if engine OEMs are looking to grow, they may do so with specific engine focused MROs, from what I can see at this point.

I'll also just point back, just to cover myself, don't rule anything out either. There could be some surprises along the way, in general I think, with some of the acquisitions we may see or the M&A activity over the next one to two years in the commercial MRO space.

Lee Ann Shay:

So, Jens, given that a lot of... You had mentioned investment, like Lufthansa's looking at re-fleeting. A Lot of deals are made when airlines make a big investment. There could be an aftermarket component attached to that.

Do you see any tie up between their future fleet plans and an investor in Lufthansa Technik? Or, could it be even somebody like a Raytheon, where you get Collins, Pratt & Whitney, and all the diverse capabilities that a company like Raytheon would bring? Or, could they maybe go into the digital space? Lufthansa Technik has really been pushing digitalization. They've got their AVIATAR program, they've been trying to grow their digital portfolio in an independent way. What do you think?

Jens Flottau:

It's a really, really tricky question. If I can take a step back to explain a little bit what the strategy currently is. So, in the past, they've defined themselves as an aviation group, and that is being more and more replaced by the idea of being an airline group. So, they're getting out of LSG Sky Chefs, the catering subsidiary. They're selling a lot of smaller subsidiaries. They want to focus the business on the airline side of things.

Now, Lufthansa Technik is defined as core, nonetheless, which has implications for the kinds of investors that they will want to allow in, because Lufthansa doesn't want to give up control of the unit. They want the money, they want someone who takes a minority stake, but they want to have say in the company. So, anyone who will want to invest in them, who's interested in investing in Lufthansa Technik, will have to accept that. And I think that limits the amount of interested parties right there.

As far as the OEM side is concerned, I'm a bit skeptical, because, just because, if you imagined Airbus would buy a 20% stake in Lufthansa Technik, I'm sure Boeing wouldn't be happy with... There would be concerns about intellectual property, Airbus getting access to information about Boeing aircraft maintenance that it doesn't want them to have. And that applies to probably any other player in the OEMs and in the MRO space.

So, my feeling, without having any deeper knowledge of who they're talking to, is that it might be a financial investor that they're chasing. Could well be, as James mentioned, in the US. There's ample money available.

They also haven't ruled out an IPO. If they aren't coming to an agreement with any specific investor, then maybe why not do a partial IPO and sell 20%, 25% on the stock exchange? I wouldn't rule that out.

And a final comment, this process has been dragging on for some time now, which tells me that it isn't an easy one. They're waiting for the right time. And speaking of the right time, maybe it'll drag out further, because all the economic indicators aren't particularly great right now. They're not getting better. And maybe they can even come to the conclusion that we'll shelve this for the time being and hope for better times.

Lee Ann Shay:

So, it doesn't sound like you are optimistic that they will make an announcement about the potential buyer in the second or third quarter this year?

Jens Flottau:

No. I mean, they've said that that's the target. Coming out publicly with a statement like that would tell us that they are confident that it's going to happen, but things can change fast. And it wouldn't be the first investment process, or IPO process, that has been stopped at the last minute. I'm just saying there's a lot of things that are in flux, there's a lot of uncertainty there, and it may all change again.

Lee Ann Shay:

Well, I guess we just have to stay tuned, and we'll continue to follow this story. Gentlemen, thank you for your answers, but it doesn't sound like any of us have a clear cut idea of who could it be. So, we will watch this story.

Don't miss the next episode by subscribing to the MRO podcast, wherever you listen to your podcasts. And one last request. If you're listening in Apple Podcasts and want to support us, please leave us a star rating or writer review. Thank you so much. And, James and Jens, thank you.