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Lufthansa: JetBlue Deal's Not About the Money

Ted Reed

CHARLOTTE, N.C. -- Germany's Lufthansa says it's not putting $300 million into JetBlue(JBLU Quote) solely as a financial investment -- it sees strategic value in an alliance with the biggest carrier at New York's Kennedy International.

After all, "Kennedy is a second Heathrow. It shouldn't be undervalued," Lufthansa CEO Wolfgang Mayrhuber said Friday at a Frankfurt press conference. Yet Kennedy, and in fact, the entire New York international market, is a place where the Star Alliance, which Lufthansa co-founded, is barely represented.

In terms of discussing where the two carriers can find common ground, Mayrhuber went well beyond what JetBlue CEO Dave Barger said Thursday during a conference with analysts. Barger stressed that the deal, in which Lufthansa will acquire 19% of JetBlue if regulators approve, is strictly a financial one, with further possibilities to be discussed later on.

By contrast, Mayrhuber focused on the operational potential. "A financial investment in JetBlue is something interesting, but it wouldn't have been sufficient," he said. "We wanted something of strategic importance for the two companies."

The specifics will be worked out in the future, he said, but he believes JetBlue will make a good partner. "The Lufthansa customer who expects a premium product in the United States won't be disappointed at all," he said. "Customers are impressed by what JetBlue is doing. Otherwise, we wouldn't be investing here."

Lufthansa CFO Stephan Gemkow commented on the financial value of the transaction, saying JetBlue "has been undervalued and the dollar has been relatively weak, and it will stay like this for a long time." He added that while U.S. competitors at Kennedy connect 50% or more of their international traffic to domestic flights, Lufthansa connects just 5%.

Although JetBlue's financial performance has been lagging, Lufthansa sees something it likes in the low-priced carrier's model. Unlike the vast majority of its peers, JetBlue focuses on offering an enhanced passenger experience in coach class. This week, for instance, JetBlue began offering free e-mail and instant messaging on one of its aircraft. Several competitors are also moving to offer Internet access, possibly more extensively, but "free" is not part of their plan.

Shares of JetBlue jumped 14% during the previous session, and Friday they were up another 0.8% to $7.21.

At Kennedy, where Lufthansa has three daily flights, JetBlue serves 48 destinations and carries 50% of the domestic traffic. Next year, it will open a spectacular new terminal. Sure, it will be tough to connect international passengers at a terminal that will not have federal inspectors or widebody gates, but JetBlue is already working out a plan to code-share with Ireland's Aer Lingus, so somebody thinks it will nevertheless be possible to exchange passengers.

Kennedy is the site of one of the airline industry's most critical battles as U.S. carriers battle for international traffic in New York, the world's biggest aviation market. AMR's (AMR Quote) American opened its shiny new terminal this summer, and Delta (DAL Quote) is preparing to build one.

Meanwhile, Continental(CAL Quote) operates a competing international hub at Newark.

American is in the Oneworld alliance, while Delta and Continental are in Skyteam.

The Star Alliance drew attention this week, formally welcoming two major Chinese airlines -- Mayrhuber attended the ceremony in Beijing -- and announcing that Air India will also join.

China is nice. India is good, too. But it would help to have New York.