Lufthansa, Finnair Okay Catering Deal

FRANKFURT, Germany (Reuters) - Deutsche Lufthansa's LSG Sky Chefs has struck a deal with Finnair allowing it to buy shares in the Helsinki-based airline's catering division within the next five years.

The agreement, announced on Wednesday, is LSG Sky Chefs' second move on its smaller peer after Lufthansa's supervisory board blocked a takeover deal in May because of a group-wide spending freeze.

LSG Sky Chefs, the world's biggest airline catering company with 2.3 billion euros ($2.83 billion) in annual revenue, said that it would immediately take over full managerial and operational responsibility for Finnair Catering.

If it buys shares in the business, it will do so at a pre-determined price, LSG said, without providing details.

Finnair Catering has annual revenues of about 80 million euros.

As airlines around the world seek ways to cut costs and boost paper-thin margins amid soaring fuel prices and fierce competition from low-cost carriers, more catering assets are expected to come on the market.

A media report in June said that Franco-Dutch carrier Air France-KLM was considering the sale of a stake in its Servair unit, and sources have told Reuters that Lufthansa could put at least part of LSG Sky Chefs on the block this year.

Also, a partial flotation of Saudi Arabian Airlines' catering business was more than twice covered by investors last month, raising 1.3billion Saudi riyals ($347 million).

LSG Sky Chefs' deal with Finnair gives it access to the Finnish market, a major hub for flights to Asia, and the opportunity to whittledown costs at the business before spending money on full ownership.

It also helps Finland's loss-making flag carrier to focus its resources on profitable routes to destinations such as China and Japan while it seeks ways to cut costs, particularly in Europe, where it faces stiff competition from discount airlines.

In May Finnair said it was handing over the operation of a third of its European routes to low-cost British airline Flybe to reduce costs.

The company said that it expects the LSG deal to help it to save about 9 million euros a year from the third year of cooperation. It launched a 140 million euro cost-cutting program last year and has saidit expects to achieve 80 million euros of those savings by the end of 2012.

As part of the agreement with LSG Sky Chefs, Finnair Catering willbe re-named LSG Sky Chefs Finland Oy.