German flag carrier Lufthansa has become Europe's biggest airline after the Austrian government sold its 41.65 per cent stake in the debt-ridden Austrian Airlines for €366,000, with a provision for paying an additional €162 million in 2011 subject to certain conditions.

The acceptance of the Lufthansa bid is the result of a bidding process launched in the early part of 2008 in accordance with EU privatisation guidelines. The process was structured and carried out by ÖIAG and investment bank Merrill Lynch and the deal is subject to conditions, including antitrust approval, and the European Commission ruling on the payment of the airlines €500 million debt as part of the takeover process.

The second part of the payment for the 41.65 per cent government stake depends on Austrian Airlines meeting the targets and performance as envisaged in the merger plans.

Lufthansa chief executive, Wolfgang Mayrhuber told a news conference in Vienna that "the risk of the commission turning down the restructuring aid is about zero" and added that the final closing of the deal will take place in May 2009.

Austrian Airlines will remain a broadly independent airline with its head office in Austria, its own brand, fleet and crew, and will be managed as a profit centre in the Lufthansa Group.

Lufthansa has agreed to maintain Austrian air traffic infrastructure to the "greatest possible extent", taking into consideration the needs of Vienna as a business location, as well as continuing to expand this wherever commercially viable in line with the needs of the market.

Austrian Airlines, which expects a 2008 net loss of up to €475 million, should turn profitable within the next three years and Mayrhuber said, "It is difficult to say exactly when we will break even in this current environment, but if we didn't expect it to happen within the next three years, we wouldn't make the investment."

"Austrian Air opens eastern Europe to Lufthansa," Mayrhuber said and further added that the staff of Austrian Air staff are an asset and Lufthansa has no plans in cutting any jobs and the merger will result in annual savings of €40 million.

With more than approx 30 carriers packing up this year, the surviving airlines are trying to consolidate with mergers in a bid to reduce its operating cost, which have taken a pounding due to high fuel prices and the global economic slowdown.

The International Air Transport Association estimates a combined loss of $5.2 billion to the airlines for the current fiscal year.

In Europe, British Airways is in merger talks with Spanish airline, Iberia as well as Australian flag carrier, Qantas and is in talks with American Airlines for a transatlantic partnership.

However, latest reports indicate that the merger talks with Qantas and Iberia is in jeopardy as Qantas has issued an ultimatium to BA to choose between Iberia and Qantas as according to them the three way tie up will not work.

In Europe, Ryanair has made a fresh bid for Aer Lingus while Air France-KLM and Lufthansa are vying for Alitalia. Delta Air Lines, in the US recently acquired its rival Northwest Airlines.

Lufthansa has also taken a 45 per cent stake in the parent company of a small Brussels airline and upped its stake in British Midland Airways from 30 per cent to 80 per cent. It also took a 19 per cent stake in a US budget carrier.

Industry analysts have warned that, with Lufthansa having many stakes in several airlines will stretch its management capabilities to the full that too at a time when the airline industry is going through a turbulent phase.