THE Lufthansa takeover of BMI British Midland has been thrown into doubt by a row with Sir Michael Bishop, the British airline’s founder, over the injection of fresh money into the company.

The German flag carrier has demanded that Bishop, one of the UK’s best-known airline entrepreneurs, take part in a recapitalisation of BMI to avoid the risk of it breaching regulatory rules on capital reserves.

Bishop is understood to have told Lufthansa he will not play ball and that there is no risk of a breach. Both sides are now seeking legal advice on how to resolve the wrangle.

A spokesman for Bishop declined to comment, but sources close to him rejected the demand as “an attempt to reduce in effect the price they [Lufthansa] have already agreed to pay”.

Insiders said the sum requested was around £100m. “They are playing hard ball – it’s very aggressive,” one source said. Lufthansa declined to comment.

The row has its roots in a deal struck by Bishop a decade ago. Lufthansa took a minority stake in BMI and gave him the option to sell the German group his majority stake later at an agreed price. Lufthansa and another minority shareholder, SAS, also agreed to underwrite a share of any losses made by BMI.

When the deal was struck, Lufthansa and its fellow airlines in the Star alliance group were desperate to gain access to Heathrow to attack British Airways’ home market. BMI is the second-largest holder of runway slots at Heathrow.

The downturn in the airline business has made the terms of the 1999 deal look generous.

In October Bishop exercised his option, with Lufthansa forced to pay around £300m for his holding.

BMI, meanwhile, has racked up mounting deficits, losing a reported £99.7m last year, compared with a £7m profit a year earlier. The airline has slashed capacity and embarked on a tough cost-cutting programme.

Lufthansa is understood to have told Bishop it wants to recapitalise BMI to avoid a potential breach of the UK Civil Aviation Authority’s capital-adequacy requirements. The rules mean a UK airline must have sufficient cash reserves at all times to operate for three months, or risk losing its operating licence.

Sources close to Bishop insisted yesterday that there was no danger of BMI failing the capital-adequacy test.

“It is simply a desperate attempt by them to get something back from the deal,” one source said.

Completion of the deal has been held up while it receives competition clearance from Brussels, which is expected within the next few weeks.

Lufthansa is in the throes of completing the takeover of two other airlines, Brussels Airlines and Austrian Airlines. It is also on a list of potential suitors for Aer Lingus drawn up by the Irish government, which has recently approached a number of Europe’s biggest airlines about the sale of its 25% stake in the Irish flag carrier.

Sources close to the situation say initial discussions have been held with Lufthansa, Air France and British Airways, but have yet to progress.

It is believed that while several rivals would be interested in buying the government’s stake as a prelude to a possible full takeover of Aer Lingus, none are brave enough to risk a battle with Ryanair. It is the airline’s biggest shareholder and recently failed with a second takeover attempt of its own.

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