German airline Deutsche Lufthansa AG (LHA.XE) Monday said it has reached an agreement with Sir Micheal Bishop, the cofounder of the British Midland Airways, or bmi, to buy the airline in stages, ending a dispute that has simmered for months.

The initial stage will see Lufthansa, which already owns 30% less one share of bmi, taking an indirect 80% stake in its loss-making U.K.-based peer. It is then aiming to buy the whole of the airline in the future, once it has made sure it won't fall foul of U.K. airline ownership rules.

Lufthansa and Bishop have been in talks since last October, when BMI's founder exercised a put option that allowed him to force Lufthansa to buy his stake of 50% plus one share. The option, which also involved Scandinavian carrier SAS AB (SAS.SK), had been in place since 1999. Under the deal, Lufthansa could also have exercised an option forcing the sale of Bishop's stake.

The two sides have disagreed on the sale price and on the terms of the option since Bishop exercised his right, but have now reached an out-of-court settlement.

The deal comes as the global airlines industry is facing one of its sharpest ever downturns, with passenger numbers and cargo volumes dropping as the economic slowdown bites. Most of the world's airlines have seen profits drop sharply, or turn into losses. Lufthansa Friday issed a profit warning for 2009, saying it's goal now is to avert a full-year operating loss as weak demand for passenger and freight air services persists and fuel prices are on the rise again.

Lufthansa will pay Bishop and his holding company a total of GBP223 million, or EUR263.8 million, considerably less than the EUR400 million the German flag carrier put aside for the deal. Lufthansa will cancel the put option by paying Bishop GBP175 million compensation and a "Lufthansa-related U.K. holding company," LHBD Holding Ltd, will acquire Bishop's shares, held by his BBW holding company, for around GBP48 million, Lufthansa said.

It said that it will initially own a 35% stake in U.K.-based LHBD, but wants to raise the stake to 100% once it has obtained the necessary traffic rights for bmi. U.K. authorities could force bmi to give up some of its traffic rights, if it deems that is being acquired by a foreign airline.

At 1304 GMT, Lufthansa's shares were down EUR0.10, or 1.1%, at EUR8.70 in Frankfurt, outperforming a 1.8% fall in the blue-chip DAX index.

If Lufthansa can turn around BMI, it could prove lucrative as the British airline is the second-biggest user of London's Heathrow airport, holding over 11% of its takeover and landing slots. However, the timing of the transaction is a problem: "In recent years...bmi has experienced increasing financial challenges. These have been strongly exacerbated by the sharp rise in fuel prices in the past year and the ongoing global economic crisis," Lufthansa said.

The deal also comes after Lufthansa made several other acquisitions in recent months, which are coming under regulatory scrutiny. The European Commission Monday cleared Lufthansa to buy SN Airholding, the parent company of SN Brussels Airlines, with the condition that the carrier give competitors access to four routes. The commission is still investigating a separate deal where Lufthansa is planning to buy Austrian Airlines AG (AUA.VI).

Company Web site: www.lufthansa-financials.com

-By Jan Hromadko, Dow Jones Newswires; +49 69 29 725 503; jan.hromadko@dowjones.com

(Adam Cohen in Brussels contributed to this article.)