To the patient belong the spoils, this they could say of the privatization of Italy’s ITA Airways. The Lufthansa Group appears poised to win the contest for the state-owned carrier, even after an apparent loss this fall to the private equity-backed bid of Air France-KLM and Delta Air Lines.
A new decree from the Italian government, which is expected to be signed by Prime Minister Giorgia Meloni on Friday, specifies that an airline must lead the equity investment in ITA, reports Italian daily Corriere della Sera. That change would effectively leave Lufthansa as the sole bidder given the capital in Air France-KLM and Delta’s bid comes entirely from Certares. And while the latter could restructure their offer, Air France-KLM is barred from investing in other airlines until it repays the coronavirus aid it received from the French and Dutch governments, something that is not scheduled before May 2025.
Lufthansa had planned to be a minority investor in ITA, teaming with shipping giant MSC in its initial bid. However, after Italy reopened the privatization to the group, MSC bowed out in November and left Lufthansa to go it alone.
The group intends to invest €230-240 million ($244-255 million) for an initial 40 percent stake in ITA, Corriere della Sera has reported. Lufthansa intends to take full control of the Italian airline in the future.
A Lufthansa spokesperson declined to comment.
A deal for ITA would achieve a long sought goal of Lufthansa: To secure a piece of Italy’s national airline. The group has been maneuvering for part of Alitalia, and now ITA that replaced Alitalia in October 2021, since at least 2008. More recently, CEO Carsten Spohr has said his group is the “natural home” for ITA amid repeated public overtures for the airline. The Lufthansa Group is already Europe’s largest airline conglomerate, including its namesake carrier plus Austrian Airlines, Brussels Airlines, Eurowings, and Swiss.
Lufthansa’s interest in ITA comes with good reason. Italy, as Spohr put it in July, is the “most important market beyond our home markets.” In 2019, the country was the fourth largest in the European Union by passengers after Spain, Germany, and France. The Lufthansa Group already has an Italian subsidiary, Air Dolomiti, that feeds Lufthansa’s hubs in Frankfurt and Munich from a bevy of Italian cities but ITA would give it a much larger share of the market, plus slots at key airports, including Milan Linate and Rome Fiumicino.
Air France-KLM, and Delta, were seen as the victors of ITA’s “beauty contest” when their consortium was selected as the preferred bidder in the final days of former Italian Prime Minister Mario Draghi’s government. The two airlines were to handle the commercial side of the deal, which was expected to include ITA’s integration into their transatlantic joint venture with Virgin Atlantic. However, the consortium and the new Meloni government were unable to finalize an agreement before the exclusivity period ended in October, reopening the competition to Lufthansa.
And, as the process dragged on, Air France-KLM appears to have found a more attractive takeover target: TAP Air Portugal. “We’re very comfortable with the Iberian peninsula, and TAP could be [an] option for us to have a larger presence,” CEO Ben Smith said in October, adding that the group plans to “definitely engage” with the Portuguese government when it is ready to talk. Reports have also indicated that TAP is in a better financial position than ITA, which makes it potentially more attractive to Air France-KLM.
What could a Lufthansa-ITA deal mean? First, it would undoubtedly result in more flight connectivity between Italy and the Lufthansa Group’s core hubs — Brussels, Frankfurt, Munich, Vienna, and Zurich. It would also increase the group’s share of European capacity by about a point to nearly 10 percent; the largest of the continent’s three big airline groups but still behind discounters, including EasyJet and Ryanair. And ITA would almost certainly eventually join Lufthansa’s transatlantic joint venture with Air Canada and United Airlines, as well as the Star Alliance (it is currently a member of SkyTeam).
However, the deal may not be everything Lufthansa management hopes for its bottom line. The group has a checkered past acquiring airlines in the name of consolidation and greater market clout in order to boost its finances. Only Swiss has consistently produced strong profit margins amid its dealmaking. The group earned just a 6 percent operating margin from 2015-2019, a period of strong demand and relatively low fuel costs, despite its airline acquisitions.
Air France-KLM did not respond to inquiries on its bid ITA by press time.