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Lufthansa Targets 2 Years For Payoff From ITA Airways Deal

Edward Russell

June 4th, 2023

An ITA Airways Airbus A220

Lufthansa Group CEO Carsten Spohr is confident in financial gains within two years of the pending acquisition of Italy’s ITA Airways, despite the carrier’s history of losses.

“Whenever the closing is, then the clock starts ticking and then [in two years] the management team and I want to have it turned around,” Spohr said at the IATA Annual General Meeting in Istanbul Sunday. He expressed confidence that ITA would improve the group’s bottom line despite its predecessor, Alitalia, proving a financial drag on numerous past investors, including Air France-KLM and Etihad Airways.

ITA, despite being made of the “good” assets of Alitalia when it was created in 2021, reported a €486 million ($520 million) net loss in 2022.

“ITA is not Alitalia,” Spohr said. “It’s more a revenue case synergy than a cost restructuring.”

The Lufthansa group agreed in May to buy a 41 percent stake in state-owned ITA for €325 million in what would be the first major post-pandemic airline merger in Europe. The Italian government will kick in another €250 million as part of the agreement. Lufthansa has the option to take full control of ITA in the future.

The combination, if approved by the European Commission, would expand the Lufthansa Group’s share of the European market. It already owns its namesake airline, as well as Austrian Airlines, Brussels Airlines, Eurowings, and Swiss Air, as well as regional carrier Air Dolomiti. Spohr has previously said that ITA’s Rome hub would position the group to better compete with Air France-KLM and International Airlines Group — including British Airways and Iberia — to Africa and Latin America.

Spohr’s targets for ITA are ambitious. Two years from deal close is a quick turnaround for most mergers, especially for one with an airline with a shaky financial past. Even Spohr admitted that it took nearly 20 years for the group to turn Swiss — arguably the Lufthansa Group’s most financially successful acquisition — into the success story it is today.

“We, Lufthansa Group, learned,” Spohr said citing its past deals. “We believe we are now well prepared for ITA.”

Spohr added that, thanks to the work done by the Italian government, ITA is already “restructured.” The Lufthansa Group’s focus will be on boosting revenue, particularly in business-travel heavy northern Italy served by the Milan airports. One way it will achieve these gains, for example, will be plugging ITA into the group’s existing corporate contracts around the world; a business traveler in, say, Washington, D.C., will see ITA flights appear as part of their booking options as soon as the deal closes.

And ITA, Spohr said unequivocally, will join the Star Alliance along with the rest of the group’s airlines and leave SkyTeam.

Of course none of this will be possible without regulatory approval. The European Commission blocked IAG’s first attempt to takeover Air Europa in 2021. The London-based group has reformulated its offer and is again seeking approval for the deal that would allow it to create a “360-degree hub” in Madrid. The commission has more recently objected to Korean Air’s takeover of Asiana.

“ITA is almost an easy case,” Spohr said. “ITA is only number four in Italy … I think the European Commission will find it positive — it will find a solution that will broaden its market view.”

The European regulator is not alone in taking a harder line on airline consolidation. The U.S. Justice Department successfully sued to unwind an alliance between American Airlines and JetBlue Airways, though the former intends to appeal that ruling. The DOJ has also sued to block JetBlue’s planned merger with Spirit Airlines. And in Colombia, the country’s regulator, Aerocivil, waited so long to rule on Avianca’s planned merger with Viva Air that the latter went bankrupt and Avianca dropped the deal.

European approval of Lufthansa’s ITA deal could set a precedent for other combinations. In addition to IAG’s proposed Air Europa takeover, Air France-KLM has repeatedly expressed interest in state-owned TAP Air Portugal. The Portuguese government is expected to solicit bids for TAP later this year.

Updated with ITA’s 2022 net loss numbers.

Edward Russell

June 4th, 2023

Tags: Europe

Photo credit: An ITA Airways Airbus A220 ITA Airways

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