Lufthansa eyes stake in Italy’s ITA to extend regional reach

Deutsche Lufthansa AG said it aims to buy a minority stake in ITA Airways, seeking to advance an industry consolidation that would give the German airline a stronger foothold in a major European aviation market.

The German carrier didn’t disclose financial details, or lay out the size of the stake it wishes to buy in the successor of Alitalia SpA. Lufthansa wants to buy as much as 40% of ITA in an initial step and subject to negotiations, according to people familiar with the talks, asking not to be identified discussing private deliberations. 

The airline said in a statement that it submitted a bid to Italy’s Economy and Finance Ministry, with a view to buying the remaining shares “at a later date.” Further talks will primarily focus on the form of a possible equity investment, the commercial and operational integration of ITA into Lufthansa, the airline said.

A firm deal would allow Lufthansa to expand in one of Europe’s key markets, while charting a course for Rome to rid itself of an asset that has soaked up billions of euros in state support. While ITA and the erstwhile Alitalia have been notoriously unprofitable, Lufthansa would gain access to lucrative trans-Atlantic travel while preventing a rival from building up a base in northern Italy that might soak up passengers from Lufthansa’s own Munich hub.

“The offer from Lufthansa was widely expected, but in our view sends a sub-optimal message on capital allocation: yes, Italy is an important, attractive market - but the successful restructuring of ITA into a sustainably profitable airline is far from assured,” Bernstein analysts Alex Irving and Clementine Flinois said in a note. 

ITA would add to a group of national carriers already under the Lufthansa umbrella, including Swiss and Austrian Airlines. Lufthansa Chief Executive Officer Carsten Spohr, a trained pilot who has run the company for close to a decade, has built the company into Europe’s biggest airline group, competing with the other two major conglomerates — British Airways parent IAG SA and Air France-KLM — as well as the trio of budget specialists: Ryanair Holdings Plc, EasyJet Plc and Wizz Air Holdings Plc. 

The planned purchase removes one more independent player from the European landscape, leaving Portugal’s state-owned airline TAP SA and Nordic carrier SAS SA as possible takeover targets. ITA had previously been at the center of a multi-company bidding contest that at one time involved MSC Mediterranean Shipping Co., Delta Air Lines Inc., Air France-KLM and private equity firm Certares Management LLC.

Air France said earlier today that it didn’t plan to make an offer for ITA. Lufthansa rose as much as 47 cents, or 5.5%, to €9.28 in Frankfurt. The stock has gained 19% this year, after rising 26% in value in 2022.

Italy’s finance ministry hasn’t received any additional offer apart from Lufthansa’s, according to a statement. 

Alitalia, which began flying two years after the end of World War II in 1947, officially ceased operations in late 2021 and was reborn as ITA, or Italia Trasporto Aereo, remaining under government ownership. Under former Prime Minister Mario Draghi, the state had chosen a rival bidding group led by Certares, Delta and Air France as the preferred bidder, before his successor, Giorgia Meloni rekindled talks with Lufthansa and MSC in October.

Important Market

“For Lufthansa Group, Italy is the most important market outside of its home markets and the US,” the German carrier said. “Italy’s importance for both business and private travel lies in its strong export-oriented economy and status as one of Europe’s top vacation spots.” 

Among the most recognizable airline brands in the world, Alitalia ferried popes and soccer stars across the globe, bringing Italian flair to far-flung places. Flight crews donned Armani-designed outfits and the aircraft were painted in green, white, and red livery with an A shape on the tail. On papal flights, the plane’s call sign is designated Shepherd One, with the Italian and the Vatican flags flying from the cockpit window upon arrival.

After Alitalia went bankrupt in 2008 following years of deficit, the carrier started a decade-long odyssey under on-and-off owners. Air France became Alitalia’s biggest shareholder after buying 25% of the stock for €323 million euros in 2009, only to see most of its investment wiped out in the ensuing years. Abu-Dhabi based carrier Etihad Airways PJSC tried its luck a few years later with a 49% stake in Alitalia to funnel more passengers through its Gulf hub, but that plan, too, fell through. 

Alitalia filed for bankruptcy again in 2017, the second time in less than a decade. The airline had a fleet of about 160 aircraft in the mid-1990s. By the time of its launch, ITA operated 52 aircraft, with that number set to double by 2025. Lufthansa hasn’t said whether it will make adjustments to ITA’s growth plans.

Long Struggle

“Can Lufthansa achieve the impossible after all, and turn around an airline that has struggled for 75 long years?” the Bernstein analysts wrote in their note.

For Lufthansa, the foray represents a gamble on an Italian market that’s more competitive than the German carrier is accustomed to following the rapid expansion of low-cost operators. But adding ITA to Lufthansa’s stable of German, Swiss, Austrian and Belgian flag carriers would allow the German carrier to optimize flight schedules on European routes, delivering efficiencies and potentially boosting ticket prices.

Negotiations were complicated by Lufthansa’s insistence that it wanted control of its Italian rival, something Meloni’s government was long unwilling to grant. In the end, the two sides came together, not least because the government spent at least €10 billion, including the debt burden, since 2008 keeping Alitalia aloft and providing capital for its successor.

The asset became more attractive to bidders because Italian government’s overhaul of the airline in 2020 meant that it ceded many of Alitalia’s assets while retaining much of its debt.

An eventual full sale to Lufthansa would end 75 years of government involvement in the Italian national carrier. While operating with a reduced fleet, route network and payroll, the intention for ITA has always been to find it a partner given the level of competition from other network airlines, low-cost carriers and Italy’s high-speed train network.