It is an offer with a longer lead time. For weeks, there have been growing indications that Lufthansa was paving the way to acquiring Italian newcomer, ITA Airways, and integrating the Roman carrier into its own aviation empire. Now the Italian Ministro dell'economia e delle finanze has received Lufthansa’s binding proposal.
With its offer, Lufthansa is pursuing a two-pronged approach. In a first step, the airline intends to acquire a minority stake in ITA - local sources speak of 40% - taking over the majority at a
later stage.
Should the Italian government consent the intent, further negotiations and discussions would be conducted on an exclusive basis.
LoI submitted
According to people familiar with the process, the Italian Finance Ministry wants to quickly sign a binding letter of intent with Lufthansa. The sale of ITA had been expected for quite some time.
In a first proposal submitted a year ago, Lufthansa and shipping line, MSC, had jointly offered to acquire an 80% stake in ITA Airways. This offer was given preference by the Italian government
headed by Prime Minister Draghi. However, a U-turn by Italian politicians followed, giving preference to an offer from the U.S. investment fund, Certares, which includes Air France-KLM and Delta
Air Lines. Then right-wing Georgia Meloni took power and turned the matter back again.
Time is money
Meanwhile, the issue is pressing enormously, because ITA is losing a lot of money every day and has no chance of survival without a strong financial partner. Further state subsidies are no longer
possible under current EU rules.
During the COVID-19 pandemic, ITA lost considerable market share to budget carriers Wizz Air, Easyjet, and Ryanair. At its main hub, Rome-Fiumicino, it operates less than 30% of the flights. As a
golden rule of thumb in aviation, an airline must control at least 50% of its central hub in order to be profitable,
On long-haul routes, the Italian newcomer has a market share of just 1%. Meanwhile, Lufthansa has announced that it would reinforce traffic at Rome-Fiumicino by supporting ITA to operate feeder
flights to its own intercontinental gateways, Frankfurt and Munich. In addition, long-haul services to Africa and Latin America seem to be an option, provided Lufthansa and the Italian government
come to terms.
Do opportunities or risks predominate?
In a statement given to German TV channel, ZDF, Andrea Giuricin, an aviation expert at Milan's Bicocca University, warns of a lean period: “In the short term, Lufthansa would possibly lose
money, but in the longer term, revenues could grow if the Rome hub is expanded.” To achieve this goal, it will also be necessary to increase ITA's fleet which currently comprises around 50
aircraft. Following the submission of the binding proposal, the Lufthansa share rose by 5.17% on the Frankfurt Stock Exchange and reached a daily value of 9.17 EUR. The decision by Air France –
KLM to refrain from submitting an own tender, is also likely to have contributed to the rise in the Lufthansa share price.
From the air freight point of view, Milan Malpensa is the most important player in Italy, as most industrial companies are located in the north of the country. Rome, on the other hand, only plays
second fiddle in this respect. Whether ITA's fleet will be expanded to include freighters in order to secure the airline a piece of the lucrative Milan cargo pie remains to be seen.
New round of consolidation in European aviation?
The Lufthansa-ITA advance has ignited talk of further potential sector consolidation as the industry seeks to plot a more profitable post-pandemic recovery, reports news agency Reuters. Many of
Europe's legacy flag-carrying airlines are struggling to compete effectively with budget carriers, hampered by weak balance sheets that could be made more robust by merging with rivals, analysts
said.
"This may be the next step in European airline consolidation," said Bernstein analyst Alex Irving, citing Portugal's national airline, TAP, as a prime target.
The Portuguese government, which owns TAP, has said it is considering an outright or partial sale of the business. Lufthansa, Air-France KLM (AIRF.PA) and British Airways owner IAG (ICAG.L) are
potential buyers, analysts said.
Heiner Siegmund
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