Lufthansa Seeks Investment in Italy's ITA to Expand Regional Presence

Deutsche Lufthansa AG announced their intention to purchase a minority stake in ITA Airways, in an effort to increase their presence in a major European aviation market. This move is part of a larger industry consolidation.

The German airline did not reveal any financial information or the amount of the stake it is looking to acquire in the new Alitalia SpA. Sources close to the negotiations, who asked to remain anonymous due to the confidential nature of the talks, stated that Lufthansa is aiming to purchase up to 40% of ITA as a first step, pending further negotiations.

The airline announced that it had presented a proposal to Italy's Economy and Finance Ministry, with the intention of acquiring the remaining shares at a later time. Discussions will center around the potential equity investment, as well as the commercial and operational integration of ITA into Lufthansa, the airline added.

If a solid agreement is reached, Lufthansa would be able to grow in one of Europe's most important markets, while Rome would be able to get rid of an asset that has taken up a lot of state funding. Although ITA and the former Alitalia have been notoriously unprofitable, Lufthansa would be able to benefit from the profitable trans-Atlantic travel and prevent a competitor from establishing a base in northern Italy that could take away passengers from Lufthansa's Munich hub.

Analysts Alex Irving and Clementine Flinois from Bernstein commented in a note that the offer from Lufthansa was anticipated, but it sends a less than ideal message about capital allocation. They stated that while Italy is a significant and desirable market, the successful reorganization of ITA into a profitable airline is far from guaranteed.

Lufthansa, Europe's largest airline group, is looking to add ITA to its roster of national carriers, which already includes Swiss and Austrian Airlines. Carsten Spohr, the CEO of Lufthansa and a trained pilot, has been at the helm of the company for nearly a decade. The company is in competition with other major airline conglomerates such as IAG SA (parent of British Airways) and Air France-KLM, as well as budget airlines Ryanair, EasyJet, and Wizz Air.

The proposed acquisition eliminates another independent entity from the European market, leaving TAP SA, a Portuguese state-owned airline, and SAS SA, a Nordic airline, as potential acquisition targets. ITA had been the focus of a multi-company bidding war that included MSC Mediterranean Shipping Co., Delta Air Lines Inc., Air France-KLM, and Certares Management LLC.

Air France announced today that they have no intention of making a bid for ITA. This news caused Lufthansa's stock to increase by as much as 5.5%, reaching €9.28 in Frankfurt. This year, the stock has seen a 19% increase in value, following a 26% rise in 2022.

The Italian finance ministry has not been presented with any other bids besides Lufthansa's, according to an official statement.

Alitalia, which began its operations in 1947, two years after the end of World War II, ceased operations in late 2021. It was then reborn as ITA, or Italia Trasporto Aereo, and remained under government ownership. Former Prime Minister Mario Draghi had chosen a rival bidding group led by Certares, Delta and Air France as the preferred bidder. However, his successor, Giorgia Meloni, reignited talks with Lufthansa and MSC in October.

The Lufthansa Group has identified Italy as its most significant market outside of Germany and the United States. This is due to Italy's strong export-driven economy and its popularity as a tourist destination in Europe.

In 2008, Alitalia declared bankruptcy after years of financial losses. Air France then purchased 25% of the company's stock for €323 million euros in 2009, but the investment was not successful. Etihad Airways PJSC, based in Abu-Dhabi, then attempted to acquire a 49% stake in Alitalia in order to increase the number of passengers travelling through its Gulf hub, but this plan also failed. This began a decade-long journey of ownership changes for the carrier.

In 2017, Alitalia declared bankruptcy for the second time in a short period of time. In the mid-1990s, the airline had a fleet of around 160 planes. When it was first established, ITA had 52 planes and was expected to double that number by 2025. Lufthansa has not yet revealed if they will make any changes to ITA's expansion plans.

In a note, Bernstein analysts questioned if Lufthansa could manage to accomplish the seemingly impossible task of reviving an airline that has been in a state of difficulty for the past 75 years.

Lufthansa is taking a risk by entering the Italian market, which is more competitive than what the German airline is used to due to the growth of low-cost carriers. However, if they add ITA to their list of German, Swiss, Austrian, and Belgian airlines, they will be able to better coordinate flight times on European routes, leading to greater efficiency and possibly higher ticket prices.

The negotiations between Lufthansa and the Italian government, led by Meloni, were difficult due to Lufthansa's desire to have control of its Italian counterpart. Ultimately, the two sides were able to reach an agreement, largely due to the fact that the government had invested at least €10 billion since 2008 in order to keep Alitalia afloat and provide capital for its successor.

The asset became more appealing to potential buyers due to the Italian government's restructuring of Alitalia in 2020, which resulted in the transfer of many of its assets while much of its debt remained.

A potential sale of ITA to Lufthansa would mark the end of 75 years of government involvement in the Italian national carrier. The airline has been operating with a smaller fleet, route network, and payroll due to the competition from other network airlines, low-cost carriers, and Italy's high-speed train network. The goal has been to find a partner for ITA in order to remain competitive.