General Industry

ITA-Lufthansa Deal Sparks Further Airline Merger Talk

By Dave Simpson
ITA-Lufthansa Deal Sparks Further Airline Merger Talk

German airline Lufthansa's bid for a minority stake in Italy's ITA Airways has ignited talk of further potential sector consolidation as the industry seeks to plot a more profitable post-pandemic recovery.

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.

Lufthansa has offered to buy an initial minority stake in ITA, Italy's state-owned successor to Alitalia, it said on Wednesday.

"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 and Aer Lingus owner IAG are potential buyers, analysts said.


"We clearly focus on ITA," a Lufthansa spokesperson said. "At the same time, however, we closely monitor consolidation in the European airline market."

Air-France KLM and IAG declined to comment.

Sweden's SAS, which has been under Chapter 11 bankruptcy protection in the United States since last summer, is also a potential candidate, Kepler Cheuvreux airlines analyst Ruxandra Haradau-Doeser and Bernstein's Irving said.

An SAS spokesperson said it's "too early in the process to comment on any potential future investors".

British budget carrier easyJet is another possible target, said Haradau-Doeser.


"For Lufthansa, the logic of taking over easyJet would be great - it could strengthen its market position in Great Britain, Paris-Orly and Geneva," she said.

Michael O'Leary, the outspoken CEO of fellow low-cost airline Ryanair, also weighed in with his predictions this week.

"TAP will finish up in BA-IAG, then I think easyJet is going to finish up being bought by either BA or Air France or both jointly and then Lufthansa will buy Wizz," he said.


Some aviation executives, however, said airlines would be wary of taking on risk in what is still a tough operating environment.


EasyJet downplayed talk of consolidation.

"It's very difficult to really make it work well in Europe. These type of deals are very complicated and distracting," easyJet Strategy Director Shane Lord said at the Air Finance Journal conference in Dublin.

While some analysts have been quick to speculate on potential mergers, there are other ways airlines could strengthen their finances.

"For healthier yields and margins, European airlines need to find capacity discipline: this is something that has been lacking in the past," Bernstein's Irving said.

And the big buyers, including Lufthansa and Air France-KLM, have not demonstrated any real appetite for acquisitions.


"Right now our priority is to fully recover from the COVID crisis and to complete our transformation," an Air-France KLM spokesperson said in an emailed response to a request for comment.

German business daily Handelsblatt has reported that Lufthansa CEO Carsten Spohr mentioned at an internal company event that TAP could be an option for more long-haul business with South America.

However, it could take months before the ITA Airways-Lufthansa deal is finalised, making it unlikely that Lufthansa will move ahead with further deals any time soon, a company source said.

Lufthansa Bids For ITA Stake To Revive Italy's Loss-Making Airline

The above news followed by news that German carrier Lufthansa said on Wednesday 18 January it had offered to buy an minority stake in ITA Airways, betting on reviving the loss-making successor to Italy's Alitalia and expanding its footprint in Europe.

Lufthansa said Italy is the most important market outside of its existing home markets and the United States, noting its prominence as both a business and tourism destination.

It did not disclose the size of the stake or the price.

The offer was for a 40% stake in the company, two sources close to the matter said. One of the sources said it was valued at 200-300 million euros. They declined to be identified because the matter is confidential.

The move comes as Europe's airlines have struggled to recover their balance sheets after the years-long COVID-19 pandemic and as legacy carriers have looked to consolidation to help them compete with low cost airlines.

The cost-of-living crisis in Europe has stirred concerns about softening demand at a time when carriers are also struggling with higher costs of wages, fuel and other inputs.

Italy's Economy Ministry said later on Wednesday Lufthansa was the only bidder. It will now review the offer and decide whether to approve it.

Under the terms of the bidding process, Lufthansa has to ensure it will develop Italy's main hubs and guarantee ITA has access to strategic markets as well as increases its long-haul routes.

The new right-wing administration in Rome passed a decree in December to initially sell a minority stake through capital increases, in order to speed up a full divestment in ITA.

Beside its domestic German business, Lufthansa already operates the brands Swiss, Austrian Airlines and Brussels Airlines.

"The plan is to agree on the initial acquisition of a minority stake as well as on options to purchase the remaining shares at a later date," Lufthansa said in a statement, adding it hoped to sign a Memorandum of Understanding with the Italian Economy Ministry and move on to exclusive talks.

Two sources said previously that ITA's shareholders will convene to give a green light to the capital increase once the Italian Treasury signs off on the memorandum with Lufthansa, a process Italy aims to finalise quickly.

ITA in 2021 posted an operating loss of 170 million euros and analysts believed a merger with a stronger rival was the only option left for the airline, seen as unable to survive national and international competition as a standalone company.

Lufthansa became the frontrunner after Italy held talks last year with U.S. private equity fund Certares, Air France KLM and Delta about a deal but failed to reach an agreement.

Air France confirmed earlier on Wednesday 18 January that it would not bid for ITA.


Alitalia was considered a national icon in Italy, and successive governments spent an estimated 10 billion euros to keep it afloat in its last 14 years of life, despite heavy losses and bad management.

Rome has already pledged more than 1 billion euros for ITA and under a deal with the European Union, it could provide another 250 million this year.

Analysts say it could take a long time before Lufthansa can turn ITA around.

"Acquiring ITA is one of the most challenging propositions in European aviation: the airline has been persistently loss-making," said Bernstein analyst Alex Irving.

"If anything, the backdrop is becoming even more challenging, especially on short-haul, as Ryanair and Wizz Air have added as much capacity to Italy as they realistically can."

Air France Says It Won't Bid For Italy's ITA Airways

All of the above news followed news that Air France-KLM said on Wednesday 18 January it had informed the Italian government it would not bid for an equity stake in its flag carrier ITA Airways.

Sources earlier this month told Reuters Germany's Lufthansa would soon file an offer for ITA, which officially replaced loss-making Alitalia in 2021.

"Air France will continue to closely monitor the privatisation process and hereby reasserts its strong interest to maintain its commercial relationship with ITA, which is a SkyTeam member," Air France-KLM said.

ITA's privatisation has proved a headache for the Italian government, which in December passed a decree to sell a minority stake as the first step towards a full divestment.

Air France said the ITA privatisation requires the airlines involved to ultimately hold the majority of ITA's capital at the date of the government's exit.

The group previously took part in the privatization process as part of a consortium which also included Delta Air Lines and Certares, with the intention of becoming a potential commercial partner.

Read More: Lufthansa Seen As Ready To Bid For ITA Airways Stake, Sources Say

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