The deal comes as Europe's airlines struggle to repair their balance sheets after the COVID-19 pandemic and as legacy carriers have looked to consolidation to help them compete with low-cost airlines.
Lufthansa CEO Carsten Spohr met Italian Economy Minister Giancarlo Giorgetti in Rome on Thursday 25 May to finalise talks, which started in January but were extended beyond an initial deadline of 24 April.
"Today's agreement will lead to a win-win situation for Italy, ITA Airways and Lufthansa Group ... a stronger ITA will invigorate competition in the Italian market," Spohr said.
The Lufthansa Group said in its statement that it will also jointly manage ITA, including naming a chief executive for the airline once the deal is closed.
The €325 million it will inject into ITA will be raised from Lufthansa Group's existing liquidity, it said. The Italian Treasury will contribute a further €250 million to ITA.
"The closing of the transaction after the contractual finalization remains subject in particular to regulatory approvals, especially by the European competition authority," it said in the statement.
ITA, the successor to Italy's loss-making flagship airline Alitalia, took to the air in 2021 as a state-owned company and posted a loss of around €486 million last year due to the lingering effects of the pandemic and rising fuel costs.
Efforts to save Alitalia and subsequently sell a major stake in ITA Airways have proved a headache for successive Italian governments, with some politicians reluctant to sell the company as they considered it a national icon.
ITA's business plan forecasts revenue growth of €2.5 billion in 2023 and of 4.1 billion in 2027, a statement from the economy ministry and Lufthansa showed.
ITA sees its fleet increasing to 94 aircraft compared with the current 71 by the end of 2027, and it expects its workforce to grow to over 5,500 people from 4,300 seen this year.
Lufthansa Intends To Fully Take Over ITA Airways - CEO
The above news was followed by news that Lufthansa said its goal was to take over ITA Airways in full, but it could not be forced to do so, after it announced it was taking on a minority stake.
Lufthansa will take a 41% stake in ITA Airways by way of a €325 million capital increase that will flow directly to the Italian carrier, the German group said.
That ownership stake could be extended based on how well the airline performs in the coming year, Lufthansa CEO Carsten Spohr said.
"There are Lufthansa call options for 49% (ownership) in a time frame that begins in 2025. For me, that would be the two years we have planned for the turnaround of the company," Spohr told an analyst call.
He said there are further options for acquiring the remaining 10% but that it "depends on the economic development of ITA."
He added that the German group had to be sure they didn't overpay for the financially troubled Italian airline.
Rome Fiumicino Seen As Lufthansa's New Southern Hub After ITA Deal
All of the above news was followed by news that Lufthansa hopes to develop Rome Fiumicino as a southern hub for the group and will focus on long-haul flights from the Italian airport to Northern and Latin America, group slides said.
Lufthansa will buy a 41% stake in ITA Airways, the successor of former flagship carrier Alitalia, through a €325 million capital increase and is aiming to take full control of the airline in the future.
"We will also build on ITA's established strength on routes to Asia, Northern Africa and the Middle East," Lufthansa CEO Carsten Spohr told analysts.
A report from TRA consulting firm says some 43 million people travelled through Rome Fiumicino in 2019, before the COVID-19 outbreak, and the airport has potential to become an even stronger hub for the Mediterranean area.
TRA analyst Andrea Giuricin said poor intercontinental connections are a persistent issue for Italian airports, as around 5.6 million travellers per year stop over at other European hubs before reaching their final destinations.
His report said this is due to the weakness of the national airline, and the integration of ITA into the Lufthansa group might help Fiumicino become an hub for travellers heading to the Americas.
The German carrier would also look to expand tourism in Milan Linate city airport, company slides showed.
"Lufthansa is facing a hard challenge with ITA, but it is proposing reasonable plans to win it," Giuricin told Reuters, adding ITA remains strong in Fiumicino and Linate but lost much of its business in the rest of Italian airports.
Lufthansa, which already operates the brands Swiss, Austrian Airlines and Brussels Airlines, said it would look to feed more passengers into Fiumicino airport.
Analysts believe Lufthansa has good chances to boost Fiumicino, after fostering development of other airports it entered after its previous takeovers.
A study from consulting firm AlixPartners shows that both Swiss and Austrian Airlines registered solid growth in their hubs in Zurich and Vienna since their full integration into the Lufthansa group, providing evidence that a multi-hub strategy can be effective.
"This is an example of what can happen in Italy and specifically Rome, where the growth in traffic can also come from the leisure touristic segment, especially from a stronger south-eastern Asian flows," AlixPartners managing director Michele Mauri told Reuters.