Lufthansa joins the Italian airline ITA Airways. The German MDax group agreed with the Italian state to take over a minority. This was announced by Lufthansa and the Ministry of Finance in Rome on Thursday.
The deal comes as no surprise, as Hendrik Pontzen from Union Investment recently criticized the plans at the Lufthansa Annual General Meeting. His employer and Lufthansa shareholder does not believe “that the takeover of the loss-making ITA will pay off for the shareholders”. When it comes to integrating acquired companies, “Lufthansa has not covered itself in glory in the past. We cannot imagine how an ITA or even another potential takeover candidate from Portugal can be successfully integrated”. And anyway, Pontzen called out to Lufthansa boss Carsten Spohr: “We don’t know where you actually want to go with Lufthansa after the end of the pandemic. You don’t have a clear strategy and no clear vision.”
Somehow, however, Spohr made a fool of himself at this ITA. And so he let his people continue to negotiate long after the official deadline, especially about how much Lufthansa would ultimately have to pay for the really very loss-making Italian airline. On Thursday, Spohr finally flew to Rome, because in the end Lufthansa was awarded the contract after years of confusion: Lufthansa will initially take over 41 percent of the shares in the Italian airline ITA Airways. For this purpose, 325 million euros will be invested as part of a capital increase, as the group announced on Thursday evening. The Ministry of Economics and Finance in Rome, as the previous sole owner, has committed itself to bringing in a further 250 million euros. “We see good prospects for ITA as part of our group,” Spohr promised the shareholders.
Lufthansa wants to secure access to important markets
However, Spohr and his negotiating team are pretty much alone with this assessment, because Pontzen is far from the only one questioning the logic behind the takeover. Spohr himself had recently admitted that ITA could not become as profitable as the Lufthansa subsidiary Swiss International, but rather like the other two offshoots in neighboring countries, Austrian and Brussels Airlines. In other words: either not at all or just a little bit in very good times such as the year 2023.
But Spohr is concerned with the idea, which has been cultivated in the Lufthansa Group for many years, of building a growing system of hubs in Europe, through which Lufthansa should secure access to important markets. In each country, the acquired airlines are allowed to retain their own brand, management and a degree of autonomy. The argument of market access obviously weighs far more heavily in the internal debates than the question of whether the market is really that attractive or whether the acquired company works.
You can see that in Swiss, Austrian and Brussels. Swiss was a great success, mainly because the Swiss market is so incredibly lucrative. In addition, the airline had gone through a tough restructuring before Lufthansa got involved. The counter-example is Austrian. The Austrian market is less attractive (fewer long-haul routes, fewer business travellers) and Austrian was not really in good shape when Lufthansa entered.
A difficult case
ITA is also likely to be a difficult case. The airline was founded by the state in 2020/21 after the notoriously loss-making Alitalia finally went bankrupt in the wake of the corona pandemic. Recently, the negotiations had also stalled because Lufthansa did not want to run into old claims against Alitalia – the Italian unions regard ITA as their successor, an assessment that the government vehemently denies. The European Commission has approved more than one billion euros in state aid for the development of the ITA, but after horrendous losses since the start in autumn 2021, money is already tight again.
Although ITA currently has very low personnel costs – the collective agreements for pilots and flight attendants are well below the industry average. But that is exactly what should be part of the Lufthansa problem: the costs will increase significantly once the new owner has entered. ITA has long since lost control of the Italian market to Ryanair and other low-cost airlines – Ryanair alone has a market share of 40 percent. There are a few attractive routes like Rome-Milan and maybe a few long-haul routes, but is that enough to at least get close to the Austrian level?
In any case, Spohr believes that it will succeed. Rome (and not Milan) should be developed as a hub and specialize primarily in North Africa and, in the future, Latin America. However: In Africa, the subsidiaries Swiss and Brussels Airlines are already busy. And as for Latin America, TAP Air Portugal will soon be for sale. And in contrast to ITA Airways, it has a really attractive route network across the South Atlantic.