If Lufthansa had had its way, it would have added a new subsidiary to the corporate family long ago. She would like to take over Ita Airways, the new Italian airline and successor to the insolvent Alitalia, especially because Italy is such an important market. Even the once pessimistic forecast that the European Commission would approve entry by the end of 2023 has long since been lost. The competition law review continues – the next deadline is June 6th.
The process and the underlying reasons for the extremely slow process are relevant to the European aviation industry beyond the specific case. According to information from industry circles, the Commission used very unusual standards and criteria when it came to assessing the consequences of the takeover on competition. Two lines of argument in particular have the potential to essentially prevent any merger between two airlines in Europe – unfortunately there are a few transactions pending at the moment.
According to reports, the competition authority does not want to take Ryanair into account in the assessment. This is surprising because the Irish low-cost airline has a 42 percent share of domestic flights from Milan and 37 percent of European flights. According to the Italian competition authority AGCM, Ryanair has a total share of 26 percent in Rome. For comparison: Ita has a total of four percent of the Italian market, the Lufthansa Group as a whole currently has ten percent. Even taken together, the two are far from the size of Ryanair. In addition: Easyjet controls twelve percent of the Italian market, Wizz Air eleven percent – two other low-cost airlines.
The European Commission argues that the low-cost airlines serve a different market segment than Lufthansa and therefore do not count as competition. A way of thinking that, to say the least, causes irritation at the Frankfurt headquarters. It also has concrete consequences on individual routes: Lufthansa Group airlines fly Milan-Brussels, Ryanair flies from neighboring Bergamo to Charleroi, south of the Belgian capital. Customers in Northern Italy have a choice.
The second idiosyncratic line of argument concerns long distances. Here the commission only wants to include non-stop flights in the competition analysis, but not the usual connecting connections via other hubs. Especially on long-haul flights, connecting flights are a standard feature of every provider – and Lufthansa complains more often than most people want to hear about how many passengers it loses because they prefer to fly to Asia via hubs like Istanbul or Dubai.
Ryanair could benefit
For Lufthansa, investing in Ita – 41 percent is initially planned – is anything but necessary for survival; conversely, Ita needs a strong investor sooner or later. And if the Commission were to apply the same standards to other planned takeovers, it could halt the reorganization of European aviation.
But consolidation is currently gaining momentum: International Airlines Group (IAG), the parent company of Iberia and British Airways, also wants to take over the Spanish Air Europa. Air France-KLM plans to initially buy a minority stake (19.9 percent) in SAS Scandinavian Airlines together with a financial investor when it ends its insolvency proceedings. And the Portuguese state is also set to sell TAP Air Portugal to a private investor – Lufthansa, IAG and Air France-KLM have all expressed interest.
Lufthansa boss Carsten Spohr and his colleagues at Air France-KLM and IAG, Ben Smith and Luis Gallego, have long argued that more consolidation is needed to keep up with the big players in Asia and the US.
In industry circles, however, the impression is currently gaining ground that the Commission at least wants to prevent Lufthansa/Ita, but is also extremely skeptical about further takeovers. The authority only officially confirms that it is analyzing proposals from Lufthansa and Ita, with which they hope to be able to dispel the EU’s concerns. It is now quite possible that the deal will fall through, especially if the Commission makes further demands. Ryanair boss Michael O’Leary is probably most pleased about this.