Lufthansa bid on ITA Airways could start more consolidation

Europe’s airline industry is in for a huge shake-up and the long-awaited start of the next phase of consolidation, now that Lufthansa Group and shipping company MSC Group have expressed their interest to purchase a majority share in Italy’s ITA Airways. If approved and completed, this could lead to a snowball effect elsewhere. Lufthansa bid on ITA Airways could start more consolidation. ITA Airways, which started as a successor of Alitalia on October 15, confirmed the interest of Lufthansa and MSC on January 24 in a brief media statement: “The Company announces that today it has received an Expression of Interest from the MSC Group and Lufthansa to acquire the majority of ITA Airways. MSC Group has agreed with Lufthansa its participation in the partnership on terms to be defined during the Due Diligence.” The statement continues: “Both the MSC Group and Lufthansa have expressed the wish that the Italian Government maintains a minority stake in the Company. Furthermore, the MSC Group and Lufthansa have requested ninety days of exclusivity to work on this Expression of Interest.” Lufthansa nor MSC Group have disclosed details of the bid, but according to the Italian newspaper Corriere Della Sera, they have made an offer to ITA for €1.2 to 1.4 billion. Experts value the airline at €600 to 700 million, plus the value of its precious slots at Milan Linate airport. ITA’s Board of Directors will review the Expression of Interest in an upcoming meeting on January 31. Lufthansa and MSC will start due diligence with the opening of a so-called data room in early February. Door seemed closed after SkyTeam deal When in October ITA Airways joined the SkyTeam alliance led by Delta and Air France-KLM, it looked as if this had closed the door on Lufthansa. But behind the scenes, the Italians and Germans have always remained in contact about a possible investment. Discussions were first confirmed in December 2020, when acting CEO Fabio Lazzerini said in Italian parliament that he as talks with both Lufthansa and Air France-KLM, with Delta acting in the background. Last June, media reported that Lufthansa made an offer to ITA, giving the Italians access to its commercial sales infrastructure and joint purchase benefits. Although ITA seemed to have a preference for Delta, the American airline said last December that it has no plans in taking a share. This reopened the door to Lufthansa. Lufthansa CEO Carsten Spohr has always had a strong interest in the Italian market. (Lufthansa) Lufthansa CEO Carsten Spohr has always stressed the importance of the Italian market, both from a business and strategic perspective. With many Germans spending their holidays or city breaks in Italy each year, the market is too big to leave it to the growing competition of Ryanair, easyjet, and more recently Wizz Air, which all have built their presence. Having repaid all €3.5 billion in state aid to the German government last November that will end the state’s silent participation, Lufthansa is also free again to decide its own strategy. A spokesperson of the European Commission confirmed in Il Sole 24 Ore that Lufthansa is free to buy because it has – according to Brussels - returned more than 75 percent of the state aid. A worry for investors and shareholders could be ITA’s long-term financial position. It still has to prove it can keep up with the stiff competition. The airline posted a €-170 million EBIT since the launch in October, which has been calculated in ITA’s initial business plan. After injecting €700 million in ITA last year, the Italian government will invest another €400 million this year and €250 million in 2023. Part is that is for ITA’s fleet renewal plan with a direct order for 28 aircraft with Airbus and 31 from Air Lease Corporation, plus four A350-900s from Kuwaiti lessor ALAFCO. It’s this smaller and more efficient fleet and a workforce that even after growing to 5.500 in 2025 is still half the size of Alitalia that gives Lufthansa management the confidence that Italy’s new airline will not become the cash drain that Alitalia used to be. MSC sees possibilities for synergies Making a joint bid with Mediterranean Shipping Company (MSC) offers a twist to Lufthansa’s interest in ITA Airways. Based in Geneva, MSC is a large player in the logistics and container market, with a presence in 155 countries. It has a fleet of over 600 vessels. With MSC Cruises, it owns nineteen large cruise ships and has ten more on order. It is this leisure market that MSC could feed if it enters the airline market through a joint investment with Lufthansa in ITA. MSC says in a statement it is interested in ITA “from the possibility of activating positive synergies for both companies in the cargo and passenger sectors in which the group is a global leader.” If the bid succeeds and ITA Airways becomes majority-owned by Lufthansa and MSC, with a minority share for the Italian government, this will have major implications on the European airline industry. With Lufthansa, Eurowings, Eurowings Discover, SWISS, Austrian Airlines, Brussels Airlines, Air Dolomiti, and ITA, Lufthansa Group would become the dominant player on the European market. That’s certainly something that the European Commission will look at and will surely have more effects on the airline than just surrendering slots at Frankfurt and Munich in 2020, after receiving German state aid. Forcing competitors into a rethink Lufthansa Group including ITA Airways will force its competitors International Airlines Group (IAG), Air France-KLM, Ryanair, easyjet, and Wizz Air to rethink their strategies. Just before the outbreak of the Covid-crisis, most observers and airline CEOs agreed that a new round of consolidation in Europe was welcome. Expect a snowball effect. IAG may be urged to finally acquire Air Europa in Spain to strengthen and protect its Spanish and South American markets. Air France and KLM will feel the pressure to further improve their high-cost structure through more integration, something that is expected to enter a higher gear now that the contract with KLM’s CEO Pieter Elbers has not been renewed. Wizz Air made an unsuccessful attempt last summer to buy a share of easyjet, but was balked. The Scandinavian airlines SAS and Finnair could feel exposed and threatened by an even bigger block in central and southern Europe.

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