Will Lufthansa abandon planned stake in ITA Airways?

A report today in the Italian newspaper La Repubblica indicated that Lufthansa Group may back away from the planned purchase of a stake in ITA Airways. The European Commission on Competition is investigating Lufthansa’s proposed 41% purchase of ITA Airlines from the Italian government. The investigation appears to be ongoing, with harsh terms proposed for acquiring a minority share in the airline. The commission is concerned about competition on key routes, particularly between Italy and Germany. It also uses Lufthansa’s partner airlines United and Air Canada in its competitive evaluation by including those code-share flights. Brussels has the right to continue investigating competition beyond the initial deadline of June 6th 2024, and Lufthansa representatives used the word “disengagement” in recent discussions with the EU commission. The commission wants to prevent the Germans from strengthening themselves at some Italian airports (Linate, Fiumicino) and in Germany (Munich, Frankfurt) along multiple routes, especially long-haul routes. While Lufthansa and the Italian ministry were “expecting Brussels to put stakes in the ground, they didn’t imagine them being so deep,” the article says. Lufthansa has three different objectives, which it has pointed out to the Commission. The first is that its conditions will generate significant additional costs. Lufthansa explains that long-haul connections will be burdened by excessive costs following the European diktat. Those can be significant to the point of exceeding - on many routes - the economic advantages that Lufthansa expects from acquiring Ita. If they cannot be profitable, LH is threatening to scuttle the deal. Its second objection is related to precedents, as it appears the ITA deal will be treated differently than Austrian Airlines or Brussels Airlines acquisitions by Lufthansa Group. With the commission using code-shares and airline flights, it has identified 60 markets where the competitive overlaps between LH, Air Canada United, and ITA are included. This is a change from prior acquisitions, and the commission would prefer major route divestitures to approve the merger. The third objection is that the decision is being pushed from June 6th to November or December of this year. Lufthansa is already weary from 40 separate data requests over the last nine months and likely feels that the EU is slow-walking the process, unlike prior acquisitions. It appears that LH Group is just about at the point of walking out on the deal. The Bottom Line If the commission wanted to push Lufthansa’s buttons, they have found the right way. Germans don’t like late decisions, inconsistent policies, and the potential for excessive costs. Given those frustrations, it is likely that Lufthansa will walk away from the ITA deal, leaving the new airline to operate on its own. But without solid access to capital and the inability of the Italian government to provide support under EU laws, how long can ITA survive as a stand-alone? Alitalia couldn’t make it, and ITA may be headed for the same fate without the Lufthansa Group standing alongside them. Perhaps another suitor? Stay tuned.

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