Lufthansa receives EU approval to buy a stake in Italian company ITA Airways worth €325 million

Germany’s Lufthansa on Wednesday won EU approval to buy 41 percent of Italian airline ITA Airways for 325 million euros ($350 million) after giving up routes and slots.

The transaction will strengthen Lufthansa’s presence in the lucrative Southern European market and is one of three high-profile deals of its kind in Europe, underlining Lufthansa’s efforts to expand its operations to compensate for rising operating costs.

ITA also offers key long-haul routes to Lufthansa, which has an option to take full ownership of the Italian airline if its financial results improve.

Lufthansa and ITA have agreed to hand over Italian short-haul routes to one or two rivals, the European Commission said, confirming a Reuters report. The German airline said it was in talks with Easyjet and Spanish budget carrier Volotea.

The combined group will also undertake interlining agreements, or slot swaps, on long-haul routes to increase frequencies and improve connections for single-stop flights, it added. Interlining agreements allow individual airlines to serve passengers on routes that require multiple flights on multiple carriers.

Lufthansa and ITA will also transfer part of the state-owned carrier’s short-haul routes from Milan Linate Airport to competitors, enabling them to establish a permanent base.

“The package of remedies proposed by Lufthansa and the MEF (Italian Ministry of Economy) in connection with this cross-border agreement fully addresses our competition concerns, ensuring that a sufficient level of competitive pressure is maintained on all relevant routes,” Margrethe Vestager, head of the EU’s antitrust authority, said in a statement.

Lufthansa can only close the deal once rivals approved by the EU’s antitrust watchdog start operating the routes. EU regulators have been frustrated by previous approved deals in which rivals refused to take the routes and slots because they said they could not compete with Lufthansa.

Lufthansa faced rising labour costs amid strikes earlier this year, prompting the company to issue a profit warning.

Analysts say it won’t be easy to turn around ITA, whose predecessor, Alitalia, has struggled with decades of financial problems and bailouts. Lufthansa will likely need to make a significant investment to rebuild ITA.

Regulators in Europe are also concerned that the region’s three largest airline groups – IAG, Air France KLM and Lufthansa – are gaining too much dominance, which could limit consumer choice and make air travel less affordable.

The commission is currently examining a bid by IAG, owner of British Airways, to buy Air Europa. It will also assess a bid by Air France-KLM to take over a 19.9 percent stake in Scandinavian carrier SAS.

IAG said it was pleased that the Commission recognised the benefits of airline consolidation.