Lufthansa receives EU approval for $350m stake in Italy’s ITA

Lufthansa LHA won EU approval Wednesday to buy a 41% stake in ITA Airways for 325 million euros ($350 million) after giving up routes and slots, a move that boosted the value of shares in rival IAG and raised hopes it could take over Air Europa.

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.

Lufthansa CEO Carsten Spohr told a news conference in Rome that Fiumicino Airport, as ITA’s hub, gives the group better access to Africa and Latin America and offers it great growth opportunities.

Lufthansa shares were up 3.27 percent at 13:39 GMT after the announcement, while IAG shares were up 4.6 percent on expectations that the approval increases the likelihood of a green light for the Air Europa takeover.

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

“Regulatory scrutiny remains high, but the deal has likely increased confidence that airline mergers and acquisitions can be approved, subject to remedies negotiated with competition authorities,” said RBC analyst Ruairi Cullinane.

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 EZJ and the Spanish low-cost airline Volotea.

The combined group will also enter into interlining or slot-swapping agreements on long-haul routes to increase flight frequencies and improve connections on one-stop flights.

Interlining agreements allow individual airlines to serve passengers traveling on routes that require multiple flights and are operated by 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.

A Lufthansa spokesman said the airline will allocate 204 slots per week at Milan Linate Airport in the summer and 192 in the winter. This means that under the new agreement, the ITA and Lufthansa will have fewer slots than before.

The spokesman said it would also provide better connections for competitors in major North American hubs, namely Washington, San Francisco and Toronto.

“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.

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It was not an easy negotiation, Italian Economy Minister Giancarlo Giorgetti said in Rome that he had argued with Spohr about the details “until the very last minute.” ITA will no longer need state aid as part of the deal, he added.

“This is the best option for ITA and Italy at the moment, privatisation through Lufthansa, which has a multi-hub strategy and wants to focus on Fiumicino… it is also good for Italian taxpayers,” said Andrea Giuricin, a transport analyst at consultancy TRA.

The deal can only close once competitors approved by the EU’s antitrust watchdog start operating the routes. EU regulators have been frustrated by previous approved deals in which competitors 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 warning about the risk of falling profits.

Analysts say rebuilding ITA won’t be easy, as its predecessor, Alitalia, struggled financially for decades and was bailed out by bailouts. Lufthansa will likely have to make significant investments.

Regulators in Europe are also concerned about the three largest aviation groups in the region – IAG IAGAir France KLM AF and Lufthansa – are becoming too dominant, which could limit consumer choice and make air travel less affordable.

The Commission is investigating a bid by IAG, the owner of British Airways, to buy Air Europa. It also intends to assess Air France-KLM’s bid to take over a 19.9% stake in Scandinavian airline SAS.

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