ITA ready to fall into Lufthansa’s arms?

Just over 6 months after its birth from the ashes of Alitalia, ITA is looking for capital partners, and one of them could be Lufthansa. Where the new Italian airline seems to be reconnecting with its ancestor’s past.

What is ITA?

In case you haven’t noticed, because you haven’t been able to travel lately, Alitalia’s planes have disappeared from the skies. In their place, gradually, are aircraft sporting the new blue livery of an airline called ITA.

Almost chronically bankrupt for many years, from aborted marriages to state bailouts, Alitalia’s final years were chaotic until COVID precipitated its downfall…and its resurrection.

Failing to find someone to marry off its historically loss-making airline, the Italian government has had to rescue it on numerous occasions, under the suspicious eye of the European authorities, for whom this aid bordered on the illegal. COVID has speeded things up and created an original situation, to say the least.

After once again having to put the airline on life support, the government had to resort to the only solution to prevent the airline’s demise: a renationalization.

This was too much for the European Union, which only conditionally approved the operation: to validate the launch of this new airline, it had to be completely independent of the former Alitalia. So with a new name, new employment contracts, a reduced fleet and staff, ITA was born from the rubble of Alitalia, taking over some of its assets but making a clean break with the past.

The originality of the situation is that, while the sector was sinking into crisis, ITA was born with “clean” finances and was able to start operations last summer, albeit on a limited scale, but with Alitalia’s debts wiped out.

But, nowadays, a national airline can’t expect to make it on its own, so it needs to find partners.

The tumultuous story of Alitalia’s failed marriages

This brings us back to Alitalia’s more or less recent past. As a member of the Skyteam alliance, and of a transatlantic joint venture with Air France-KLM and Delta, it has never stopped looking for a partner for a capital-intensive marriage likely to save itself.

The favorite contender since the dawn of time, Air France has thrown in the towel given the state of the airline. Alitalia then fell into the hands of Etihad, which eventually sold the company as it was unable to make it profitable.

Then Delta Airlines and China Eastern, both Skyteam members (and Air France – KLM shareholders) and even EasyJet were considered, either on their own or with the help of an investment fund. Failure.

Previously, Lufthansa had shown an interest, but on terms that were (at the time) unacceptable to the state.

We know how that turned out.

But while ITA offers a more engaging and reliable profile (at least financially and for the time being) than its predecessor, history repeats itself, and the search for partners once again becomes an imperative for an airline of limited size.

A natural alliance with Air France-KLM…and some infidelities

In a rather logical move,ITA joined the Skyteam alliance. We remember that Star Alliance and Lufthansa had already made an approach to Alitalia in the past, seeing a commercial agreement as a prerequisite to a capital deal, but in the end the simplest thing for ITA was to resurrect past agreements.

In October, ITA joined Skyteam and in December announced codeshare agreements with Air France and KLM, followed by Delta. Just like the good old days? Not really so.

For years now, alliances have no longer been the only partnership scheme for airlines, the best example perhaps being Delta which, despite being a Skyteam heavyweight, is multiplying adhoc partnerships outside the alliance, arguing that alliances were not always the panacea.

Even before joining forces with Skyteam and Air France-KLM, ITA signed codeshare agreements with Air Europa (Skyteam), TAP (Star Alliance), Air Serbia (Etihad Partners) and Etihad.

This helps to ensure a more consistent offering, but does not solve the problem of finding a capital partner.

This is where Lufthansa comes in.

40% ITA for Lufthansa?

According to Alfredo Altavilla, President of ITA Airways “It would be a mistake to remain independent, as we would still be too small compared with the three major airline groups operating in Europe. We’re a pretty single lady with a lot of admirers… We hope Lufthansa will be one of them!“.

A call to action that clearly did not go unheard, as it is rumoured that Lufthansa would take between 15% and 40% of ITA’s capital, integrate it into the Lufthansa Group’s operations as it does today with its Swiss, Austrian and Brussels Airlines subsidiaries, and help it finance its fleet growth and develop the Rome Fiumicino hub.

Carsten Spohr, Chairman of Lufthansa, said, “After the United States, Italy is our most important foreign market“.

Lufthansa has always had an eye on Italy, as we saw with its previous attempts at rapprochement when Alitalia had to be saved. But the German airline was already a candidate when the company was privatized in 2007. To no avail. It then set up a subsidiary in Italy, Lufthansa Italia, in 2008, which it closed in 2011. Today it owns the Italian regional airline Air Dolomiti.

ITA-Lufthansa: a promising marriage?

Should the operation go ahead, the benefits are relatively obvious.

For Alitalia, a partner capable of financing its growth and with experience in airline turnarounds (Austrian, Swiss, Brussels Airlines…).

For Lufthansa, this means gaining a foothold in the Italian market, one of Europe’s most popular tourist destinations, and a new hub in Europe after Frankfurt, Munich, Zurich and, to a lesser extent, Vienna. And strike a blow against its competitors Skyteam and Air France – KLM.

But the marriage is not without clouds. Italy is a buoyant leisure destination, yes, but not really a lucrative one in terms of the clientele it attracts. Moreover, we know Alitalia’s recurrent problems with its unions and the government’s interference, and there’s nothing to say that history won’t repeat. Finally, while ITA today positions itself almost exclusively on the North American long-haul market, it is not clear that a hub in Rome is preferred by customers over Zurich, Frankfurt and Munich, as opposed to Vienna because of Austrian’s medium-haul services to Central Europe and the Adriatic.

Lufthansa success or Air France-KLM failure?

We know that, for obvious reasons, Air France-KLM is very interested in this new Italian airline, which is finally financially “sound”.

A stake would have been in the air…but only in the air, because it’s impossible. It’s not even a question of whether Air France can afford to invest in ITA: it is just not allowed to!

After the announcement of the partnership between Air France and ITA Ben Smith said. “We have great ambitions with ITA and this step is a first step towards wider cooperation“. In other words, “we’d like to go further, but we’re stuck“.

Let’s not forget that the European Commission made state-guaranteed “COVID loans” to airlines conditional on a prohibition on investing in another airline until they had been repaid. Lufthansa has repaid its loans, and Air France-KLM will not do so until 2025.

So if Alitalia needs a partner in the short to medium term, it won’t be Air France-KLM until at least 2025. This leaves only Lufthansa, with IAG (British Airways) seemingly uninterested, preferring to concentrate on the Iberian peninsula.

It’s reasonable to think that the Franco-Dutch group would have been the most logical choice, given the context and history, but from a pragmatic point of view, if ITA is in a hurry, there’s only Lufthansa left. Unless…

Unless, for example, the fear of seeing ITA leaving Skyteam for Star Alliance (an outcome which seems fairly obvious as soon as Lufthansa takes a stake in ITA) pushes Delta to intervene, having already positioned itself to take over Alitalia? There seems to be no such intention today.

Today, Lufthansa is certainly not a default choice, but Air France-KLM may well pay dearly for its inability to resolve financial problems that largely predate COVID.

Bottom line

ITA is looking for commercial and capital partners, and has already approached Skyteam and Air France-KLM. But these partners are unable to help the company capitalistically, which could push it into the arms of Lufthansa, at the risk of leaving the Skyteam alliance.

Bertrand Duperrin
Bertrand Duperrinhttp://www.duperrin.com
Compulsive traveler, present in the French #avgeek community since the late 2000s and passionate about (long) travel since his youth, Bertrand Duperrin co-founded Travel Guys with Olivier Delestre in March 2015.
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