Bidding War for Alitalia?! British Airways/IAG and Lufthansa Eye ITA Airways Stake

Is there a bidding war for ITA Airways (Italia Trasporto Aereo), the Italian government’s latest iteration of Alitalia replacement?

Reports from Italy indicate that there might be. Separate reports have surfaced in recent days placing IAG, the parent company of British Airways, Iberia, and Vueling, and the Lufthansa Group as actively exploring acquiring a major stake in the new carrier.

The success of either effort would mean a dramatic shift in the Italian aviation landscape. It would be a blow to the Delta/Air France-KLM-led SkyTeam alliance in Europe to lose the Italian flag carrier.

The airline recently made waves in the points & miles community by offering a generous status match to elite members of 24 frequent flyer programs. But while technically a member of SkyTeam, ITA Airways has made clear that the arrangement is subject to change and has only signed up for a year.

Lufthansa Exploring Purchase of 40% of ITA Airways

ITA Airways President Alfredo Altavilla has publicly flirted with Lufthansa and expressed interest.

“It would be a mistake to keep us independent because then we would always be too small compared to other big airline groups operating in Europe. We are a pretty single lady who has many suitors… We expect Lufthansa to be one of those attractive and wealthy admirers who might be interested in ITA Airways.”

Of course, with Lufthansa already the largest airline in Europe, this would likely come with major competitive red flags for the European Commission. Italy is already Lufthansa’s largest overseas market barring the United States. But according to Rome’s center-left newspaper, Il Messagerrio, Lufthansa is now the leading contender to invest in ITA Airways.

Negotiations are in progress for Lufthansa to take a 15-40% stake in the airline according to the newspaper (translated):

In recent months, Lufthansa has been working behind the scenes to overcome Air France’s courtship of ITA Airways (initiated with support from Delta Airlines). Delta now seems less likely to succeed given the Germans’ willingness to become shareholders of ITA Airways. A circulating unofficial dossier is circulating where Lufthansa imagines scenarios for future collaboration. Among these, in addition to commercial agreements, Lufthansa would make a capital investment to purchase 15-40% of ITA Airways, the development of Rome’s Fiumicino Airport as a new hub, and the integration of sales to develop synergies to the maximum.

But the main objective for Lufthansa is to deal a severe blow to European competitors by integrating ITA Airways. The Germans like the new course of the Italian company focused on an environmentally-friendly fleet, discontinuity with the past, quality service, and a strong presense in the tempting Italian market.

IAG and British Airways Challenge Lufthansa for ITA Airways

Lufthansa may wish the ITA Airways acquisition is a done deal but that may not be the case. A report indicates that British Airways is also aiming to partner with ITA Airways.

Affaritaliani.it, a Milanese online magazine, reports that British Airways and the International Airline Group is also entering the frey to compete for ITA Airways.

According to the report, ITA Airways President Alfredo Altavilla has also been having conversations with IAG leadership about integrating the carrier.

Not much is known about the IAG deal but with the Air Europa deal falling through, the group has at least 1 billion euros to spend.

Arguably, the oneworld alliance would be the best home for Italy’s flag carrier. While Alitalia was a member of SkyTeam, it didn’t benefit much. Delta even kicked Alitalia out of the SkyTeam transatlantic joint venture in favor of partnering exclusively with Air France–KLM and non-SkyTeam member Virgin Atlantic.

Lufthansa Group is already strong in Italy but an acquisition would likely spark competition concerns with the European Commission. Of course, given Lufthansa and the Italian government’s ability to successfully lobby the commission, this may be a nonissue. Even so, with hubs in Germany, Switzerland, and Austria, it’s not at all clear that Lufthansa would want to invest in building long haul capacity out of Italy.

Challenges for ITA Airways’ Partner

Wanting to grow in Italy is an understandable goal for any European airline group. After all, it’s a large market. But it’s hard to imagine integrating ITA Airways would go entirely smoothly for any would-be partner.

One Mile At A Time outlines some of the potential pitfalls of acquisition for Lufthansa (which are also applicable to IAG/British Airways):

• Lufthansa would be partnering with the Italian government, which didn’t have a great track record of running Alitalia successfully
• While ITA Airways is much smaller than Alitalia, over time it’s likely that the airline will become bloated and inefficient, like Alitalia was, including having labor issues
• The Italian short haul market is brutal, given the amount of competition, especially from ultra low cost carriers
• Italy is a more leisure-oriented destination than Germany and the United Kingdom, for example, so the seasonality can make long haul flying out of Italy tricky
• Italy doesn’t exactly have the best geography as a connecting hub; for example, for transatlantic flights there’s potentially quite a bit of backtracking for those wanting to travel to other points in Europe

The Upshot

With Lufthansa Group and IAG both actively exploring a partnership, ITA Airways may be able to achieve its wish of finalizing an agreement with a larger group this year. But while Italy is a tempting and large market for any European group, will the same issues that plagued Alitalia eventually plague ITA Airways? Perhaps Lufthansa and IAG executives should give James Hogan a call…