Market News

(Bloomberg) -- Deutsche Lufthansa AG agreed to buy a stake in Italian carrier ITA Airways, allowing the German airline to expand in Europe’s third-largest aviation market while letting Rome rid itself of an asset that’s soaked up billions of euros in state support.

Lufthansa, the region’s biggest airline group, will invest €325 million ($349 million) via a capital increase for a 41% stake, with the Italian government contributing an additional €250 million, according to a statement by the airline. The company has the option to increase its stake or buy all of ITA outright, with the purchase price depending on certain financial metrics that need to be met. 

“A stronger ITA will invigorate competition in the Italian market,” Lufthansa Chief Executive Officer Carsten Spohr said in the statement. 

ITA and its predecessor, Alitalia SpA, have been a drag on state coffers for decades. Alitalia, which began flying two years after the end of World War II, officially ceased operations in 2021 and a scaled-back version, reborn as Italia Trasporto Aereo, or ITA, remained under government ownership.

The transaction continues a consolidation drive in the European aviation market that’s now built principally around three main groups: Lufthansa, Air France-KLM and IAG SA, the parent of British Airways and Iberia. Then there are low-cost carriers like Ryanair Holdings Plc, EasyJet Plc and Hungary’s Wizz Air Holdings Plc. A few airlines remain independent, including Portugal’s TAP and SAS AB in Scandinavia, with the latter is currently working through insolvency proceedings. 

Lufthansa plans to expand the fleet to 94 aircraft by 2027 from 71 now and increase the number of employees to 5,500 by then, it said in the release. ITA will become part of Lufthansa’s multi-hub strategy that will establish Rome as a major airport for the group, with a particular focus on long-haul traffic, according to the release. 

According to a business plan, revenue at ITA will rise to €4.1 billion in 2027 from €2.5 billion expected for this year. Lufthansa said the Italian government can sell its remaining stake in ITA “in the medium term if the agreed financial targets for net debt and EBITDA are achieved.”

For Lufthansa, the foray is a gamble on an Italian market that’s more competitive than the German carrier is accustomed to following the rapid expansion of low-cost operators. Chief Financial Officer Remco Steenbergen cautioned this month that it would take some time to make ITA profitable.

The deal is expected to receive intensive antitrust review from European Commission officials in Brussels.

Adding ITA expands Lufthansa’s stable of German, Swiss, Austrian and Belgian flag carriers. It will allow the company to optimize flight schedules on European routes, boosting yields.

(Updates second paragraph with financial details of transaction.)