Brussels is set to clear Lufthansa’s purchase of a €325mn minority stake of Italy’s ITA Airways after obtaining concessions that appeased competition worries. The concessions will reportedly give rival airlines more slots at Milan’s Linate airport (which isn’t exactly a main airport hub, it should be noted) and should also improve competition in the long-haul market.

The European Commission had been under political pressure from the Italy’s government as it lacks sufficient funds to keep financing ITA, the successor to Alitalia.

An official announcement is expected in early July although the timing could still shift. The EU and Lufthansa declined to comment. The German airline group group — which owns Lufthansa, SWISS, Austrian Airlines, Brussels Airlines, Eurowings, and Air Dolomiti — hopes to conclude the lengthy negotiations to include the Italian carrier in its broad portfolio of European airlines.

With the deal deadline fast approaching, the European Commission had put pressure on Lufthansa and the Italian Finance Ministry to draw up a remedy package that will help to protect competition between airlines on transatlantic routes.

However, Lufthansa isn’t prepared to reopen its joint venture with United Airlines and Air Canada to solve the EU’s issues — sparking fears that the carrier may not be able to come up with a package that meets the bloc’s demands, according to a person familiar with the matter.

In November 2023, Lufthansa agreed with the Italian Economic Ministry to buy 41% of the airline shares for €325mn, potentially increasing its ownership to 100%. However, the European Commission expressed concerns about the transaction, stating that Lufthansa’s influence in Europe would become too dominant, potentially leading to anti-competitive practices.

The Lufthansa Group — already the world’s third-largest airline conglomerate — would expand by adding over 90 aircraft to its fleet and gaining a major hub in Southern Europe. Italy has the third-largest economy in Europe by gross domestic product.

Regulators have launched probes into such deals by Germany’s Lufthansa and British Airways owner International Airlines Group (IAG), which were announced in the first half of last year. The main concern of watchdogs is that the airlines could use the acquisitions to boost already dominant positions, with passengers losing out because of higher fares and fewer airlines competing on routes.

Executives also believe that creating larger and more profitable airline groups is the only way to succeed when competing with the historically more profitable US market, which consolidated around four big airlines following the financial crisis, and deep-pocketed Gulf and Asian carriers.

Regulators in Brussels had reaffirmed they would seek tougher concessions from airlines, amid concerns that historically some slots were not taken up, or not used on the routes originally planned.

“Some years ago, we were sure the slots solution was fine. Maybe the results are not there,” then EU antitrust commissioner Didier Reynders said in an October interview.

The crackdown by regulators follows increased prices and worries about the quality of services after the reopening of travel in the wake of the pandemic.

According to data published by the European Commission, the executive body of the EU, flying is becoming increasingly costly for consumers with average airline fares up 20-30% last summer compared with 2019.

EU officials stress all airline deals are different and scrutinised on their merits. Brussels could support the Lufthansa proposals, people familiar with the probe added.

The German airline said it was in constant exchanges with the EU to try and win support for its agreed purchase of a stake in ITA, adding that it was confident the commission would approve it as soon as possible.

A similar process is underway with Portugal’s national airline, TAP. The Portuguese government put TAP up for sale last year, paving the way for further airline consolidation in Europe and a potential bidding war among the EU’s major carriers.

The chief executive of the carrier has urged the government to retain a stake in the airline as he anticipates its planned sell-off to begin in earnest within the next few months.

Luís Rodrigues also advocates for bringing in non-aviation investors to alleviate competition concerns amid increasing unease in Brussels about the prospect of an industry dominated by a few large airline groups in the region.

The newly-elected centre-right minority government, which came to power in March, has expressed a desire to sell 100 percent of the airline.

However, Rodrigues emphasised the importance of the state maintaining a stake in the airline, particularly given Portugal’s reliance on tourism.

“My recommendation would be for the Portuguese government to maintain a position, to be part of the whole development process,” he said.

“Just to ensure that if actors change, no one comes in with a different agenda,” he added, highlighting the need to serve Portugal’s autonomous regions, Madeira and the Azores.

“I think sometime in the future we may be ready for a 100% sale, but let’s take it step by step.”

Prime Minister Luís Montenegro stated during the election campaign that a 100% stake sale should include safeguards to protect Portugal’s strategic interests, such as maintaining Lisbon as a hub airport.

The previous government had aimed to sell more than 50% of the company but less than 100%, keeping a stake in state hands.

Europe’s three major airline groups — IAG, Air France-KLM, and Lufthansa —which own a range of subsidiaries and are looking to expand further, have shown interest in TAP amidst a sharp increase in deal-making across the sector.

TAP offers strong connections to Brazil and the booming South American market for companies lacking a presence there, as well as a gateway into Africa through its routes to Portuguese-speaking countries like Angola and Mozambique.

IAG has already agreed to buy Spain’s Air Europa. Air France has also taken a 20% stake in struggling Scandinavian airline SAS, as part of a deal involving private equity firm Castlelake and the Danish state.

Rodrigues mentioned that he expects TAP to retain its brand name and identity in any deal and suggested that the government might consider involving private equity or other investors instead of selling directly to another airline, partly to help ease competition concerns in Brussels.
The author is an aviation analyst. Twitter handle: @AlexInAir