Analysis: Lufthansa’s hoped-for Italian subsidiary – a problem child?

Frankfurt, January 18 – The Lufthansa family of airlines may soon grow: according to insiders, after a lot of back and forth, the group is getting involved with the Italian state-owned ITA Airways, the successor to the notorious loss- has made Alitalia since October 2021 On Wednesday, an offer to buy a minority stake was pending when the government in Rome expired. After a long history, Lufthansa could achieve its goal: Alitalia made progress in 2007, but the fear of a loss-making block and legs prevented it from taking over its most important European foreign market. A decade and a half later, Alitalia has become the leaner ITA. However, industry experts doubt a turning point in the airline’s long history of losses. “We believe there is a high risk that ITA will be a continued disappointment for Lufthansa in the early years,” warns Ruxandra Haradau-Döser, analyst at Kepler Cheuvreux.

“The market in Italy is extremely difficult,” explains the aviation expert. During the Corona crisis, ITA lost even more market share in European business to the low-cost airlines Ryanair, Wizz and Easyjet. At its own hub in Rome-Fiumicino, it operates just under 30 percent of flights, but for profitability an airline must be able to control at least 50 percent at its main hub. And in the long-haul industry, ITA has a market share of only one percent on transatlantic routes and two percent to Latin America. “Lufthansa aims to expand long-haul business with Africa and Latin America from Italy – it will not be easy,” she adds.

In Italy, long-haul flights with business travelers is a very profitable market, highlights Stifel Research analyst Johannes Braun as the biggest advantage for Lufthansa. With feeder flights from ITA to Lufthansa’s hubs in Munich or Frankfurt, it would certainly be profitable for Lufthansa. His colleague Alex Irving of Bernstein Research does not consider it necessary to strengthen the Rome hub, an important issue in Italy. With five hubs in Frankfurt, Munich, Vienna, Zurich and Brussels, Lufthansa does not need another one. In Rome, however, the routes to South America or Africa could be expanded. Andrea Giuricin, an aviation expert at Milan’s Bicocca University, warns of a prolonged dry spell: “In the short term Lufthansa could lose money, but in the long term earnings could increase if the Rome hub was expanded,” Giuricin says. “It’s a tough challenge.”

MINORITY OR MAJORITY

In the longer term, Lufthansa can take over the majority if it succeeds in buying a minority stake of 40 percent, which, according to insiders, will cost them 200 to 300 million euros. In Haradau-Döser and Braun’s opinion, it would be advisable to take your time due to the expected weak figures from the ITA. “The risk would initially be limited to an acceptable level of a minority stake,” says Stifel analyst Braun. In the first year of its existence, the airline had a loss of 170 million euros. According to ITA boss Fabio Lazzerini, sales recently exceeded costs.

At ITA, further restructuring is necessary to become more competitive, Bernstein analyst Irving points out. The airline started with only around 50 aircraft and 2,800 employees in 2021, while Alitalia previously had over 10,000 employees and a fleet of 110 machines. ITA’s growth plan envisages returning to the old fleet size by 2025 and providing new opportunities for some of the roughly 7,000 people who have been made redundant. By 2025, the workforce is expected to grow to up to 5,700 people according to the current plan.

To be more efficient, Lufthansa needs full operational control with a majority stake, Irving explains. “Implementing change is important.” But according to Kepler expert Haradau-Döser, it is doubtful that Lufthansa ITA is trimming for cost discipline. Austrian Airlines, which was purchased in 2009, and Brussels Airlines, Belgium, which was fully acquired in 2016 after joining the company in 2008, are not profitable in the long term. “Lufthansa does not have a good track record in restructuring subsidiaries.”

Analysis: Lufthansa’s hoped-for Italian subsidiary – a problem child?

Source: Reuters

Symbol photo: image by Wälz on Pixabay

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