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How Italy Could Finally Unload the Ghost of Alitalia

A bird flies past an Embraer passenger aircraft, operated by Alitalia SpA, as it prepares to land at London City Airport in London, U.K., on Thursday, Jan. 5, 2017. Alitalia shareholders approved Etihad Airways PJSC investment of up to $231m, Etihad became Alitalia’s largest shareholder in 2014 as part of the Persian Gulf carrier’s attempt to gain a European foothold by strengthening struggling carriers in the region. (Bloomberg)

When Italy’s national airline Alitalia stopped flying in 2021 after decades of losses and numerous brushes with bankruptcy, it was the end of an era. The green, red and white-striped flag carrier favored by popes and glitterati like Sophia Loren was replaced by state-backed ITA Airways, with a fraction of Alitalia’s fleet and staff and a simplified network. Competing with budget carriers in a crowded market — and amid a global pandemic — proved tough, however. Despite a forecast for years of continued losses for ITA, Italy’s new government says it’s finally succeeded where others have failed: It’s found a buyer, Deutsche Lufthansa AG. Yet to be seen is what changes the German behemoth has in mind, whether ITA will retain any Italian flair, and if Rome will really cede control.

1. What happened to Alitalia?

The company began flying just after World War II in 1947 under state ownership, with four G-12 airplanes built by Fiat and rented from the Italian Air Force, according to a history in Boeing’s Aero magazine. Pope Paul VI was the first of many popes who flew it around the world. While the company always struggled to make a profit, the real decline started in the late 1990s, when deregulation led to the arrival of low-cost competitors. Alitalia failed to either scale up its lucrative long-haul network or pare down like a budget carrier. As a result it lost market share both in domestic and international traffic to rivals. Successive governments failed to find a long-term solution or buyer for Alitalia, leading to bankruptcy in 2008. Air France became Alitalia’s biggest shareholder after buying a 25% stake for €323 million ($349 million today) in 2009, only to see most of its investment wiped out. Etihad Airways PJSC tried its luck a few years later with a 49% stake in Alitalia to funnel more passengers through its Gulf hub, but that plan, too, fell through. Alitalia filed for bankruptcy again in 2017. The brand officially ceased operations in late 2021, when it was reborn as ITA. It operated only 52 aircraft, down from about 160 Alitalia had in the mid-1990s. According to its own business plan, ITA didn’t expect to earn a profit before 2024. Then-Prime Minister Mario Draghi put it up for sale again in February.

2. What is Lufthansa’s plan? 

Europe’s biggest airline said Jan. 18 that it aims to buy as much as 40% of ITA in an initial step, with the rest possible “at a later date.” It has been eyeing Alitalia for years. A deal would allow the company to expand in a major market while charting a course for Rome to finally rid itself of a notoriously unprofitable asset. Lufthansa also would gain access to more trans-Atlantic routes while preventing a rival from building up a base in northern Italy that might draw passengers away.

3. What’s Lufthansa’s track record? 

Lufthansa has swept up troubled national airlines before with Austrian Airlines, Brussels Airlines of Belgium and Switzerland’s Swiss International Air Lines all part of its stable. Lufthansa’s willingness to let its subsidiaries outside of Germany maintain their separate branding makes it the go-to choice for politicians who like to pretend that they haven’t sold their national airline to foreigners. While the airlines haven’t always performed well financially — Austrian, for example, managed an earnings margin of barely 1% in 2019, the year before the pandemic — they’ve served to protect Lufthansa’s core German market and feed traffic into the lucrative Frankfurt and Munich transatlantic hubs. Dominating European business travel is Lufthansa’s overriding strategy.

4. What’s the outlook for competition? 

The European Commission would have to approve any takeover. It could try and ensure consumers don’t suffer by ordering Lufthansa to surrender takeoff and landing slots at its Frankfurt and Munich hubs or take other measures to allow new entrants to join the market. It’s unclear whether there’d be takers, however, with two of Europe’s biggest low-cost airlines, Ryanair and EasyJet, downsizing in Germany due to the country’s relatively high airport fees. On routes where Lufthansa and its subsidiaries have taken over from failed carriers, such as on the Frankfurt to Berlin stretch that was formerly operated by defunct Air Berlin, prices have risen. While passengers notice the pinch, it’s fiendishly difficult to prove that ticket pricing is unfair, so there’s little competition regulators can do about it. 

5. Will the Italian government keep a hand in? 

The government of Prime Minister Giorgia Meloni has been keen to retain a majority stake in the initial phase of the sale to oversee the transition and show its commitment to the future of the company — and the employment level. While Lufthansa has the option to purchase 100% of the company, Italy will still be able to have a say in the business given the company operates in a strategic sector. 

6. What do Italians think? 

Italians are long accustomed to the fact that the national airline is a money-losing venture, to the point that it’s almost part of the culture. While selling it to a German company could upset some who believe in the symbolic importance of owning a national carrier, the relief of not having to continue to open their pockets to keep it flying is expected to prevail. 

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