After having largely exceeded the planned schedule, the Italian government finally decided on the future of ITA Airways a few days ago. It was the consortium formed by Air France-KLM, Delta Air Lines and the Certares Management fund that won ahead of Lufthansa and the shipowner MSC, thus entering a period of exclusive negotiations to buy back part of the capital of the Italian state-owned company. Beyond the reversal of the situation, Lufthansa and MSC having long been favorites, this decision raises questions about the future role of the French group in the transaction and then the control of ITA Airways, and about the profits it will be able to make. pull. And the answers are far from obvious, as was the case for Air France, which sought to take control of Alitalia for almost 20 years.
What role for Air France-KLM in the transaction?
In the hours following the announcement by the Italian Ministry of Economy and Finance, Air France-KLM clarified the role it would play in the future merger with ITA Airways. For now, and like Delta Air Lines, the French group is only positioning itself as a commercial and operational partner. The financial dimension, and therefore the investment, must be provided by the Certares Management investment fund.
Air France-KLM would therefore not make any investment on its own. This therefore solves the problem, at least for the moment, of the straitjacket imposed by Brussels in return for the state aid received during the crisis: the group cannot acquire more than 10% of a company in the sector as long as it has not reimbursed 75% of the sums received. It is now at around 67% and aims to achieve this objective by the end of the year.
Will Air France-KLM be able to enter the capital afterwards?
A future investment by Air France-KLM remains entirely possible, even probable. In its press release, the group states that it “could consider in the medium term to take a minority stake in ITA”.
This option could even be necessary for the consortium to become a majority shareholder of ITA Airways, points out a connoisseur of the sector. Indeed, to keep its status as a European carrier, an airline must keep at least 51% of its capital held by European players. However, Certares and Delta Air Lines are American. Except to carry out an assembly, with a “European” investment vehicle, they need a participation of Air France-KLM to pass the bar of 49%.
This configuration therefore seems to indicate a scenario with a gradual takeover. An eventuality that is provided for in the Italian government decree. And if, as indicated by the Italian press, the consortium’s objective is to acquire 56% of the capital of ITA Airways for 600 million euros, the French group will have to commit in the long term to the tune of at least 11%.
Can the state pose a problem?
One of the unknowns in this dossier is the role the Italian state will play in the company in the future. Today, ITA Airways is an entirely public company, set up by the Italian state last year to succeed a bankrupt Alitalia. In its privatization decree, the Italian Ministry of Economy and Finance indicates its desire to retain “a non-controlling minority stake in ITA and ensures the definition of appropriate governance agreements”. In the long term, a complete disengagement is also envisaged. Rome therefore seems to want to content itself with a role of control.
However, the Italian State will retain a significant stake and, again according to the Italian press, will still have two seats out of the five that will be on the company’s future board of directors. He also rejected the offer of 850 million euros from MSC and Lufthansa which aimed to buy 80% of the capital. In these times of high inflation, he might want to put pressure on wages or ticket prices, for example.
Be that as it may, the situation could change with the legislative elections scheduled for September 25. Launched by the government of Giuseppe Conte at the end of 2020, ITA Airways began operations a year ago under the mandate of Mario Draghi, who has now resigned. And it is another Prime Minister who will take over in a few weeks, possibly Giorgia Meloni, president of the far-right Fratelli Italia party and at the top of the voting intentions for the moment. She had also summoned Mario Draghi not to hasten a decision in this case.
And in view of the past, it is not impossible to see the government interfering in the affairs of the company as was the case in the days of Alitalia. For years, the company has been forced for partly political reasons to maintain a dual hub system between Rome and Milan, dividing its forces and resources.
Why is Air France-KLM interested?
Scalded several times in its long-term relationship with Alitalia, Air France-KLM is therefore still determined to establish itself strongly in the powerful Italian market, the 5th in Europe before the crisis with 150 million passengers. And teaming up with ITA Airways is one of the ways to do that.
The network inherited from Alitalia, with a strong presence in Milan and its significant business traffic as well as in Rome and its formidable tourist potential, offers significant synergies with those of Air France and KLM.
Although having managed to retain most of Alitalia’s slots in Milan, ITA Airways was forced to refocus its international activity on the Italian capital alone due to limited resources (only 13 long-haul aircraft), if is a connection between Milan and New York. An understandable strategy as Alitalia has lost its feathers playing on both counts, but which leaves a lot of room for Air France and KLM in northern Italy. Charges the two companies with draining passengers with high added value to their own connecting platforms, whether directly or code-shared with ITA Airways.
According to a connoisseur of the sector, Air France-KLM will also be keen to reintegrate into the transatlantic joint venture, like Alitalia in its time. For 10 years, the latter thus operated alongside Air France-KLM and Delta Air Lines between Europe and the United States. “As long as revenues are shared and costs are controlled, it’s really a win-win, no matter who runs ITA Airways,” he says. If the volume that ITA Airways could potentially be is still low, the new Italian company seems determined to develop in the United States and could be a source of additional revenue for the alliance. And then Air France-KLM probably had no desire to see these receipts, even reduced, go to Lufthansa.
Have the low cost already locked the market?
If the prospects are therefore interesting, the Italian market is far from being a ripe fruit ready to be picked. Competition from low-cost airlines is very strong: their market share grew very rapidly from the end of the 2000s to become the majority during the following decade. Ryanair already dominated the market before the crisis and has strengthened further since, taking advantage of the disappearance of Alitalia to make Italy one of its main markets, just like Wizz Air. Easyjet is also very well established like Vueling or Volotea. Air France and KLM come far behind with just a few percent market share.
Similarly, domestic travel is partly drained by rail, with the high-speed lines of Trenitalia and Italo. The exacerbated competition from its two operators on the Rome-Milan has also enabled rail to increase its modal share, particularly among business travellers.