What can Air France-KLM expect by joining ITA Airways (formerly Alitalia)?

Après sa longue histoire mouvementée avec Alitalia, Air France-KLM s

Having far exceeded the planned schedule, the Italian government finally decided a few days ago on the future of ITA Airways. 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 repurchase part of the company’s capital from the Italian State. Beyond the reversal of the situation, Lufthansa and MSC have long been the 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 that it will be able to obtain. . And the answers are far from obvious, as was the case with Air France, which sought to take control of Alitalia for nearly 20 years.

What role of Air France-KLM in the transaction?

In the hours after the announcement from 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 positioned as a commercial and operational partner. The financial dimension, and therefore the investment, must be provided by the Certares Management investment fund.

Therefore, Air France-KLM would not make any investment on its own. This solves, at least for the moment, the problem of the straitjacket imposed by Brussels in exchange for state aid received during the crisis: the group cannot acquire more than 10% of a company in the sector until it has repaid 75 % of sums received. It is now around 67% and aims to reach this goal 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 likely. In its press release, the group states that “it could consider acquiring a minority stake in ITA in the medium term”.

This option could even be necessary for the consortium to become the majority shareholder of ITA Airways, points out an expert in the sector. In fact, to maintain its status as a European carrier, an airline must keep at least 51% of its capital in the hands of European players. However, Certares and Delta Air Lines are American. Except for a setup, with a “European” investment vehicle, they need an Air France-KLM stake to pass the 49% bar.

This configuration, therefore, seems to indicate a scenario with a gradual acquisition. An eventuality that is foreseen in the decree of the Italian government. And if, as indicated by the Italian press, the objective of the consortium 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 with at least 11%.

Can the state raise a problem?

One of the unknowns in this dossier is the role that the Italian State will play in the company in the future. Today, ITA Airways is a fully public company, created by the Italian state last year to succeed bankrupt Alitalia. In its privatization decree, the Italian Ministry of Economy and Finance indicates its desire to maintain “a non-controlling minority stake in ITA and ensures the definition of appropriate governance arrangements”. In the long term, a complete withdrawal is also envisaged. Rome therefore seems to want to be content with a controlling role.

However, the Italian state will retain a significant stake and, again according to the Italian press, will continue to hold two of the five seats on the company’s future board of directors. It also rejected the offer of 850 million euros from MSC and Lufthansa that aimed to buy 80% of the capital. In these times of high inflation, you 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 Giuseppe Conte government at the end of 2020, ITA Airways started operations a year ago under 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 voting intentions at the moment. She had also summoned Mario Draghi so that he would not rush a decision in this case.

And given the past, it is not impossible to see the government meddling in company affairs as was the case in the days of Alitalia. For years, the company has been forced, partly for 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 remains determined to establish itself strongly in the powerful Italian market, fifth in Europe before the crisis with 150 million passengers. And partnering with ITA Airways is one of the ways to do that.

Alitalia’s inherited network, with a strong presence in Milan and its significant business traffic, as well as in Rome and its formidable tourism potential, offers significant synergies with those of Air France and KLM.

Despite having managed to retain the majority of Alitalia’s slots in Milan, ITA Airways was forced to refocus its international activity only in the Italian capital due to limited resources (only 13 long-haul aircraft), if it is a connection between Milan and New York. An understandable strategy as Alitalia has lost its feathers playing both ways, but one that leaves plenty of room for Air France and KLM in Northern Italy. It accuses the two companies of draining passengers with high added value to their own connection platforms, either directly or in codeshare with ITA Airways.

According to an industry insider, Air France-KLM will also be willing to rejoin the transatlantic joint venture, like Alitalia at the time. For 10 years, the latter operated together with Air France-KLM and Delta Air Lines between Europe and the United States. “As long as revenue is 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 have is still low, the new Italian company seems determined to develop in the United States and could be an additional source of income for the alliance. And then Air France-KLM probably had no desire to see these receipts, even reduced, for Lufthansa.

Has the low cost already closed the market?

If the prospects are 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 until they became the majority during the following decade. Ryanair already dominated the market before the crisis and has grown even stronger since then, taking advantage of Alitalia’s demise to make Italy one of its main markets, as has Wizz Air. Easyjet is also very consolidated like Vueling or Volotea. Air France and KLM lag behind with only a small percentage of market share.

Similarly, domestic travel is partly drained by rail, with the high-speed lines of Trenitalia and Italo. The heightened competition from its two operators on the Rome-Milan route has also allowed the railway to increase its modal share, especially among business travellers.