Lufthansa–Alitalia

Bulking Up For The Airline Wars

120558330 Lufthansa Alitalia DPA
Lufthansa is hoping to land Alitalia next. Source: DPA

At the beginning of this year, Lufthansa’s prospects looked pretty gloomy. Low-cost Irish carrier Ryanair was likely to surpass the German flag carrier in terms of passengers, while higher fuel prices led a number of analysts to downgrade the company’s shares, which were in the doldrums.

Just 10 months later, Lufthansa is going from strength to strength, snapping up most of its German rival, Air Berlin, for a bargain basement price of €210 million ($247 million), and on Monday reportedly offering €500 million to buy the operations of bankrupt Italian carrier Alitalia. The German airline’s share price has rocketed from €11 to over €25.

The price of oil was cited by analysts in January as the reason for Lufthansa’s poor prospects. Now, ironically, it looks like the main reason for Lufthansa’s comeback – and for the fall of one of its biggest erstwhile rivals.

Alitalia has 2,000 managers for 23 million passengers while Ryanair has 120 managers for 117 million passengers.

Both Air Berlin and Alitalia had sold substantial stakes to Etihad, the Abu Dhabi airline which was rapidly expanding from its Middle East base. But because the price of oil has fallen dramatically, the Middle East nation was unable to help its struggling airline out of difficulties and it declared a €800 million loss.

That loss in turn forced management to tell Air Berlin, in which it had a 29 percent stake, and Alitalia, in which it had purchased 49 percent, that it could no longer provide financing. Alitalia lost no time in declaring bankruptcy in May and Air Berlin followed in July.

The purchase of Air Berlin’s main assets, including the Austrian low-cost airline Niki and LGW, another discount carrier, has given Lufthansa a commanding position in central Europe from which to fight off competition from Ryanair and EasyJet, Europe’s other leading low-cost carrier.

In fact, Lufthansa announced that many of the 81 jets it is buying from Air Berlin are being transferred to its main low cost carrier, Eurowings. The Air Berlin crews will work under contracts covering the low cost carriers, which offer less pay.

In other words, Lufthansa is bringing the battle back to the low-cost carriers at a time when they too are struggling. Monarch Airlines, a British-based low-cost carrier, went bankrupt on October 3, setting off a scramble for its slots at British airports. Ryanair cancelled thousands of flights this fall because of a pilot scheduling snafu.

Lufthansa’s acquisition of Alitalia is likely to be more difficult than Air Berlin. For one thing, Air Berlin’s CEO during the bankruptcy talks, Thomas Winkelmann, was a Lufthansa executive who was recruited only in March, so he retained close ties with Lufthansa CEO Carsten Spohr.

Another factor is likely to be Italy’s reluctance to see its flag carrier carved up. Lufthansa said in a statement that it wanted to create a “New Alitalia” with a business model focused on “European point-to-point traffic” and the Italian airline’s global network. But that could come at a heavy price. While it didn’t give details, the Italian newspaper Corriere della Sera said Lufthansa wanted to cut 6,000 jobs, nearly half the workforce. EasyJet also said it had made an offer, but only for “certain assets of a restructured Alitalia.”

The Italian government has balked at accepting such huge layoffs, especially with elections scheduled for next year. Instead, Rome postponed the sale of the airline until next April in hopes that potential buyers would sweeten their offers. It extended a €600 million loan until September 2018 to give the airline enough breathing room to make it through the next summer flying season.

But with Lufthansa forcing Air Berlin crew to accept lower wages at its low-cost subsidiaries, it’s unlikely to move much to accommodate Alitalia’s notoriously bloated staff. Ryanair, which considered making an offer for Alitalia in August, noted ruefully at the time that the Italian carrier had 2,000 managers for 23 million annual passengers, compared with Ryanair’s own 120 managers for 117 million passengers.

Jens Koenen is Handelsblatt’s aviation correspondent and Charles Wallace is an editor for Handelsblatt Global in New York. To contact the authors: koenen@handelsblatt.com and c.wallace@extern.handelsblatt.com

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