ITA-Lufthansa Deal Sparks Further Airline Merger Talk

German airline Lufthansa's bid for a minority stake in Italy's ITA Airways has ignited talk of further potential sector consolidation as the industry seeks to plot a more profitable post-pandemic recovery.

Many of Europe's legacy flag-carrying airlines are struggling to compete effectively with budget carriers, hampered by weak balance sheets that could be made more robust by merging with rivals, analysts said.

Lufthansa has offered to buy an initial minority stake in ITA, Italy's state-owned successor to Alitalia, it said on Wednesday.

"This may be the next step in European airline consolidation," said Bernstein analyst Alex Irving, citing Portugal's national airline, TAP, as a prime target.

The Portuguese government, which owns TAP, has said it is considering an outright or partial sale of the business. Lufthansa, Air-France KLM and British Airways owner IAG are potential buyers, analysts said.

"We clearly focus on ITA," a Lufthansa spokesperson said. "At the same time, however, we closely monitor consolidation in the European airline market."

Air-France KLM and IAG declined to comment.

Sweden's SAS, which has been under Chapter 11 bankruptcy protection in the United States since last summer, is also a potential candidate, Kepler Cheuvreux airlines analyst Ruxandra Haradau-Doeser and Bernstein's Irving said.

An SAS spokesperson said it's "too early in the process to comment on any potential future investors".

British budget carrier easyJet is another possible target, said Haradau-Doeser.

"For Lufthansa, the logic of taking over easyJet would be great - it could strengthen its market position in Great Britain, Paris-Orly and Geneva," she said.

Michael O'Leary, the outspoken CEO of fellow low-cost airline Ryanair, also weighed in with his predictions this week.

"TAP will finish up in BA-IAG, then I think easyJet is going to finish up being bought by either BA or Air France or both jointly and then Lufthansa will buy Wizz," he said.

CAUTION AND PATIENCE

Some aviation executives, however, said airlines would be wary of taking on risk in what is still a tough operating environment.

EasyJet downplayed talk of consolidation.

"It's very difficult to really make it work well in Europe. These type of deals are very complicated and distracting," easyJet Strategy Director Shane Lord said at the Air Finance Journal conference in Dublin.

While some analysts have been quick to speculate on potential mergers, there are other ways airlines could strengthen their finances.

"For healthier yields and margins, European airlines need to find capacity discipline: this is something that has been lacking in the past," Bernstein's Irving said.

And the big buyers, including Lufthansa and Air France-KLM, have not demonstrated any real appetite for acquisitions.

"Right now our priority is to fully recover from the COVID crisis and to complete our transformation," an Air-France KLM spokesperson said in an emailed response to a request for comment.

German business daily Handelsblatt has reported that Lufthansa CEO Carsten Spohr mentioned at an internal company event that TAP could be an option for more long-haul business with South America.

However, it could take months before the ITA Airways-Lufthansa deal is finalised, making it unlikely that Lufthansa will move ahead with further deals any time soon, a company source said.