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ITA Airways - The Choice of a Strategic Partner

Almost 10 months from the birth of the new Italian national airline from the ashes of Alitalia, the story unfortunately still seems far from being at the end credits. After the Italian government indicated they were interested in significantly reducing their 100% ownership stake in ITA, two well-qualified suitors emerged.

ITA must now make a choice between the two current suitors or decide to stay totally in public hands. It is an interesting and complex exercise. Despite the favorable opinion of the consultants on the Lufthansa-MSC offer, both from the company and from the ministry, the political issues related to the resignation of the Draghi government pose a cloud of perplexity that risks interrupting the process just as it reaches the last meters before the finish line. 

Current Situation

ITA Airways, today, is a much smaller flag carrier than most of its European competitors. Its number of routes and destinations are limited and they are concentrated on short and medium-haul markets, where it competes with highspeed trains and ultra-low cost airlines.  ITA is one of eighteen members of Sky Team Airline Alliance which includes Air France, KLM, Delta and Korean Air.

Although ITA is part of Skyteam, the uncertainty regarding its future means that many of the agreements and advantages of joining the alliance are not fully in effect.

Some of these have a modest impact, such as the fact that the higher statuses of ITA's frequent flyer program are not recognized by Skyteam's partner airlines, but others are much more impactful, an example of which is the fact that sales of ITA flights by partner members do not take place as they did in the past for Alitalia when its permanence within the alliance was not in question. The effect, especially on markets such as North America, is greater difficulty in filling flights, lower average revenues and significant economic impacts

The Suitors

The first suitor to emerge was Lufthansa in partnership with the shipping giant MSC.  A couple months later, Air France KLM appeared with backing from the investment fund Certares. With its major funding from American Express, Certares has a focus on travel-related investments. Both suitors see ITA as a good strategic fit and are very well funded.

The Decision

At this point, we must ask ourselves with which of the two suitors ITA would have a greater chance of carving out a lasting role.  Beyond the business plans that have been presented and which can be modified at any time with changes in market conditions, some thoughts can certainly be made based purely on business issues. 

I tend to agree with the consultants from both the Ministry and the airline, the Lufthansa-MSC tends to be a better solution.

There are a few reasons, but the most relevant are the following: firstly, Lufthansa has a substantial capacity problem to which it must find an answer. The German airports bases of Lufthansa are saturated.  They do not have the possibility of further increasing their capacity without making are infrastructural investments, which however are independent of the will of Lufthansa itself.  As an example, Lufthansa, in light of the high recent demand, has decided to bring back into service the Airbus A380s, which they were sent into storage. 

Lufthansa could exploit Rome Fiumicino capacity for material growth and its favourable geographical position for routes to South America and Africa (with an undoubted advantage in terms of flight hours, and fuel consumption) while obviously maintaining the legacy routes (such as the connections to North America).  Acquiring ITA would be a strategic investment capable of creating interesting synergies and opportunities for growth. 

Another advantage with Lufthansa is the presence of MSC. As the largest shipping company in the world, MSC would lead to a very broad development of the cargo sector, an area that today guarantees very high profitability. 

Finally, wanting to safeguard its Italian character, we must not forget that the MSC group is led by an Italian entrepreneur. 

Staying Independent

The third option, remaining independent, does not solve the need for growth capital. To be profitable, ITA needs to expand to more profitable routes and needs to replace much of its aging fleet. The required capital will be expensive if it is even able to be secured. Even with additional capital, would ITA be able to compete in an industry dominated by far larger carriers?

Need to Decide

The time has come to make the decision before an event occurs causing one of the suitors to lose interest.  Any geopolitical, macroeconomic, or business change risks the buyer deciding to deploy its resources elsewhere.  ITA faces these same risks which could diminish its value for any buyer and thus the proceeds for the public coffers.

Not only that, the ambitious, and in some ways essential, business plan implemented by ITA Airways’ management, including the renewal of the fleet, requires substantial investments, some of which are expected to be found on the financial market. Without a credible and sustainable path, this will be impossible.

ITA needs to decide now to bring certainty to its plans moving forward, its employees and its customers.

About CDI's Aerospace and Defense Mergers and Acquisitions

Aerospace and Defense manufacturing is a high-technology industry that produces aircraft, guided missiles, space vehicles, aircraft engines, propulsion units, and related parts. Much of the industry is geared toward governmental work, but commercial airlines are also a significant industry segment. The Aerospace and Defense Industry is dominated by large original equipment manufacturers (OEMs). There are many high-quality smaller companies who provide support services to OEMs and their customers, including parts and sub-assemblies.

Within the Aerospace and Defense Industry sector, CDI Global has experienced and dedicated partners who can identify and interview appropriate candidates on a face-to-face basis. We know confidentiality is vital. As an independent firm, we are free to approach potential candidates without prematurely revealing our client’s identity. CDI Global professionals have completed numerous search mandates and sell mandates in addition to fully realized mergers and acquisitions in the sector. Our structured and phased approaches are key to our historically high success rate for transactions in Aerospace and Defense.

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By Federico Maria Alberto Caligaris

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