Lufthansa gets EU nod for $350 million stake in Italy's ITA

By Foo Yun Chee, Ilona Wissenbach and Angelo Amante

BRUSSELS/FRANKFURT/ROME (Reuters) -Lufthansa won EU antitrust approval to buy 41% of ITA Airways for 325 million euros ($350 million) on Wednesday after ceding routes and slots, with the news boosting rival IAG's shares and hopes for its takeover of Air Europa.

The deal will boost Lufthansa's presence in the lucrative southern European market and is one of three high-profile sector transactions in Europe, underscoring efforts by its airlines to boost scale to offset rising operating costs.

Lufthansa CEO Carsten Spohr told a press conference in Rome that ITA's Fiumicino airport hub gave the group better access to Africa and Latin America and that it had much room for growth.

Shares in Lufthansa were up 3.27% at 1339 GMT after the announcement, with IAG shares up by 4.6% on anticipation that the approval made its takeover of Air Europa more likely to be given the green light.

IAG said it was glad that the Commission recognised the benefits of airline consolidation.

"Regulatory scrutiny remains high, but the deal has likely increased confidence that airline M&A can gain approval, subject to remedies negotiated with competition authorities," said Ruairi Cullinane, an analyst at RBC.

ITA also offers key long-haul routes to Lufthansa, which has an option to take full ownership if the Italian airline's financial performance improves.

Lufthansa and ITA agreed to cede Italian short-haul routes to one or two rivals, the European Commission said, confirming a Reuters report. The German airline has said it is in talks with Easyjet and Spanish low-cost carrier Volotea.

The combined group will also undertake interlining agreements or slot swaps for long-haul routes to increase frequencies and improve connections for one-stop flights.

Interlining deals allow individual airlines to handle passengers travelling on itineraries requiring multiple flights on multiple carriers.

Lufthansa and ITA will also transfer some of the state-owned airline's slots for short-haul routes at Milan's Linate airport to competitors, allowing them to set up a sustainable base.

A Lufthansa spokesperson said the airlines would give away 204 slots per week at Linate Airport in Milan in the summer, and 192 in the winter. That means that under the new deal, ITA and Lufthansa will have fewer slots than before.

It would also provide better connections for its competitors at key hubs in North America, namely Washington, San Francisco and Toronto, the spokesperson said.

"The package of remedies proposed by Lufthansa and the MEF (Italy's ministry of economy) on this cross-border deal fully addresses our competition concerns by ensuring that a sufficient level of competitive pressure remains on all relevant routes," EU antitrust chief Margrethe Vestager said in a statement.

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It was not an easy negotiation, with Italy's Economy Minister Giancarlo Giorgetti saying in Rome that he argued with Spohr over details "until the last minute". ITA would no longer need state aid as part of the deal, he added.

"This is the best option right now for ITA and for Italy, a privatisation that goes through Lufthansa which has a multi-hub strategy and wants to focus on Fiumicino ... this is also good for the Italian taxpayer," said Andrea Giuricin, a transport analyst at TRA consulting.

The deal can only close once rivals, approved by the EU antitrust watchdog, start operating the routes. EU regulators had been frustrated with its previous approved deals during which rivals declined to take up routes and slots because they said they could not compete with Lufthansa.

Lufthansa has faced rising labour costs tied to strikes earlier this year, causing it to issue a profit warning.

Analysts say it will not be easy to rebuild ITA, whose predecessor Alitalia faced decades of financial struggles and bailouts, and Lufthansa will likely need to make a significant investment.

Regulators in Europe also worry the region's three largest airline groups - IAG, Air France KLM and Lufthansa - are becoming too dominant, potentially hurting consumer choice and making flying less affordable.

The Commission is examining British Airways-owner IAG's bid to buy Air Europa and is also set to evaluate Air France-KLM's offer to take a 19.9% stake in Scandinavia's SAS.

($1 = 0.9295 euros)

(Reporting by Giuseppe Fonte in Rome, Joanna Plucinska in London; Editing by Josephine Mason, Sharon Singleton and Alexander Smith)