Deutsche Lufthansa AG’s finance chief cautioned against a quick turnaround of Italy’s national airline ITA Airways after its purchase, while expressing confidence the German carrier has the financial muscle to forge an overdue industry consolidation.
Lufthansa has the capacity to acquire other airlines even as it enacts a turnaround at loss-making ITA, though it would only do so if it adds value for the group, Remco Steenbergen said in an interview in London. Lufthansa is close to a deal to acquire a minority stake in ITA as soon as next week, giving it better access to one of Europe’s biggest travel markets.
“When there are opportunities in Europe for other airlines, we will carefully look whether it makes sense to add them to the portfolio or not,” Steenbergen said.
Lufthansa is in expansion mode as the global travel sector recovers from the coronavirus pandemic. The carrier is set to take over ITA in two steps, starting out with a stake of about 40% before assuming full ownership. Such a move will help mitigate the risk of absorbing the perennially unprofitable asset that’s soaked up billions in Italian state support over the years.
‘A Little Time’
“All parties involved know it takes a little time,” Steenbergen said of the task of turning ITA into a profitable company. “But together we have outlined a clear path to reach this goal.”
While many smaller national carriers have been absorbed by the three large regional airline groups — Lufthansa; Air France-KLM and IAG SA — there are still some assets up for grabs. Portugal’s Prime Minister Antonio Costa has said that Lufthansa communicated interest in national flag-carrier TAP SA, and SAS AB in Stockholm may be seeking a buyer once it exits insolvency proceedings.
Steenbergen said ITA’s cost base had shrunk dramatically, and adding the Italian airline to Lufthansa’s global marketing of tickets could create a revenue boost that would aid a turnaround. ITA lost almost half a billion euros in 2022 on revenue of just three times that amount.
Stalled Business Travel
Lufthansa is itself recovering from a pandemic that pushed it into a €9 billion ($9.84 billion) state bailout. While the company repaid taxpayer funds, the move left it with high debt that Steenbergen wants to cut to regain the investment-grade rating it lost during the pandemic.
The German airline is targeting an 8% earnings margin by 2024, almost double what it reported for 2022. Some analysts have questioned the company’s ability to hit that target given that corporate travel — one of Lufthansa’s most profitable business lines before then pandemic — has yet to recover. Business-travel volumes were stuck at 60% of pre-crisis levels in the first quarter.
READ: CEOs Doom Business-Travel Revival With Budgets Slashed Worldwide
Steenbergen said Germany’s biggest companies are traveling less after the pandemic, but that a move to premium in the leisure segment can offset the drag on margins. Major corporate customers like Siemens AG and Volkswagen AG have said they’re cutting back on flights to lower emissions and costs.
“There is a substantial shift toward premium leisure travel,” Steenbergen said of higher demand for premium travel by leisure customers. “Once customers have gone from economy to business or first class they don’t want to go back.”
Lufthansa Technik
Lufthansa is holding talks with potential suitors for a minority stake in its Lufthansa Technik aircraft maintenance division. Investors including Advent International, CVC Capital Partners, Bain Capital and Blackstone Inc. have expressed interest, people familiar with the matter said previously. The deal could value Technik at more than €6 billion.
While Steenbergen declined to comment on how many non-binding bids were submitted before an April 2023 deadline, he said there was strong interest. A deal could be agreed before the end of 2023, he said. Any proceeds would be used for debt reduction or reinvested into Technik, and the company would consider expanding the business with bolt-on acquisitions, he said.
Another sticking point is labor unrest. Lufthansa has been hit by waves of strikes by employees seeking better pay. Now labor representatives are pushing the airline to establish a unified pay commission that will agree wages across the company’s broad stable of airlines. Such a move would limit management’s ability to establish new airlines with lower personnel costs than at its existing airline.
Steenbergen said the airline needs to be able to have different cost bases at individual airlines, noting the company also has to compete with budget carriers.
“I really hope it doesn’t happen,” Steenbergen said in reference to a potential breakdown in talks. “I can assure you that everyone involved is trying to do everything they can to find an agreement.”
