Meloni Running Out of Time to Save Alitalia’s Cash-Strapped Successor

(Bloomberg) -- Prime Minister Giorgia Meloni is running out of time to salvage ITA Airways, the successor to serial loss-maker Alitalia. If her bid to cut a deal and free Rome from a longtime financial burden fails, there’s no plan B in sight.

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European Union antitrust chief Margrethe Vestager is pressing hard for tough concessions on the planned €325 million ($352 million) investment in the Italian flagship by Germany’s Deutsche Lufthansa AG, citing concerns on higher prices and reduced options for passengers.

Lufthansa has in turn peppered Brussels with a few proposed remedies in a bid to break the deadlock. It has suggested sharing routes with rivals out of hubs in Rome and Milan, giving up slots on some European routes, or freezing minimum capacity on flights to the US, Canada and Japan.

But so far, that hasn’t been enough to placate European regulators, and the Italian media has speculated darkly that the impasse could mean the deal, which carries an approval deadline of July 4, will fall through. On Wednesday, the Italian government said it submitted its replies to the EU, and that it’s not seeking an extension on the deadline.

Asked Wednesday about the status of the review, Vestager said that merger cases are “complex” and certain reviews can “take effort to solve.” She added that the European Commission remains in discussions both with Lufthansa and ITA Airways regarding the future outcome of the deal.

Its collapse would be a big problem for Meloni. Her right-wing government, which swept to power in 2022 on a pro-business platform, was counting on not having to continue paying to keep ITA flying.

“The intercontinental air market from Italy is extremely competitive. If ITA does not end up within the Lufthansa group, Italian taxpayers are at risk of spending much more on the company,” said Andrea Giuricin, a consultant specializing in the aviation industry who’s affiliated with the Milano Bicocca University.

Italy is facing rising deficits, debt loads and anemic economic growth, while Meloni has been eager to concentrate the meager resources at her disposal on keeping key electoral promises like cutting taxes.

In the absence of a deal, which would see the German carrier initially buy 41% of ITA, Italy would have trouble justifying pumping more cash into the airline.

Under EU fiscal rules, any new state spending that could sidetrack the country’s deficit and debt reduction efforts could lead to sanctions from Brussels, and Italy is already facing excessive deficit procedures linked to its 2023 budget.

Drag on Coffers

ITA and its predecessor Alitalia have been a drag on state coffers for decades. Alitalia, which was launched just two years after the end of World War II, officially ceased operations in 2021, though the scaled-back ITA — officially Italia Trasporto Aereo — was set up to take its place under full state ownership.

Rome earmarked as much as €3 billion to shore up the new carrier, though the EU only allowed a capital injection of €1.35 billion under its state aid regime.

ITA improved its performance last year, reporting a loss of €5 million amid a rebound in the aviation market. But the carrier’s viability remains in question, and even potential suitors have been lukewarm about its prospects.

Lufthansa Chief Executive Officer Carsten Spohr said last month that ITA is not a must-have asset for the German company, and that it could well live without it. That leaves Italy and Meloni with ever fewer and starker alternatives.

In the absence of a deal with Lufthansa, could Meloni just walk away?

It might prove difficult for the right-wing firebrand, who’s presented her administration as a champion of Italian industry and protector of the “Italianness” of many of the country’s firms.

Alternatives to a deal with the German carrier look unrealistic at this point. While MSC Mediterranean Shipping Company SA Chairman Diego Aponte said last year he’d be open to buying a stake in ITA, the idea hasn’t gained traction.

A deal with Air France-KLM would likely run up against the same competition concerns that have called the Lufthansa link-up into question. Recent industrial tensions between the Italian and French governments make the option even less likely.

The failure to secure a deal could also create new tension in Meloni’s coalition. League party leader and Transportation Minister Matteo Salvini has said it would be a “hostile act” by the EU to block the deal, suggesting he may use ITA as a wedge issue in his on-again, off-again rivalry with the premier.

Some voters, particularly older ones, remain nostalgic about the flagship, despite its spotty reputation for service. Discussions among Italians about the carrier are as likely to center on a return to its historic livery or debates about flight staff uniforms as on the financial burden of keeping the airline going.

And ITA, like Alitalia before it, is strongly unionized. Unions representing staff at the carrier this week called on Brussels to allow the merger to go ahead, arguing that it would strengthen Europe’s aviation industry.

Still, traffic figures suggest many fliers are ready to put the ITA-Alitalia saga behind them. Low-cost carriers are grabbing ever-bigger shares of the market for flights in and out of Italy, with Ryanair Holdings Plc now the country’s top domestic carrier. ITA lags behind its competitors on lucrative intercontinental routes too, accounting for just a 9% market share last year.

European Champions

Ultimately, the ball is in the EU’s court, underscoring a philosophical dilemma for Vestager and the bloc: Should it help create European-level “champions” to compete more successfully on the global stage, even at the risk of limiting competition?

Electoral politics could play a role in shaping the final decision on a deal. With European elections nearing, European Commission President Ursula von der Leyen, who is seeking a second term after next month’s European elections, is well aware of the need for Meloni’s backing for her reappointment.

At the same time, French President Emmanuel Macron has been pitching former Italian Prime Minister Mario Draghi as a potential commission chief, adding uncertainty to von der Leyen’s bid.

Von der Leyen’s hand may be forced, as she could feel the need to apply pressure on the bloc’s competition wing to find a swift solution to the impasse. So far, however, Vestager hasn’t been susceptible to political pressure over mergers.

--With assistance from Donato Paolo Mancini, Samuel Stolton, Giovanni Salzano and Chiara Albanese.

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