On July 3, 2024, the Commission conditionally approved Deutsche Lufthansa AG’s (“Lufthansa”) and the Italian Ministry of Economy and Finance’s (“MEF”) joint control of ITA Airways (“ITA”). [1] The approval is contingent upon full compliance with the commitments.
Background
On May 25, 2023, Lufthansa announced its intention to acquire a 41% stake in ITA, with an option to purchase all remaining shares from the MEF later.[2] The deal was notified to the Commission on November 20, 2023, and an in-depth investigation was launched on January 23, 2024.
Competition concerns
The Commission’s Statement of Objections, issued on March 25, 2024, raised concerns about: (i) reduced competition on a number of short-haul routes between Italy and Central Europe, where Lufthansa and ITA compete directly; (ii) reduced competition on long-haul routes between Italy and North America, where Lufthansa and its partners (United Airlines and Air Canada) coordinate on price, capacity, scheduling, and share revenues; and (iii) the creation or strengthening of ITA’s dominant position at Milan-Linate (“LIN”) airport.[3],[4]
Remedies
Lufthansa and the MEF submitted remedies to address the Commission’s concerns, including:
- Short-haul commitments: providing assets for non-stop flights between Rome or Milan and Central Europe to one or two rival airlines (these assets include necessary slots and other required resources according to the remedy taker’s needs, as well as a five-year agreement connecting the short-haul remedy taker to the intra-Italian routes served by ITA from LIN airport and Rome Fiumicino airport for connecting flights).[5] These commitments must cover at least six consecutive International Air Transport Association seasons (which are divided into summer and winter seasons);[6]
- Long-haul commitments: entering into three-year agreements with competitors to enhance their position on long-haul routes between Italy and North America by increasing the frequency of competitor connections through measures like interlining agreements between airlines to handle passengers traveling on multiple flights with separate airlines, slot swaps, and retiming of flights;[7] and
- LIN commitments: divesting take-off and landing slots at LIN airport to the short-haul remedy taker to allow competitors to establish a strong presence for short-haul routes.[8]
On July 3, 2024, the Commission approved the merger, contingent on Lufthansa and MEF implementing the transaction only after receiving the Commission’s approval of acceptable short-haul and long-haul remedy takers and of the agreements between Lufthansa and MEF and the remedy takers.[9]
A new age for remedies in airline mergers
While standard, slot remedies, where airlines relinquish take-off and landing slots to rivals, have become less effective in airline mergers. Experience shows that finding suitable remedy takers who can turn the slots into competitive operations is challenging. For instance, slots offered under Lufthansa’s commitments in the Lufthansa/Brussels Airlines[10] and Lufthansa/Swiss[11] mergers remain unclaimed. Moreover, the General Court recently found the slot remedies which the Commission had accepted in a State Aid case concerning Lufthansa to be insufficient to preserve effective competition, as they: (i) gave preference to new entrants, excluding Lufthansa’s closest competitors from bidding; and (ii) required remuneration instead of a free slot transfer.[12]
The Commission has acknowledged this issue in merger cases and now applies a stricter approach to airline merger remedies.[13] Reflecting this higher standard, in Lufthansa/ITA, the Commission required more comprehensive measures, including asset transfers and interlining agreements with competitors. Furthermore, the clearance is conditional on finding suitable remedy takers for each commitment, preventing issues seen in previous Lufthansa mergers.
The Commission needed a new strategy to authorize the merger while safeguarding competition, given ITA’s uncertain long-term sustainability as a stand-alone carrier and the associated significant lobbying efforts from Italy.[14] In fact, the remedies appear less demanding than those applied in Korean Air/Asiana, where the Commission not only required the parties to divest relevant slots and assets: Korean Air also had to put forward a remedy taker for the passenger transport commitments (T’Way) prior to receiving clearance, and the parties were not allowed to close the transaction until T’Way actually started operating on the overlap routes.[15]
[1] Commission Press Release IP/24/3604, “Commission clears proposed acquisition of stake in ITA Airways by Lufthansa, subject to conditions,” July 3, 2024.
[2] Lufthansa Group Press Release, “Lufthansa Group reaches agreement on the acquisition of 41 per cent stake in ITA Airways,” May 25, 2023, available here.
[3] Commission Press Release IP/24/1430, “Commission sends Statement of Objections over proposed acquisition of a stake in ITA Airways by Lufthansa,” March 24, 2024.
[4] When defining the relevant product market in airline mergers in the past, the Commission has used the “point of origin/point of destination” city-pair approach for passenger air transport services, in which every combination of a point of origin and a point of destination constitutes a separate market. The Commission has also included, where relevant, all substitutable airports for each point of origin and destination in its analysis of the effects of the transaction. See Lufthansa/SN Airholding (Brussels Airlines) (Case COMP/M.5335), Commission decision of June 22, 2009, para. 12, fn. 9, and para. 13.
[5] DLH/MEF/ITA (Case COMP/M. 11071), Commitments to the European Commission, paras. 1, 6, and 27.
[6] Ibid, para. 4.
[7] Ibid, paras. 9 and 31.
[8] Ibid, paras. 14 and 21.
[9] Ibid, para. 13.
[10] Lufthansa/SN Airholding (Brussels Airlines) (Case COMP/M.5335), Commission decision of June 22, 2009.
[11] Lufthansa/Swiss (Case COMP/M.3770), Commission decision of July 4, 2005.
[12] Ryanair v Commission and Condor Flugdienst v Commission, Joined Cases T-34/21 and T-87/21, EU:T:2023:248.
[13] The current Director General for competition, Olivier Guersent, criticized slot remedies for monopoly routes, calling them a “bad policy,” and advocated for a more rigorous standard. See Bethan John, “Lufthansa/ITA remedies are strongest yet, Guersent says,” GCR, July 9, 2024, available here. Commissioner Margarethe Vestager also expressed skepticism, noting that slot remedies work only under very specific circumstances. See Lewis Crofts, “Slot remedies in airline mergers only work in ‘very specific circumstances,’ EU’s Vestager says,” MLex, February 29, 2024, available here.
[14] Italian government officials were vocal in the press about their stance on the deal. For example, Italy’s deputy prime minister Matteo Salvini warned that a prohibition would be seen as a “serious attack on Italy, a hostile act.” See Giovanna Faggionato, “Lufthansa’s ITA deal set to get EU approval,” Politico, July 13, 2024, available here.
[15] Korean Air Lines/Asiana Airlines (Case COMP/M.10149), Commitments to the European Commission of January 9, 2024, para. 5.