An investor group including Air France-KLM and Delta Air Lines Inc. looks primed to buy Italy’s fledgling state-controlled carrier, after being selected over a rival bid from a team that included Deutsche Lufthansa AG.

The Rome-based Finance Ministry, which is running the process to find a new owner for ITA Airways, said Wednesday that it will start exclusive talks with the investor group led by the Certares investment fund that includes Air France-KLM and Delta. 

The two bidding groups had spent months jockeying for position in the contest for the airline that emerged from the ashes of former flag carrier Alitalia.

“After exclusive talks, a binding agreement will be signed only if the outcome will be fully satisfactory for the public shareholder,” the ministry said in a statement Wednesday.

While the choice moves the Certares-led bidders a step closer to owning ITA, a number of key hurdles remain, including Italy’s national elections in less than a month. A new government -- most likely led by a right-wing coalition based on recent polls -- could reverse Wednesday’s decision or even block the carrier’s privatization altogether.

Under the Certares group’s offer terms, the state would hold around 40% of ITA’s shares and could control two of the company’s five board seats, with some level of veto power over management nominations, newspapers including Corriere della Sera have reported. 

That structure is widely seen as offering a better chance of appealing to a future rightist government, though official details haven’t been announced on either bid.

“Apparently, a path is now being chosen that allows for more state influence and does not provide for a complete privatization of ITA,” Lufthansa said in a statement after the decision was announced.

Hands Tied

Air France-KLM has its hands tied on the acquisition front until it pays back billions of euros in state funds used to ensure its survival during the height of the pandemic.

But Chief Executive Officer Ben Smith said in June the carrier could soon be free of a European Commission-imposed ban on acquiring more than 10% of a rival, pointing to planned reimbursements before the end of 2022.

“We don’t want to be marginalized in Europe” due to restrictions on dealmaking, Smith said at the time.

Publicly, the Air France-KLM chief has remained cautious about a linkup with the Italian carrier, pointing to the Franco-Dutch airline’s past experiences with ITA’s predecessor. 

Italy is strategically important but “not number one on our list or something we’re losing sleep over,” Smith said in February.

A spokesperson for Air France-KLM declined to comment on Wednesday.

Alitalia, a serial loss-maker, was only able to continue flying thanks to state aid. The Italian government reformed the airline under the ITA name in 2020, ceding many of Alitalia’s assets while retaining much of its debt.

The sale of ITA “won’t be left to the next government, we have to do our duty,” Prime Minister Mario Draghi, who’s serving in a caretaker role until the Sept. 25 vote, told reporters earlier this month.