Lufthansa will take a 41% stake in ITA Airways by way of a 325 million euro ($358 million) capital increase that will flow directly to the Italian carrier, the German group said on Thursday.
The deal comes as Europe's airlines struggle to repair their balance sheets after the COVID-19 pandemic and as legacy carriers have looked to consolidation to help them compete with low-cost airlines.
Lufthansa CEO Carsten Spohr met Italian Economy Minister Giancarlo Giorgetti in Rome on Thursday to finalise talks, which started in January but were extended beyond an initial deadline of April 24.
"Today's agreement will lead to a win-win situation for Italy, ITA Airways and Lufthansa Group ... a stronger ITA will invigorate competition in the Italian market," Spohr said.
The Lufthansa Group said in its statement that it will also jointly manage ITA, including naming a chief executive for the airline once the deal is closed.
The 325 million euros it will inject into ITA will be raised from Lufthansa Group's existing liquidity, it said. The Italian Treasury will contribute a further 250 million euros to ITA.
"The closing of the transaction after the contractual finalization remains subject in particular to regulatory approvals, especially by the European competition authority," it said in the statement.
ITA, the successor to Italy's loss-making flagship airline Alitalia, took to the air in 2021 as a state-owned company and posted a loss of around 486 million euros last year due to the lingering effects of the pandemic and rising fuel costs.
Efforts to save Alitalia and subsequently sell a major stake in ITA Airways have proved a headache for successive Italian governments, with some politicians reluctant to sell the company as they considered it a national icon.
ITA's business plan forecasts revenue growth of 2.5 billion euros in 2023 and of 4.1 billion in 2027, a statement from the Economy Ministry and Lufthansa showed.
ITA sees its fleet increasing to 94 aircraft compared with the current 71 by the end of 2027, and it expects its workforce to grow to over 5,500 people from 4,300 seen this year.