Ryanair in cooperation talks with AlItalia, to fight Lufthansa deal

By Victoria Bryan and Conor Humphries

DUBLIN (Reuters) - Ryanair (RYA.I) is in talks about providing connecting flights to AlItalia's long-haul services and has raised objections with German authorities about a Lufthansa-Air Berlin tie-up, as it tries to ease its expansion in continental Europe.

The Irish airline, Europe's largest by passenger numbers, is looking to add 11 million passengers in the year to March 2018 and has frozen expansion in top market Britain in the wake of its decision to leave the European Union.

But it is unlikely to look to acquisitions to fuel that growth due to inefficiencies at rivals and the fact most have Airbus (AIR.PA) fleets, rather than Boeing (BA.N) planes as used by Ryanair, CEO Michael O'Leary told Reuters in an interview.

Ryanair is currently in talks with AlItalia about providing feeder flights to its long-haul hubs in a deal that could help the Italian flag carrier curb losses on short-haul flights.

AlItalia is undergoing restructuring amid uncertainty around major shareholder Etihad, which this week said it would review its European investment strategy following the departure of its chief executive James Hogan.

"We can help them by offering them cheap feed, low-cost feed into their hubs ... but that means taking out aircraft, people, and that's very difficult politically in Italy," O'Leary said. "We are still talking to them."

FEEDER FLIGHTS

Ryanair, which exclusively operates short-haul point-to-point services, is hoping to pilot a system of feeding long-haul flights in the coming months.

O'Leary said he hoped such plans with Norwegian Air Shuttle (NWC.OL) and Aer Lingus (ICAG.L) could start in May. The integration of their booking systems has delayed the signing of deals, he said.

Ryanair is offering long-haul carriers the ability to book its seats for resale at the same prices offered to customers on its own website. The long-haul carriers would take full responsibility for missed connections, though Ryanair would pay fines under EU rules for flights over three hours late, he said.

In addition to Italy, Ryanair is targeting Germany, Europe's second-largest aviation market after Britain, and O'Leary said he planned to fight Lufthansa's (LHAG.DE) recent agreement to lease 38 crewed planes from low-cost Air Berlin for six years.

O'Leary said the lease was a "fig leaf" to mask the acquisition of its main domestic competitor, which he said would raise their combined market share to 63 percent.

"It is nothing other than a takeover," O'Leary said.

Ryanair has submitted its concerns to Germany's competition authority, which said on Wednesday it would make a decision by the end of the month on whether to review the deal.

"They have been very receptive," O'Leary said.

OVERCAPACITY

Overcapacity in the short-haul market will continue to force fares lower in Europe in the coming year, but the rate may slow from a high single digit percentage drop to a low-single digit one, O'Leary said, while adding there were many variables.

"The outcome for fares depends on what happens on Brexit and economic confidence in UK and Europe, what happens to oil, and unforeseen security events," he said.

Ryanair, which is due to release results for the three months ending December, its fiscal third quarter, on Feb. 6, will continue to return cash to shareholders so long as profits continue to grow, he added.

"As long as profitability continues to rise from 1.25 billion (euros) last year, in line with traffic, ... I see no reason why share buy backs shouldn’t continue, absent unforeseen shocks," O'Leary said.

Ryanair may also tap bond markets again if rates remain low, he added.

(Additional reporting by Peter Maushagen; Editing by Mark Potter)