Alitalia suitor Lufthansa sets up Italian airline

MALPENSA AIRPORT, Italy (Reuters) - German airline Lufthansa (LHAG.DE) will set up its own Italian airline early next year, even as it courts Alitalia, as the battle to make inroads into the lucrative Italian air travel market heats up.

Lufthansa, which is vying with arch-rival Air France-KLM (AIRF.PA) to strike an alliance with Italy's bankrupt national carrier Alitalia, said its move did not mean it was "closing the door" on its ambitions to tie up with the Italian airline.

However, if it did lose out to Air France-KLM, Lufthansa's new airline would allow it to pressure Alitalia on its home-turf just as the Italian carrier tries to reinvent itself after years of losses and strikes.

The CAI consortium of top Italian businessmen buying Alitalia for 427 million euros ($553.5 million) is working to relaunch it as a smaller, more efficient carrier next month.

The airline picked as foreign partner is expected to buy a 20 percent stake, though Lufthansa Chief Executive Wolfgang Mayrhuber said a price or size of stake had not been discussed yet.

Lufthansa's new airline, which will fly under the "Lufthansa Italia" brand and seek an Italian operating license, will be based around Milan's Malpensa hub, where Alitalia has cut back sharply in a bid to reduce costs and turn itself around.

"With Lufthansa Italia, we're positioning ourselves in an important market with a high potential of growth, also for the future," Mayrhuber said a statement.

It will fly to eight European destinations, including Paris Charles de Gaulle and London Heathrow. The initial flights will take off in February and the airline will start with a fleet of six Airbus aircraft.

Malpensa will become part of Lufthansa's multi-hub system under the plans, said Giuseppe Bonomi, chairman of Milan's airport operator SEA.

Fearing job losses and a hit to the local economy, Bonomi and other Milan officials and politicians had waged a bitter fight to force Alitalia to rethink its plans to reduce its presence at Malpensa.

Lufthansa's ambitions in Italy are part of its broader plans to grow amid a cut-throat battle in the European aviation market to survive as a recession bites.

The carrier is not actively seeking to sell parts of subsidiary BMI, Mayrhuber said. He also said he would be "extremely surprised" if the EU blocked a purchase of Austrian Airlines (AUAV.VI) -- where it is the only remaining bidder.

The Austrian Airlines (AUA) sale to Lufthansa would involve the Austrian government assuming 500 million euros of debt from AUA, and therefore needs EU approval for this form of state aid on top of a review of the deal's impact on competition.

Austrian state holding company OeIAG is in exclusive talks with Lufthansa, after Air France-KLM last month dropped out of the race and a bid from Russia's S7 failed to comply with the rules of the tender.

(Writing by Deepa Babington, Editing by Erica Billingham and Andrew Macdonald)