With Deal Fading, Italy Pledges to Keep Alitalia Flying

By Nicola Clark

Elisabetta Povoledo contributed reporting from Rome. David Jolly contributed from Paris.

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With a cash crisis looming for Alitalia, the Italian government vowed Thursday to keep its planes flying despite the collapse of talks with Air France-KLM, the sole remaining bidder for the money- losing carrier.

As several hundred Alitalia employees gathered outside the company headquarters in Rome, chanting “We want Air France,” the board of the Italian airline was locked in an emergency meeting late Thursday to consider its next move after its chairman resigned in frustration over the deadlock.

The center-right government of Prime Minister Romano Prodi said it would ensure the continued operation of the Italian flag carrier while it sought to learn “whether there were still margins for an accord with the unions.” The fate of Alitalia, of which the Italian government owns 49.9 percent, has become an issue in the general election due to be held April 13 to 14.

The chairman of Alitalia, Maurizio Prato, announced his departure late Wednesday, just before a midnight deadline for reaching a takeover agreement after a last-minute job-saving proposal by Alitalia’s unions was rejected by Air France-KLM.

“I think it is pretty much over,” said Chris Avery, European airline analyst at JPMorgan in London. “There are too many unions involved, there is an imminent election and there does not appear to be a viable, concrete alternative proposal out there. I can’t see how this can go forward.”

Politicians and labor leaders still seemed to be holding out hope of a solution, however. The government said it would undertake informal contacts with union leaders and Air France-KLM in the next couple of days.

Marco Veneziani, national secretary of the UIL transport union, which represents 2,500 Alitalia workers, said Thursday that the immediate priority was to save the carrier from bankruptcy protection and then wait for the Italian elections to make a decision about the future of the company.

“We broke from the negotiations a few days ago because we felt that a new government would be in a position of strength to negotiate with the French government and Air France,” he said. “Now we’re in an emergency, and if we’re calm we’ll get out of this.”

Veneziani said Air France’s most recent proposal to unions was different from what it originally offered, both in terms of layoffs as well as the number of planes that the company was going to retire.

But a person who was present as the talks broke down Wednesday said the chairman and chief executive of Air France-KLM, Jean-Cyril Spinetta, made clear he would not return to the negotiating table.

“Everyone was very cordial, but at a certain point, he just got up and shook hands with everyone, said that he could not accept their proposals and left,” said the person, who requested anonymity because they were not authorized to discuss details of the meeting. “There’s nothing more to discuss, it’s finished. The chief executive is now back in Paris.”

The sale of Alitalia has touched nerves across the Italian political spectrum ever since the carrier was first put up for auction 15 months ago. The saga has sometimes taken near-operatic turns, complete with potential bidders – including such unlikely candidates as the Russian state-run carrier Aeroflot – entering and exiting the stage more than once. At one point late last year, Alitalia announced it had received an approach from a mysterious consortium that included Singapore Airlines – a claim that the Asian carrier swiftly denied. The purported offer turned out to have been signed by a representative of Singapore Airlines that did not exist.

The conservative former prime minister Silvio Berlusconi, whom polls show is favored to return as prime minister in the elections, has said publicly that the Italian flag carrier should not be sold to a foreign company and suggested that he would overturn any such deal if elected. Last week, Berlusconi hinted he was gathering a group of Italian businessmen – including at least one of his sons – to make an alternative bid for Alitalia, although no concrete proposal has been forthcoming.

Despite the drama, some analysts said politicians were exaggerating the importance of the national carrier in the minds of average citizens. “Frankly many Italians avoid Alitalia when they can,” said Andrea Boitani a professor of economics and transport expert at the Catholic University of Milan. “If people were truly fond of the national carrier it wouldn’t have lost its market position so drastically to other carriers.”

Air France-KLM had offered to pay euro 139 million, or $216 million, and to assume Alitalia’s outstanding convertible bonds, putting the total value of a deal at euro 740 million. It had also planned to inject a further euro 1 billion in fresh capital. But Air France-KLM made its offer contingent on obtaining union support for a plan to restructure the airline that would have included layoffs of around 1,600 people.

Alitalia is hemorrhaging money. It said last week that its cash on hand had plunged to euro 180 million at the end of February from euro 282 million at the end of January, meaning it was consuming reserves at a rate of about euro 3.5 million a day. With resources dwindling , many of the company’s creditors and suppliers are likely to demand immediate cash payments, analysts said.

“Like an hourglass, when time runs out for an airline, the sand tends to flow out pretty quickly toward the end,” said Peter Morris, chief economist of Ascend, an aviation consulting firm in London.

The company’s shares, which have lost more than 52 percent of their value over the last 12 months, were suspended Thursday in Milan pending an announcement after the board meeting. The stock, which last traded Wednesday at 50 cents, have been limping along below euro 2 since the autumn of 2005.

Despite the collapse of the deal and the bleak outlook for Alitalia as a going concern, Avery, the JPMorgan analyst, said Alitalia did not appear to be in immediate danger of failure, noting that the carrier had managed to raise euro 148 million in March, thanks to a government tax credit and the sale of its 2 percent shareholding in Air France-KLM. “Airlines also tend not to run out of cash flow going into the summer travel season,” Avery noted, though he declined to predict just how long the carrier’s funds might last.

In the event of a liquidation, analysts said Alitalia would have very few assets of value to sell. Its fleet of mostly decades-old, fuel-guzzling aircraft are unlikely to draw much interest from other airlines, while its landing rights in Rome, Milan and other foreign airports would be unlikely to sell for much in the event of a forced sale.

“With the size of the debts that go against all that, the government will not be able to make a profit on liquidation,” Avery said.

Alitalia’s net debt at the end of February was around euro 1.4 billion, up 7 percent from a month earlier. Alitalia has been in a slow death spiral for more than a decade, posting a profit only four times in the past 15 years.

The airline has faced fierce competition from discount carriers, including domestic rivals like Air One as well as foreign ones like Ryanair.

Its share of the Italian air travel market has fallen to around 30 percent from more than 80 percent in the late 1990s.

As Alitalia has atrophied, larger competitors like Air France- KLM, Lufthansa and British Airways have stepped in to add new routes and more frequent flights to attract business fliers. According to Ascend, the number of available seats on all airlines flying into and out of Italy increased by 7 percent in 2006 and by 13 percent in 2007. Meanwhile, the low-cost carrier Ryanair – which began flying to Venice, Pisa and Rimini in 1998 and established a base in Rome in 2004 – now provides 10 percent of the available seats in Italy, both on domestic and international routes.

“There has been a rapid leaking away of passengers to other airlines, both domestic and foreign,” said Morris of Ascend. “Alitalia’s competitors are starting to view it as a dormant airline.”

Some observers suggested that the recent “open skies” deregulation of trans-Atlantic air traffic might also open another front for competitors to siphon away still more customers from Alitalia. As of last Sunday, any European airline can now provide direct service to the United States from any city in the European Union.

Others argued, however, that the expense involved in setting up their own trans-Atlantic services from Italy might be prohibitive.

Originally published by The New York Times Media Group.

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