Ugly duckling no more, rescued Alitalia turns heads

An Alitalia flight attendant disembarks from a plane at Fiumicino international airport in Rome September 26, 2008.

ROME (Reuters) - Alitalia SpA AZPIa.MI, the strike-prone Italian airline that nearly went bust last month, has become the unlikely object of a deepening Franco-German tussle for an alliance even as its government rescue runs into fresh snags.

An investor group buying Alitalia's profitable assets is busy meeting executives of one-time suitor Air France-KLM this week and Lufthansa the next, as their battle for a small stake to grab a toehold in the lucrative Italian market intensifies.

British Airways BAY.L, which until recently emphatically denied any interest in Alitalia, is also eyeing a commercial alliance, though it denies interest in buying a stake.

Mocked as the airline no one wanted as it lurched from two failed auctions toward a bankruptcy filing, Alitalia has seen its fortunes recover somewhat after a government-backed bailout that promises to leave it debt-free and privately-owned.

"Alitalia's greatest quality right now is its 'X factor' -- no one knows what this airline is capable of now," said Doug McVitie of Arran Aerospace consultancy.

"It's like the beauty of an unwrapped Christmas present -- it could be empty and broken for all you know, given this is Alitalia, but there is an element that it could play a greater strategic role in the sector."

Alitalia passenger traffic fell 28 percent in September as its near demise generated frenzied local newspaper attention.

Italian media have perhaps optimistically painted the suitors as desperate to strike a deal, reporting Lufthansa had set up a "secret" meeting to lobby Alitalia unions on Wednesday even as Italian investor consortium CAI met Air France-KLM across town.

Union officials denied any such meeting with Lufthansa.

Analysts have said Lufthansa (LHAG.DE) has the edge in talks after winning the open support of Italy's government and unions, though CAI has been at pains to deny favouritism. But a senior Air France-KLM official said, "We have not had our last word."

"At the moment it is too soon to say who will strike the deal, which will probably happen only after the new Alitalia is launched," said another source close to the talks.

Both airlines want a piece of the carrier to cement their position in Italy's booming travel market, and prevent Alitalia -- one of several European carriers in play in a fast-consolidating sector -- from being snapped up by the other.

"It's a question of making sure that Alitalia doesn't fall into the hands of your competitors, so while it may not have great value in itself, it has strategic value," McVitie said.

CUTTING IT CLOSE

All the enthusiasm over linking up with Alitalia may yet be premature as its investor bailout runs into delays and new snags despite overcoming the main hurdle of union opposition.

Under the rescue plan, CAI will buy Alitalia's best assets and merge them with those of smaller rival Air One to relaunch it as a smaller carrier. Air France-KLM (AIRF.PA) or Lufthansa would give industrial backing and a 20 to 25 percent stake.

The relaunch was initially set for early November, but will be delayed since CAI has yet to formally present an offer for Alitalia's assets. Its preliminary offer is valid until October 31.

Alitalia's bankruptcy commissioner Augusto Fantozzi has said he hopes the deal can be concluded in mid-November -- just two weeks before its cash coffers run dry. Any further delays will force Alitalia to seek a new loan to keep going, he said.

Fantozzi himself is waiting for an independent adviser to value Alitalia assets, a source close to the commissioner said.

CAI meanwhile is still waiting for necessary regulatory approvals before presenting its offer, said an executive of Intesa Sanpaolo, which is one of the group's 16 investors.

CAI is also being held up because it is seeking a new flying license for the relaunched carrier so it can protect itself from any EU objections to the rescue by claiming it has no links to Alitalia in its present form, a source close to the matter said.

There are also reports of disagreements within CAI investors, with one member -- Pirelli Chairman Marco Tronchetti Provera -- saying he hoped the deal will close soon to avoid the risk of "irregular, non-business-like management."

After reluctantly agreeing to back the CAI plan to avert a liquidation of Alitalia, its troublesome unions have begun to grumble again as they finalize a contract with the group.

One pilots union has demanded a separate type of contract than that proposed, while others are suggesting the Italian state buy a stake in the reshaped Alitalia given government injections of cash are the order of the day amid the global financial crisis.

"This story is turning into one without an end in sight and with increasingly uncertain outlines," said Fabrizio Tomaselli of the SDL union, one of Alitalia's nine unions.

Italian newspaper la Repubblica meanwhile reported on Thursday that the European Commission would approve CAI's takeover plan, but not a 300 million euros ($385.7 million) Italian state loan.

(Additional reporting by Alberto Sisto, Ian Simpson, Robin Pomeroy, Tim Hepher; Editing by Mike Nesbit)