Air France seen beating tough odds for Alitalia

ROME Fri Jan 2, 2009 9:28am EST

Air France (L) and Alitalia aircrafts are seen in Paris in this undated handout photo. REUTERS/Air France/Handout

Air France (L) and Alitalia aircrafts are seen in Paris in this undated handout photo.

Credit: Reuters/Air France/Handout

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ROME (Reuters) - Air France-KLM (AIRF.PA) enters 2009 as the favorite to clinch a fierce battle for a stake in Alitalia as the Italian carrier crawls toward its planned rebirth as a smaller, private airline in just over 10 days.

After a three-month tussle for a stake of up to 25 percent, Air France-KLM appears for now to have the edge over Lufthansa despite aggressive German lobbying and overt political opposition from Rome, two sources close to the talks said.

At stake is access to Europe's fourth largest aviation market amid severe industry downturn, combining busy business routes from Italy's export-driven north with one of the world's top tourist destination markets targeting Rome in the south.

CAI, the group of Italian investors that bought Alitalia for 427 million euros ($592.8 million) last month, hopes to have a foreign partner in place when it officially relaunches the carrier with a revamped network and fewer staff on January 13, one of the sources said.

Italian media have reported that CAI has already picked Air France-KLM with a formal signing of the agreement expected next week, but both sources denied such a decision had been made.

"It's true that the talks with Air France-KLM are in a more advanced stage," one of the sources said. "We are at an important point. We're still discussing, but we don't have a deal yet."

One investor in CAI, Ninni Carbonelli D'Angelo, also told the AGI news agency that the group was in advanced talks with the French carrier but that a deal had not been reached.

Air France-KLM has long been considered a logical partner for Alitalia, with which it shares commercial ties. Both belong to the Skyteam alliance, and the French carrier last year agreed to buy Alitalia before the deal collapsed over union opposition.

CAI's plans giving Rome the lion's share of intercontinental destinations under the new network also suggest a likely deal with the French, who favored a greater role for the hub.

Italy's Prime Minister Silvio Berlusconi however has spoken out in favor of an alliance with Lufthansa, whose multi-hub model is also favored by unions and influential north Italian politicians who hope that could save jobs in Milan's airports.

British Airways BAY.L, which called off merger talks with Australia's Qantas Airways (QAN.AX) last month, is also vying to become Alitalia's foreign partner but its pursuit of only a commercial alliance has hampered its bid.

CAI executives have said they favor a partner that buys a stake, which they expect will be of about 20 to 25 percent.

Investors in CAI have agreed to pump a maximum of 1.1 billion euros into the holding company to buy and relaunch Alitalia, valuing such a stake at roughly 220-275 million euros.

Price may not be the only crunch factor, with Alitalia -- resentful at what its executives regard as second-class treatment in Skyteam -- pushing for the best possible commercial and ticketing deal with Skyteam or Lufthana's Star Alliance.

That said, some airline executives say Alitalia will have to prove it can still command the loyalty of passengers to drive them into a foreign partner's network following years of strikes, poor service and uncertainty over the airline's future.

DEATH BY 'GRANDEUR'

"We continue to work on the (Alitalia) dossier," an Air France-KLM spokesman said. "We have no other comment."

In the meantime, CAI has been swiftly ticking off the boxes on administrative and legal steps ahead of Alitalia's relaunch.

The group has completed the purchase of tiny Italian airline Air One's assets that will be merged with those of Alitalia, decided to maintain the Alitalia brand and livery, and begun an advertising campaign to promote the reshaped airline.

CAI's plans to turn around Alitalia -- which filed for bankruptcy in August after years of muddling through losses, strikes, mismanagement and political meddling -- focuses heavily on efforts to improve efficiency and rebuild market share.

Alitalia's staff base of nearly 20,000 has been pared back to just over 12,500 employees and CAI has said it aims to boost Alitalia's domestic market share to 56 percent from 30 percent at present, compared with Lufthansa's (LHAG.DE) 53 percent.

It also plans to cut and then invest in Alitalia's aging fleet to bring down the average age of its planes to 8.6 years from 12.4, in line with larger European airlines like Air France-KLM. It targets results breaking even in 2010.

But even Alitalia's biggest fans expect CAI to face a uphill climb as the new airline prepares for take-off amid a deepening recession and bitter competition that includes a new high-speed train service in Italy.

"Alitalia died because of its 'grandeur'... it had a structure that was too big with respect to its hopes of producing a profit," said Augusto Fantozzi, the administrator who oversaw Alitalia's bankruptcy told L'Espresso magazine.

"It's been said that (CAI Chairman Roberto) Colaninno was given the juciest bits of Alitalia, but even he'll have problems filling the airplanes."

(Additional reporting by Tim Hepher in Paris; Editing by Hans Peters)

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