Air France-KLM board in crossfire over Alitalia stake

PARIS Mon Sep 23, 2013 9:11am EDT

An Alitalia plane passes an Air France plane on the tarmac of Charles de Gaulles International Airport in Roissy near Paris, January 8, 2013. REUTERS/Charles Platiau

An Alitalia plane passes an Air France plane on the tarmac of Charles de Gaulles International Airport in Roissy near Paris, January 8, 2013.

Credit: Reuters/Charles Platiau

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PARIS (Reuters) - Air France-KLM (AIRF.PA) became the subject of a tug of war over its role in crisis-torn Italian partner Alitalia on Monday as Rome invited it to double its stake, while its own shareholders and unions looked ready to resist any new lifeline.

The board of Air France-KLM, which owns 25 percent of Alitalia after helping it out of bankruptcy in 2008, was due to meet at 1600 GMT as Alitalia prepares to tap shareholders for cash for a second time this year, people close to the matter said.

Alitalia is in the midst of a new crisis as it faces a cash shortfall of some 400 million euros ($540 million) and private Italian shareholders, who also took part in the 2008 rescue, become free to sell their shares when a lock-up expires in a month's time.

Air France-KLM will discuss whether to maintain its stake by participating in a capital increase, risk upsetting unions and the Dutch side of the company by raising its stake, or risk a Franco-Italian row by turning its back on its partner in the Skyteam alliance of airlines.

Any extra investment could be a hard sell with the Franco-Dutch firm's shareholders and workers, as it is in the midst of cutting costs and jobs in a bid to bring down its own debts.

But the company will also be keen to protect the value of its existing investment and maintain access to Europe's fourth-largest travel market.

Italian transport minister Maurizio Lupi raised the stakes hours ahead of the meeting on Monday by saying Italy would not oppose an increase in Air France-KLM's stake to 50 percent, effectively opening the door to foreign control.

"I expect that Air France will strongly reaffirm that Alitalia is a strategic asset for Air France, and therefore that there will be a strengthening of Air France's role," he said on the sidelines of a conference in Milan.

"We ask that Air France does not consider Alitalia and (Rome airport) Fiumicino as an appendix, but a strategic asset for the development of European air transport."

Lupi is a political ally of former Italian prime minister Silvio Berlusconi who opposed proposals to have Air France-KLM take control of Alitalia in 2008, and instead asked a group of Italian investors to take over the loss-making carrier.

POLITICALLY SENSITIVE

Alitalia has moved aggressively to cut costs in recent years, but remains severely hampered by low-cost competition in its European markets, poor demand on its domestic routes due to Italy's debt crisis and the rise of high-speed trains, as well as insufficient capital to invest in long-haul fleets.

Earlier this year, Air France-KLM participated in its share of a 150 million euro shareholder loan to keep Alitalia afloat.

Chief Executive Alexandre de Juniac pledged in July not to put up more money without tough conditions.

"In the past few weeks the management of Air France-KLM have been more open towards an increase in the stake rather than just taking part in a capital increase," a union source briefed on the discussions said, asking not to be named.

Air France-KLM declined comment.

The decision is seen as politically sensitive after Air France, 19 percent owned by the French state, announced 2,800 further job cuts last week, prompting a call for new strikes.

A banking source, however, said an increase in the stake was the least likely option. Others said the management of the Dutch side of the operation, which merged with Air France to create Air France-KLM in 2004, is particularly reluctant to back it.

"It is impossible in the current context," the source said. "The only question to ask right now is whether Air France-KLM wants to see its stake diluted."

Jitters over the decision pushed Air France-KLM shares down 1.7 percent to 6.86 euros on Monday, with the decline accelerating after the Italian minister's call for support.

"Air France-KLM wants to protect its franchise but the priority is to deliver on its plans to reduce debts," said airlines analyst Stephen Furlong at Davy Research in Dublin.

"Exposure to Alitalia has always been fraught with challenges and it would be surprising if Air France-KLM agreed to increase their stake."

($1 = 0.7402 euros)

(Additional reporting by Agnieszka Flak, Giulio Piovaccari, Lisa Jucca; Editing by Mark Potter)

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