DEALTALK-Lufthansa noses ahead in Alitalia talks

(For other Reuters columns on deals please click on [DEALTALK/]

By Deepa Babington and Tim Hepher

ROME/PARIS, Oct 2 (Reuters) - Lobbying by Italian unions and politicians is tipping the scales towards Lufthansa and hobbling Air France-KLM in a Franco-German battle for a slice of Alitalia airline, which narrowly escaped liquidation last week.

Air France-KLM (AIRF.PA) has long been touted as Alitalia's logical partner thanks to existing commercial tie-ups. It agreed a takeover this year that later collapsed amid acrimony over the price and plans to downgrade the Milan hub and focus on Rome.

But the odds have moved in the German airline's favour as its strategy of maintaining multiple hubs strikes a useful political chord in a country peppered with regional rivalries.

"Lufthansa's model of small and dispersed hubs seems to be closer to the format the Italians would instinctively prefer," said a source close to the discussions.

Leading the hunt for a foreign partner is Roberto Colaninno, head of the CAI consortium that offered to buy the profitable parts of Alitalia once its bad assets are removed by the state.

Air France-KLM and Lufthansa (LHAG.DE) have both shown interest, with Colaninno going so far as to say the two are "battling" for a minority stake.

British Airways (BAY.L) has ruled out buying shares in Alitalia, but a source close to the company said it could be interested in a commercial deal.

The winning bidder will likely get a stake of up to 20 percent in a relaunched Alitalia and a foothold in the lucrative Italian market. Italy has stressed a foreign airline will not be allowed more than a minority stake in Alitalia.

After weeks of suspense, Alitalia was kept flying last week after pilots and cabin crew backed down over their opposition to CAI's rescue offer, but Italy's powerful unions could still disrupt a deal with a foreign airline.

Major unions like Cisl and Cgil say they prefer Lufthansa because of its multi-hub strategy that could allow Alitalia to maintain a strong base in Milan, where it had begun cutting back its presence in line with then suitor Air France-KLM's plans.

Italian Prime Minister Silvio Berlusconi has also declared Lufthansa (LHAG.DE) his preferred pick after calling Air France-KLM's earlier failed deal, orchestrated by his predecessor Romano Prodi, "humiliating".

"Air France-KLM have declared their hand and what they wanted to pay, which was not very much," said Doug McVitie, who runs Arran Aerospace consulting group.

"If Berlusconi is able to dictate things, he'll keep it out of Air France-KLM's hands because he didn't take very kindly to their treatment of buying Alitalia on the cheap."

Sensing the mood, Air France-KLM CEO Jean-Cyril Spinetta flew to Rome on Wednesday and made a key concession by agreeing to back the CAI consortium's decisions on hubs and the network if they were profitable, sources familiar with the matter said.