DEALTALK-Air France seen beating tough odds for Alitalia

(For more Reuters DEALTALKS, please click [DEALTALK/])

By Deepa Babington

ROME, Jan 2 (Reuters) - Air France-KLM (AIRF.PA) enters 2009 as the favourite 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 Jan. 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 favoured a greater role for the hub.

Italy's Prime Minister Silvio Berlusconi however has spoken out in favour of an alliance with Lufthansa, whose multi-hub model is also favoured 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 favour 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.