ROME The prospect of Etihad Airways buying nearly half of Alitalia has significantly increased after a meeting between Etihad's boss and Italy's prime minister, and disagreements over job cuts may be overcome, said a source with knowledge of the talks.
Loss-making Alitalia was kept afloat by a government-engineered 500 million euro ($694 million) rescue package last year. But it needs to find a cash-rich partner quickly to revamp its flight network or else risk having to ground its planes.
Abu Dhabi-based Etihad has been looking at Alitalia's books for a possible investment since the start of the year. But the prospect of large job cuts at Alitalia and the airline's debt of at least 800 million euros had been major hurdles in the talks.
The source with knowledge of the talks between Etihad CEO James Hogan and Prime Minister Matteo Renzi late on Thursday at the premier's office said Etihad was considering investing up to 500 million euros in Alitalia and was inching towards an offer.
Out of that investment, 350 million would be for a 49 percent stake in the Italian airline, the source added.
"The letter of intent (from Etihad) will arrive within a few days," the source told Reuters on Friday. "Etihad is not coming in to patch things up but to change the whole face of Alitalia which will become a five-star airline."
One of the conditions put forward by the Gulf airline is for 2,000 job cuts out of Alitalia's 14,000-strong workforce, the source said. This is much lower than cuts of up to 7,000 staff reported in the Italian press.
The source said the Italian government believed Etihad's demands on the jobs front were not insurmountable.
Alitalia has called a board meeting for Monday at which Etihad's proposals are likely to be discussed, another source close to the situation said.
Etihad and Alitalia both declined to comment.
Formerly state-owned carrier Alitalia was privatized in 2008, but Rome considers the firm strategically important to ensure Italy has sufficient domestic transport connections, and because it is a large employer.
A marriage with Etihad could bring Alitalia the money it needs to invest in a new strategy, focused on long-haul routes, after it has been struggling to compete against low-cost airlines and high-speed trains on domestic and regional routes.
A stake in Alitalia, which offers access to Europe's fourth-largest travel market and flies 25 million passengers a year, would further Etihad's efforts to expand its global reach through strategic holdings in other airlines.
Etihad has refused to negotiate with Italy's unions, which have stalled talks between Alitalia and other foreign bidders in the past. The Gulf carrier wants the issue of job cuts settled before negotiations enter the final phase, several sources with knowledge of the matter have said.
Etihad wants to lay-off 1,000 Alitalia workers on a permanent basis, while the remaining 1,000 could be put on temporary layoff schemes partially supported by the state, the first source with knowledge of the Renzi talks said.
Etihad is also asking Alitalia's creditors, which include leading Italian banks Intesa Sanpaolo (ISP.MI) and UniCredit (CRDI.MI), to restructure 400 million euros of debt, the source said. Intesa and UniCredit are also significant shareholders.
Sources close to the creditors have said that one of the options on the table envisaged postponing the deadline for debt repayments or a debt to equity conversion. Disagreement over debt scuppered an attempt to tie up with Air France-KLM (AIRF.PA), formerly Alitalia's top shareholder, last year.
($1 = 0.7204 euros)
(Writing by Agnieszka Flak; Editing by Lisa Jucca and Pravin Char)