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MILAN/ROME (Reuters) - Alitalia is expected to give an initial green light to a tie-up with Etihad Airways at a board meeting on Friday in a last-ditch attempt to save a carrier that many in the industry have regarded as a lost cause.
The Italian flagship carrier has made an annual profit only a few times in its 68-year history and received numerous state handouts before being privatized in 2008.
It was kept afloat by a government-engineered 500-million-euro ($680 million) rescue package last year but risks having to ground its planes unless a deal can be struck with cash-rich Etihad to allow it to revamp its flight network.
Gulf-based Etihad, which already has stakes in Air Berlin and Aer Lingus, is looking to invest more than 500 million euros ($682 million) in exchange for a 49 percent stake in Alitalia to gain more clout in Europe, sources close to the talks have told Reuters.
The two carriers have been in talks since December, but a deal has so far been elusive due to Italy's reluctance to bow to Etihad's strict conditions over job cuts and a restructuring of the Italian airline's debt.
But as Alitalia is expected to run out of cash by August, sources said the company, the Italian government and unions have little choice but to accept a deal on Etihad's terms.
"Alitalia's board will agree, the Italian government will agree because they need the money badly," a Gulf source familiar with the matter said. Another senior Gulf official and a senior source close to Alitalia said the deal was pretty much done.
The board is expected to give its approval in principle, but the terms of a deal would still need to be agreed by unions and Alitalia's creditor banks.
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.
Italy's labor minister Giuliano Poletti said this week the deal would likely involve cutting Alitalia's payroll by up to 2,500 jobs, almost a fifth of the total workforce. Part of the cuts would be covered by state-sponsored layoff schemes.
While unions have stalled talks between Alitalia and other foreign bidders in the past, this time around they have openly signaled their willingness to negotiate to avert the risk of Alitalia going bankrupt.
But they insist on assurances from Rome that sufficient social buffers - such as layoff schemes and early retirement plans - would be put in place to limit the impact of job losses.
The government of Prime Minister Matteo Renzi - in office since February - is willing to absorb the cost of such schemes, government sources have said, knowing it could ill afford seeing a strategic national asset going to the wall so early in its tenure.
Etihad also still needs to agree with Alitalia's creditors, mainly Italy's top two lenders Intesa Sanpaolo and UniCredit, on how to restructure around 700 million euros of the airline's debt.
The banks have already given an informal blessing on Etihad's rescue plan, a government source said earlier on Thursday, although they still need to define details of the debt restructuring.
Options under discussion include the banks writing off parts of the debt and converting the remainder into equity.
UniCredit declined to comment. Intesa could not be reached.
Disagreements over debt restructuring previously scuppered efforts by Alitalia to secure more capital from its once biggest shareholder Air France-KLM last year.
Etihad promised to return Alitalia to profit by 2017, turn Rome's Fiumicino airport into an intercontinental hub and boost connections from Milan, an Italian government source has said.
But analysts said Alitalia will need more than 500 million euros of fresh cash to compete globally.
"Having followed Alitalia's fortunes over the last 30 years, I'm really skeptical it can ever get to the point of being profitable," said airline industry analyst James Halstead, managing partner at UK-based Aviation Strategy. "This (deal) is a lifeline until we get to the next restructuring."
Additional reporting by Stanley Carvalho in Abu Dhabi, Amena Bakr and Tim Hepher in Doha, Cyril Altmeyer in Paris, Giselda Vagnoni in Rome and Paola Arosia in Milan; Editing by Pravin Char