Air France-KLM Ties Up With Alitalia

Posted by: Carol Matlack on January 12

Air France-KLM is getting an Italian accent. It will pay $435 million to take a 25% stake in Alitalia, the Italian carrier’s controlling investor announced at a press conference in Rome on Jan. 12.

The announcement ends months of maneuvering by Air France-KLM and Germany’s Lufthansa, which had also expressed interest in buying a piece of Alitalia, as part of a plan to pull it out of bankruptcy. Air France-KLM, in fact, had earlier tried to buy outright control of Alitalia from the Italian government, but was rebuffed by Italian unions and politicians.

Instead, the government's controlling stake went to CAI, an investment group headed by Robert Colannino, the chairman of scooter maker Piaggio. CAI has jettisoned money-losing business units, cutting Alitalia's work force almost in half, and is relaunching the slimmed-down carrier this month. But it also sought outside investors to strengthen Alitalia's finances. That touched off a hotly political rivalry between Lufthansa and Air France-KLM.

Lufthansa had the support of Italian unions and politicians, who feared Air France-KLM would push to close Alitalia's hub at Milan Malpensa airport and shift most flights to Rome. Prime Minister Silvio Berlusconi openly supported Lufthansa, which said it favored a "multi-hub" approach that would save Malpensa.

But in the end, Lufthansa--which just last month bought Austrian Airlines--did not make a formal bid. And Air France-KLM promised that it would support retaining Malpensa as a hub, "on an equal basis" with Rome. Colaninno says that synergies between Alitalia and Air France-KLM will save nearly $1 billion in operating costs over the next three years.

True, the "new" Alitalia still has its work cut out for it. Unions are already threatening work stoppages to protest cost-cutting measures. The dual-hub plan may not be easy to operate. But for Air France-KLM, the deal still makes a lot of sense. It has long coveted greater access to the Italian carrier's long-haul route network.

And $435 million looks like a fair price, considering that just last year the Franco-Dutch carrier was prepared to pony up $216 million and absorb $1.7 billion of Alitalia's bad debts, in order to buy the government's 49.9% stake. Now, CAI has offloaded most of the bad debt.