The Agony of Italy's 'Cursed' Airline

Music to the ears of its shareholders, Air France-KLM steps away from negotiations to take over Alitalia. Its sights may now be on Spain's Iberia

by Mark Scott

After a 15-month effort to find a buyer for beleaguered Italian airline Alitalia (AZPIA), the proposed sale suffered a heavy setback late on Apr. 2 after Air France-KLM (AIRF), the world's largest airline by revenue, pulled out of takeover talks due to protracted difficulties settling terms with Alitalia's unions.

The decision leaves little maneuvering room for Alitalia, which is losing around $1.5 million a day and must raise more than $1 billion by June to avoid collapse. But Air France-KLM shareholders greeted the news with delight after many had expressed misgivings over the wisdom of incorporating the ailing Italian airline into the Franco-Dutch carrier (BusinessWeek.com, 12/11/07).

Their relief filtered into the markets, with Air France-KLM shares trading up as much as 5% in Paris on Apr. 3 before finishing the day up 2.4%. Alitalia's stock was suspended on Apr. 3 after the airline's chairman, Maurizio Prato, resigned and the board met in emergency session to discuss the limited options left open to the Italian carrier.

"The company is cursed; only an exorcist can save it," Alitalia union officials quoted Prato as saying after negotiations between Air France-KLM and airline workers broke down.

Fruitless Rescue Effort

Many industry watchers would agree. Air France-KLM's plans to buy the Italian government's 49.9% stake in Alitalia have been plagued with difficulties since they were first announced on Dec. 6, 2007 (BusinessWeek.com, 12/6/07). In a deal that valued the airline at around $1.15 billion, the Franco-Dutch carrier wanted to cut 2,100 jobs, sell off Alitalia's cargo business, reduce its airline maintenance unit, and change the business focus from midrange to long-haul flights. A takeover also would have accelerated the decline of Milan Malpensa International Airport, as Air France-KLM shifted flights to a beefed-up Rome hub.

"Air France-KLM was seen as the perfect carrier to come in and rescue the situation at Alitalia," says Leigh Bailey, airline analyst for Standard & Poor's, which like BusinessWeek is a unit of The McGraw-Hill Companies (MHP). "If they have walked away, it's doubtful that the conditions [surrounding Alitalia] would satisfy anyone else."

That certainly seems the case after Germany's Lufthansa (LHAG)—another perennial potential suitor for Alitalia—reaffirmed on Apr. 3 its unwillingness to put forward a bid for the carrier.

With no interest from larger rivals, the Italian airline's future is looking bleak. On Mar. 28, Alitalia said its cash reserves and short-term credit as of February, 2008, stood at $281 million, down 40% from the previous month. The carrier's net debt during the same period rose to $2.18 billion, up 7% from January, 2008. Analysts say the airline will be forced into bankruptcy unless a new injection of cash can be found quickly.

Political Factors

No movement is likely before the Italian parliamentary elections set for Apr. 13 and 14. Front-runner Silvio Berlusconi, a former Prime Minister and one of Italy's richest men, has openly criticized the proposed Air France-KLM takeover. Instead, he is promoting an Italian-led deal possibly centered on domestic low-cost carrier Air One, which was the only other airline to show interest in buying Alitalia as of the end of 2007.