Alitalia: Who Wants this Airline?

Perhaps surprisingly, a lot of people. But it's still up in the air as to which group of bidders will gain control of the troubled carrier

by Courtney Walsh

Italy's Alitalia may be tagged with the unflattering nickname "Always late in the air, late in arrival," but that hasn't dulled the appetite among buyers angling to take over the ailing national carrier. On Feb. 13 five bidders made the Italian treasury's short list to buy a controlling interest in the money-losing airline, including three Italian groups—a fund, a bank, and a private airline entrepreneur—and two top American private-equity funds.

But a lot of people are still scratching their heads as to why private-equity players such as David Bonderman's Texas Pacific Group (TPG) and MatlinPatterson Global Advisers would want anything to do with Alitalia in the first place.

Last year, the company lost an average of €1 million ($1.3 million) a day, and it hasn't posted a profit in five years. Its labor woes and inefficiencies are notorious: In one particularly mind-bending example, Alitalia forfeits countless millions in revenues every year as paying passengers are regularly bumped from its most profitable Rome-Milan route to make room for commuting pilots and crew who have refused to relocate to Milan's Malpensa hub. Indeed, constant labor strife was one of the factors behind the government's decision last December to quit bailing the company out of trouble.

Bloody Battle

Given the apparent intractability of Alitalia's woes, people were positively dumbfounded when, in late January, 11 bidders—10, actually, as one of them turned out to be a penniless high-school teacher—offered to buy at least a 30.1% stake in the company and to present turnaround plans.

The Treasury's initial bid requirements included minimum capital of around $130 million and a commitment to keep the national routes and maintain the carrier's Italian identity. But the real stickler remains what the Treasury's "general interest" in the future of Alitalia's 18,000 workers will translate into. Analysts say the battle for Alitalia likely will be fought and won over jobs.

No one doubts it will be a bloody battle. Each of the five remaining contenders has until the beginning of April to present a non-binding industrial plan. Only then will those who make it to the next round get a chance to look at the financial books. A final selection will take place late May or June, and if a deal is reached, the dirty work of restructuring begins.

Battered Brand

But the rewards are out there, and equity investors are famous for discerning diamonds in the rough. Overall, Italy's economy is showing signs of picking up speed, with gross domestic product growth of 2% last year, its best performance since 2000. Italy has an untapped market of potential domestic flyers, and business travel is rising. The bel paese also is the No. 5 tourist destination in the world. Over the years, Italy has invested heavily in its airport infrastructure, yet it retains a relatively low passenger-to-airport ratio.

Above all, after 60 years flying the Italian skies, Alitalia has brand recognition—albeit somewhat tarnished. That's one reason groups like Texas Pacific Group smell a deal. As one of the world's top five private-equity firms, with more than $30 billion dollars under management, it has invested in—and sometimes turned around—airlines ranging from Continental (CAL) and America West (LCC) to Ireland's Ryanair. TPG is currently working on a deal together with Australia's Macquarie bank for Australian airline Qantas.

"At the moment there's a bit of merger fever in the market…and quite a lot of interest in airlines," says aviation analyst Chris Tarry of consultancy CTAIRA in Tunbridge Wells, England. While the Qantas deal is up in the air, "There's no shortage of cash, investors are looking around for something new, and there's potential in the Italian market," Tarry says.