By Stephanie Bodoni and Marco Bertacche
June 11 (Bloomberg) — The European Union plans to open an investigation of Alitalia SpA’s emergency loan from the Italian government, a development that may complicate the airline’s search for a buyer.
One month after Rome-based Alitalia accepted the 300 million-euro ($464 million) injection, the European Commission, the EU’s regulatory arm, may say today it’s going ahead with an inquiry into whether the funds are illegal state aid, said a commission official who declined to be identified. Competitors led by British Airways Plc have demanded that the EU take action.
Alitalia, Italy’s state-controlled carrier, is losing 3 million euros a day, according to data compiled by Bloomberg. The loan, enough to buy just three months of jet fuel, is similar to aid paid by the Greek government to Olympic Airways in the 1990s that led to years of litigation at the EU courts in seven cases, some of them still pending.
“Alitalia already has enough enemies,” said Diogenis Papiomytis, a transport analyst at Frost & Sullivan in London. “The other airlines won’t just stand there. They will likely sue. That will make buying Alitalia an even greater risk.”
The commission may begin state-aid proceedings as soon as today, according to the official, who has direct knowledge of the case and requested anonymity because the decision hasn’t yet been made public. The regulatory body has received several letters from companies in the airline industry regarding Alitalia, EU spokesman Mark English said June 9, declining to comment on any pending decision.
An Alitalia official declined to comment on either its finances or the loan.
Air France Withdraws
Italy approved the loan on April 22 after Air France-KLM Group dropped a takeover bid for Alitalia, which has lost almost 4 billion euros in eight years. The commission, which reviews whether government grants harm competition, said two days later that it had doubts on whether the loan would get EU approval.
Prime Minister Silvio Berlusconi was given a May 30 deadline to provide the EU with information to justify the loan, which he says would keep Alitalia going for a year. The government decided on May 21 to convert the funds into share capital, saying the move was necessary to meet Italian legal requirements that companies bolster their finances should their share capital decline by more than one-third.
The Greek government used similar loans to prop up Olympic Airways. Olympic Airlines SA, created in 2003 after the bankruptcy of Olympic Airways, didn’t attract a buyer.
Aid Liability
“Aid has to be repaid, and that’s a liability which passes to the eventual investor,” said Thomas Jestaedt, a Brussels-based partner at the law firm Jones Day.
Olympic Airways, founded by the late shipping magnate Aristotle Onassis in 1957, still exists today as Olympic Airways Services, handling airport ground services only.
Berlusconi pledged to put together an Italian bidding group to buy Alitalia and invited Russia’s OAO Aeroflot to make an offer. Air France-KLM, Europe’s biggest airline, abandoned takeover talks because of opposition from the prime minister and Italian trade unions.
Alitalia had less than 200 million euros in cash and credit at the end of April.
British Airways and Virgin Atlantic Airways Ltd. of the U.K., Iberia Lineas Aereas de Espana of Spain, Scandinavian Airlines parent SAS AB, Finnair Oyj of Finland and Portugal’s TAP SGPS SA together wrote to EU Transportation Commissioner Antonio Tajani, an Italian, on April 5, expressing concern about the loan.
`Watching Closely’
“We will be watching closely to ensure that the EU guidelines on state aid are rigidly adhered to,” said Michael Johnson, a spokesman for London-based British Airways, which supplied Bloomberg with a copy of the letter.
Alitalia received 5 billion euros in aid in the past and would have gone bankrupt years ago had the commission not turned a “blind eye,” Dublin-based Ryanair Holdings Plc, Europe’s biggest discount carrier, said in a statement on April 24.
The emergency loan is almost equal to Alitalia’s first- quarter fuel bill of 285 million euros, before oil rose to a record $139.12 a barrel on June 6. The carrier is also funding a new Saatchi & Saatchi advertising campaign, which appeals to Italian national pride to keep the airline alive under the slogan: “Flying Alitalia makes Italy fly.”
To pass the EU’s subsidies test, Italy must prove it’s acting with the same incentives as a private investor. Alitalia isn’t eligible for government subsidies until 2011 after getting EU permission for aid in 2001.
Olympic was in a similar position, Papiomytis said.
“It’s a state-owned carrier, with a lot of political games behind that,” he said. “What is best for Italy isn’t necessarily what is best for Alitalia.”
To contact the reporters on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net; Marco Bertacche in Milan at mbertacche@bloomberg.net.