By STEPHEN CASTLE and NICOLA CLARK
Published: April 24, 2008
BRUSSELS — Italy’s moribund national airline, Alitalia, on Thursday became an early test case of relations between the new Italian government and European Union regulators.
The European Commission, under pressure from rival airlines, said it would look into whether a loan of 300 million euros or $478.5 million approved this week by the Italian government to the carrier constitutes illegal state aid.
The commission said it would request information about the terms of the payment, expressing doubts about Rome’s contention that it was a purely commercial arrangement.
The move is the first potential point of conflict between the European Commission and the new Italian Prime Minister, Silvio Berlusconi, who clashed with European colleagues on several occasions during his last term as the country’s premier.
Rival airlines quickly sought to put pressure on the authorities in Brussels.
“We, as I am sure will every carrier in Europe, will be watching the situation with interest to see what transpires,” a spokesman for British Airways, Michael Johnson, said.
Ryanair, the Dublin-based low-cost airline, said Thursday that it would file a complaint with the European Union, arguing that the proposed loan “makes a mockery of E.U. state aid rules.”
Within Europe, subsidies offered by national governments are covered by strict rules to ensure fair competition. Most large-scale state aid must be reported to the commission and, to be approved, must be time-limited and used as part of a restructuring process.
Whatever the eventual outcome, Alitalia is likely to gain a breathing space because of the time-lag involved in such proceedings.
Mr. Berlusconi has said that he wants to put in place a consortium of private investors to buy the struggling airline after the withdrawal of Air France-KLM from the bidding. New owners could be in place by the time a ruling is made.
“We need a clear picture,” the European Commission spokesman for transport, Michele Cercone, said. There were “a number of doubts” and the Italian authorities needed to provide “more clarification.”
In addition, even if a loan is on commercial terms, it could constitute illegal aid if it was granted in circumstances where normal banks would decline to lend, he said.
From 1997 to 2001 the European Commission approved 1.4 billion euros in government aid to Alitalia during earlier restructuring efforts.
For years Ryanair has been pressing the commission to enforce its ban on illegal government support to national flag carriers. Last year it filed a lawsuit at the European Court of First Instance in Luxembourg in an effort to force Europe to crack down.
Ryanair submitted complaints to the European Commission in 2005 against aid to Alitalia, Air France, Lufthansa of Germany and Olympic Airways of Greece, but so far no action has been taken against the respective governments.
“The European Commission, as always in the case of flag carriers, turns a blind eye and does nothing,” said Jim Callaghan, Ryanair’s head of regulatory affairs.
Beyond the question of the loan’s legality, analysts said it was not at all clear that the financing would ultimately change the fate of Alitalia.
“It’s not clear whether this doesn’t just prolong the bedside agony,” said Dan Solon, an aviation analyst in Barcelona. ‘”It is hard to see what set of domestic Italian players could come in with anything better than what Air France-KLM put on the table.”
A German government official expressed doubt that Alitalia would be able to survive as an independent airline and suggested that a takeover by a foreign carrier would be not be the worst possible outcome.
“It is important that we have competitive, powerful aviation companies in Europe,” said Matthias von Randow, state secretary in the transport ministry, said in a statement.
Alitalia’s board stressed on April 8 that it was in “urgent” need of “substantial financial support” in order to continue operating. As of the end of March, the carrier had 170 million euros in cash on hand, down from 282 million euros at the end of January, meaning it is consuming reserves at an average rate of about 1.9 million euros a day. The company said this month that it had received a government tax credit of 69 million euros, a sum equivalent to about a month of operating expenses.
Should Italy fail in its bid to bail out Alitalia, analysts said the airline would probably soon be faced with liquidation. But even then, the carrier has very few assets of value to sell. Its fleet of mostly decades-old, fuel-guzzling aircraft would probably not draw much interest from other airlines, while its landing rights in Rome, Milan and other foreign airports would be unlikely to sell for much in the event of a forced sale.
Alitalia has been in a slow death spiral for more than a decade, posting a profit only four times in the last 15 years. Its share of the Italian air travel market has fallen to around 30 percent from more than 80 percent in the late 1990s amid competition from discount carriers.
Ryanair — which began flying to Venice, Pisa and Rimini in 1998 and established a base in Rome in 2004 — now provides 10 percent of the available airplane seats in Italy, both on domestic and international routes.
“Given that the whole ship is actually sinking, the only thing that money can do is pump a bit of air into the hold for a while,” said Peter Morris, chief economist at Ascend, a London-based aviation consultancy. Whether or not the aid from Rome is found to be illegal, he said, “is largely irrelevant at this point.”
Nicola Clark reported from Paris and Stephen Castle from Brussels.
Nicola Clark reported from Paris and Stephen Castle from Brussels.