BRUSSELS, Belgium (AP) — The European Union’s transport chief on Wednesday approved the proposed takeover of bankrupt Italian airline Alitalia by a group of investors, lauding its rebirth as the latest move to change the EU airline sector from an inefficient state-driven industry to a competitive privatized one.

In announcing the decision, EU Transport Commissioner Antonio Tajani said Alitalia would still have to repay a 300 million euro ($380 million) rescue loan to the Italian state since it had received such aid during previous bailout attempts.

It remained unclear how the bankrupt company would proceed to repay the loan and whether new investors would want to take on such an added commitment.

Tajani said the sale of Alitalia’s assets to a group of private investors would not be illegal, and that it will lead to the emergence of a new Italian airline “smaller in size but more efficient.” He said it could help shake up the European airline market by providing more competition and choice for air travelers.

“I am convinced that a new, more dynamic air transport market will be able to develop in Italy,” Tajani said.

“We are going beyond the old model of national, state airlines. What we see now emerging is a new model involving airlines entirely in private hands,” he added. Tajani also pointed to Greece’s Olympic Airlines SA, for which he approved privatization plans only last month.

For decades, scores of European airlines were state owned, loss making, and employed a bloated work force. They held virtual monopolies which made flying overly expensive. Only in the past dozen years have EU state aid rules forced the industry to privatize, but not without causing serious social upheaval.

Alitalia is a case in point. The airline canceled dozens of flights for a third straight day Wednesday because of labor unrest, leaving customers scrambling.

Italian Premier Silvio Berlusconi has branded as “irresponsible, unacceptable” Monday’s wildcat walkout by an estimated 300 Alitalia workers. Unions for Alitalia pilots and flight attendants have refused to accept the rescue plan by Italian investors, which includes cutting the work force and the number of flights and routes.

CAI, the consortium of Italian investors set up to salvage the carrier, would take on debts and make cash payments for a total of 1 billion euros ($1.29 billion) in return for taking ownership. CAI’s binding offer, which was presented last month, is valid until Nov. 30.

Alitalia said that under the deal CAI would buy 64 of its aircraft and acquire the leasing contracts for another 29. Alitalia has a fleet of 173 planes.

The new carrier would also be paying for the old Alitalia’s landing and takeoff rights as well as its trademarks.

International Herald Tribune
ROME: Executives of Lufthansa, the German airline, met with representatives of unions at the Italian carrier Alitalia on Friday to discuss the possibility of taking a stake in Alitalia as negotiations continued to in an attempt to rescue it.

Lufthansa and Air France-KLM hope to increase their presence in the Italian market by taking minority stakes in Alitalia should a consortium of Italian investors succeed in acquiring the carrier.

The deal by the investor group, CAI, collapsed last week but lurched back to life on Thursday after winning the support of four major unions at Alitalia. Anpav, a union of flight attendants, on Friday also agreed to the plan, and talks continued with unions representing pilots and other airline employees.

The Italian labor minister, Maurizio Sacconi, said CAI, which has extended its offer until Oct. 15, planned to press ahead with its bid even without the backing of the remaining unions.

Representatives of the four major unions backing the bailout met on Friday with Wolfgang Mayrhuber, the chief executive of Lufthansa, and they said he had conveyed its in Alitalia. Lufthansa said Mayrhuber was in Rome at the Italian government’s request, to discuss Alitalia.

Air France-KLM, whose deal to buy Alitalia collapsed this year in the face of union opposition, is also considering a bigger stake in Alitalia. It now owns 2 percent of the airline. But it could face an uphill climb, with major Alitalia unions openly supporting Lufthansa and signs that Prime Minister Silvio Berlusconi would also favor the German carrier after opposing Air France-KLM’s deal in the past.

“It’s not a question of liking one particular nationality – it’s about the national interest,” said Raffaele Bonanni, head of the CISL, a major union at Alitalia. Lufthansa “has a multi-hub system that works well with our need to favor two Italian hubs, Milan and Rome.”

Berlusconi has repeatedly emphasized an eventual foreign partner for Alitalia would be allowed to acquire only a minority stake.

Air France-KLM and Alitalia have been longtime commercial partners in the SkyTeam Alliance, while Lufthansa has a sales and technical alliance with Alitalia’s biggest domestic rival, Air One. CAI intends to combine Alitalia’s viable operations with Air One.

Alitalia has been on the brink of collapse for years, resulting from a mix of political interference, labor unrest, inefficient strategies and high fuel prices.

Sealing the carrier’s latest rescue would be a political triumph for Berlusconi, who made an election vow to save the airline and keep it Italian. His top aide and key ministers have been presiding over the labor talks.
Greece acts to sell airline

The Greek government on Friday began the bidding process to sell Olympic Airlines, the debt-ridden state carrier, The Associated Press reported from Athens.

A government committee “decided to start the tender process to select private investors” for Olympic, the Finance Ministry said. The carrier is to be split into three companies handling flights, ground services and maintenance and repairs.

By Alberto Sisto
Reuters News

ROME, Sept 18 (Reuters) – Italian airline Alitalia (AZPIa.MI: Quote, Profile, Research, Stock Buzz) faced the prospect of liquidation after a business group that had mounted a rescue bid withdrew its offer on Thursday, citing union opposition.

All members of the CAI consortium voted to abandon the offer — a blow to Prime Minister Silvio Berlusconi, who had used his business connections and political sway to persuade investors to bid for the 20,000-employee flag carrier and keep it Italian.

“The situation is dramatic and we could be facing the abyss,” Berlusconi told reporters, adding that left-wing opposition and unions were to blame. Asked whether this meant Alitalia’s failure, Berlusconi said: “We’ll see.”

The breakdown came a day after Greece said it would close Olympic Airlines [OLY.UL] and relaunch it as a private-sector company. Airlines are struggling to cope with soaring fuel costs and declining revenues as the credit crunch crimps spending.

Alitalia’s government-appointed special administrator Augusto Fantozzi has repeatedly warned that if CAI’s bid fell apart, he would start liquidation proceedings.

However, Fantozzi appeared more cautious on Thursday, saying he would begin the difficult task of seeking new funds for Alitalia and “do everything possible to keep it alive.”

A 300 million euro bridge loan granted to the company by the previous center-left government is being questioned by the European Commission as possibly illegitimate state aid. CAI said it had pulled its offer after six of Alitalia’s nine unions refused to sign up for the plan, which would have seen the group snap up only the profitable parts of the carrier.

It said the airline’s troubled financial situation — Alitalia is losing 2 million euros ($2.90 million) a day — meant negotiations could not drag on any longer.

Labor Minister Maurizio Sacconi said the withdrawal “paves the way for the failure of all the companies in the Alitalia group.”

As the news broke, a leader of one of the three biggest unions said CAI’s withdrawal would be “a social catastrophe.”

“The company is dead and some of my colleagues want to be its undertakers,” said Luigi Angeletti, head of the UIL union, referring to other unions’ refusal to agree to the deal.

However, the news was welcomed with applause by many Alitalia staffers gathered at Rome’s Fiumicino airport and outside the CAI’s meeting in Milan.

“The offer didn’t make any sense,” said an Alitalia steward in Rome who asked not to be named. “Why would anyone accept having their pay halved and ridiculous hours and conditions? People would rather go and find jobs as waiters.”

Pilots’ union ANPAC, which had staunchly opposed CAI’s plan to slash thousands of jobs and cut salaries, said more talks could have led to a compromise.

“It’s a shame. In my opinion the conditions were there for a deal. Now they (CAI) are off and we’re still here with our extremely serious problems,” Fabio Berti told reporters.

NATIONAL SYMBOL

Alitalia, a national symbol for more than 60 years, has long suffered from political interference and union unrest and, more recently, from soaring fuel costs and an economic downturn stinging the travel sector worldwide.

Even Pope Benedict, who like his predecessors flies Alitalia on trips abroad, said he was praying for the airline last week.

CAI’s rescue plan was the third attempt in less than two years to sell the state’s 49.9 percent stake in the airline, which last posted a profit in 1999.

Under the former center-left government last year, Air France-KLM (AIRF.PA: Quote, Profile, Research, Stock Buzz) agreed to buy Alitalia. But that bid was blocked by unions and opposed by Berlusconi, then leader of the opposition. He ran a successful election campaign in April vowing to keep Alitalia alive and Italian.

Sources close to Fantozzi said he was in contact with Deutsche Lufthansa AG (LHAG.DE: Quote, Profile, Research, Stock Buzz), Air France-KLM and British Airways Plc (BAY.L: Quote, Profile, Research, Stock Buzz) — which he said had all expressed interest in a minority stake in Alitalia if CAI’s bid had succeeded. ($1=.6894 Euro) (Additional reporting by Phil Stewart and Gavin Jones; Writing by Silvia Aloisi; Editing by Sue Thomas)

* David Gow and John Hooper
* The Guardian,
* Thursday September 18 2008
* Article history

The European commission yesterday reshaped the EU’s aviation sector by forcing Olympic Airlines to repay to the Greek government €850m (£671m) in illegal state aid before it is privatised.

Plans to liquidate Olympic, which was founded by Aristotle Onassis 51 years ago, and sell some of its assets at market prices to private sector investors by the end of next year were approved yesterday by Brussels. The new company, codenamed Pantheon, will be granted Olympic’s name and famous five-ring logo. It will also acquire 65% of its capacity, including its landing slots. Two other new companies will acquire ground-handling and maintenance assets.

Yesterday’s deal ends 15 years of litigation between the EC and successive Greek governments which pumped billions of euros and drachmas into the perennially loss-making Olympic to keep it afloat and buy off union resistance to restructuring.

Antonio Tajani, EU transport commissioner, said Brussels wanted a “definitive break with the past” while Greek transport minister Costis Hatzidakis said privatisation would finally resolve “an issue that has beset Greek society and politics for some 30 years”.

Lawyers said the transaction, which resembles the liquidation of Belgian national carrier Sabena and its re-emergence as Brussels Airlines, set an important precedent for aviation privatisations. But so far no private investors have emerged.

The deal came as the head of the consortium planning to take on Italy’s bankrupt flag carrier, Alitalia, said it would withdraw its offer today if the unions failed to accept its terms. Roberto Colaninno said that after two weeks of talks “there is nothing more to argue about”.

The representative at the negotiations of prime minister Silvio Berlusconi said responses from Alitalia’s nine unions had to be received before a meeting of the consortium’s shareholders this afternoon.

It brings closer the emergence of three dominant players in EU aviation: British Airways, Air France-KLM and Lufthansa. BA is seeking to take over Spain’s Iberia while AF-KLM may yet acquire part of Alitalia.

Lufthansa, which agreed this week to buy Brussels Airlines for a maximum of €250m by 2011, already owns Swiss and could take over BMI, Austrian and SAS.

Tajani, who approved the Olympic privatisation plan because it involved no state aid, said the transaction avoided bankruptcy and meant the new owners would take on none of the airline’s liabilities or debt.

His senior officials admitted that the Greek government was unlikely to recover all the illegal aid it had paid out.

Travel Daily News

Last week, as two European airlines – one of them a “flag carrier” – collapsed, few would have noticed a small airline on the other side of the world reporting a profit. It was Polynesian Blue, hardly a major company, but the event was significant in one respect. For many years, the government of tiny south Pacific nation, Samoa, had squandered much of its annual GDP running an inefficient and unsuccessful flag carrier. In October 2005, Australian airline, Virgin Blue, became a 49% shareholder in a new joint venture with the government and took over operations of the carrier. Tourism traffic has increased nearly 50% annually, the airline has repaid an establishment loan from the government and is making money!

For Italy’s flag carrier, Alitalia, which sought “admission to the receivership procedure” under Italian law on 29-Aug-08, comes all the relief of a long term invalid finally facing up to the surgery that can make a new entity of it. A new operating formula can now be developed. There will be pain inevitably, for some employees and contractors, but the end can hardly come as a surprise.

Alitalia is fortunate even to have the opportunity for a new start. That’s because it is not just an airline, but an entrie to the Italian market it has dominated for decades. So, despite the airline’s otherwise unattractive appearance – a battle-hardened (against management, that is) workforce and a weary aircraft fleet, dominated by MD-80s and -90s with an average age just shy of 20 years – at least one handsome suitor remains.

The reported restructuring plan would allow the operational parts of the airline to be isolated, with recapitalisation by a number of Italian entrepreneurs, thus reopening the door for Air France to secure a realistic minority partnership. This time around, the recalcitrant unions will be faced with fewer options, as the alternative to a partnership with Air France will be, well, not much.

Air France has confirmed its interest, following discussions mid-week in Paris. The board announced, with some nuances remaining, that “Air France-KLM confirms its intention to remain Alitalia’s strategic partner. To this effect, and if it can be confirmed that the new company will be profitable, Air France-KLM is ready to take out a minority stake in the new company’s capital alongside the investors.”

Presumably the Italian investors, undoubtedly expecting political sunshine for making Mr Berlusconi look good, will have escape routes if a deal with the French carrier cannot be consummated. And, in turn, if Air France cannot reach a fundamental understanding with the unions, the whole deal crashes in flames. (Despite trying to beat up a bit of competitive tension by suggesting that Lufthansa may be interested, that really seems a bridge too far at this stage.)

So, when Alitalia’s unions meet government official to thrash out an understanding today, they don’t start from a strong position. But they still have the power to undermine Berlusconi’s “miracle” – and that will be their main card. This is where Air France needs to insist steadfastly on clear and effective cutbacks up front, because, once the Italian government has the problem off its hands, the new villain in any disputes will be the foreign airline partner, which, shockingly, seeks efficiencies. And Mr Berlusconi will become the good guy.

Italy is a great footballing nation and there is no more experienced team than the nation’s political footballers. Senior government officials have already begun creating expectations guaranteed to make life difficult for the next owners. Mr Berlusconi has assured there will be less staff sacrifices than under Air France’s original proposal and at the weekend, Labour Minister, Maurizio Sacconi, opportunistically promised (or “hoped”) that layoffs will be less than 5,000, far short of the 7,000-plus that Air France had previously sought.

There are some other threats too. Brussels never likes to be left out of any local excitement and, on recent experience, the Italians will seek to push EU competition and subsidy rules beyond the limit – for example, Air One will apparently be subsumed into the reconstituted airline, some aggressive refinancing is to be done and generous layoff payments are likely to be promised to mollify unions.

Air France has enjoyed a highly successful relationship with KLM, but the smaller airline well knows the challenges of partnership with Alitalia. KLM has been to Rome before and had to go through a costly and painful exercise to extricate itself. Pre-nuptial stars in the eyes this time around will be tempered by that experience. The prospect of lingering disputes with unions, as well as complex legal disputes with Brussels, is not the stuff of commercial good news, while the operating environment toughens for everyone.

Meanwhile, on the sidelines, Austrian, SAS and Olympic should be taking notes. It has taken 61 years for Alitalia to have a hope of sustainability and now salvation is in sight. But you don’t get to heaven without dying first. A remote Pacific island offers some alternative for those who don’t want to go that route.

Footnote: Unfortunately meanwhile, for UK-Canadian private airline, Zoom, which ceased operations on 28 August, it had no government to bail it out. Zoom will become just another statistic, even if a lot of travellers (and one or two small airports) are greatly inconvenienced. Such is the gap between flag carriers and commercial reality.

By Jonathan Stearns

June 17 (Bloomberg) — Antonio Tajani, an Italian who is the European Union’s new transport chief, pledged to act forcefully in leading an EU probe into Italy’s rescue loan for flag carrier Alitalia SpA as he fended off questions about his impartiality.

Tajani’s promise comes less than a week after the European Commission began an in-depth inquiry into the legality of Italy’s 300 million-euro ($464 million) loan to the unprofitable airline. The commission, the 27-nation EU’s regulatory arm, faces demands from other airlines such as British Airways Plc to reject the aid as being in breach of European rules on fair competition.

“I will be under no national influence,” Tajani, an ally of Italian Prime Minister Silvio Berlusconi, told a European Parliament confirmation hearing yesterday evening in Strasbourg, France. “I will make sure the EU treaties are respected.”

Making the 54-year-old Tajani European transport commissioner tests the credibility of EU regulators because of the top-level political efforts in Italy to save Alitalia and the rarity of national carriers in Europe going bankrupt. The Parliament is due to vote on Tajani’s new role tomorrow.

Former Italian Premier Romano Prodi approved the financial lifeline to Alitalia in April after Air France-KLM Group, Europe’s biggest airline, pulled out of a takeover bid. Berlusconi pledged to put together a group of Italian investors to buy Alitalia, in which Italy has a 49.9 percent stake.

Transport Post

Commission President Jose Barroso assigned Tajani to the transport post as part of a shuffle under which France’s Jacques Barrot took over the job of justice commissioner vacated by Franco Frattini when he returned to Italy to become foreign minister in Berlusconi’s government. Each EU government appoints one person to the commission, the president of which is responsible for assigning the jobs.

“I will do my very best,” said Tajani, who has worked as a member of the EU Parliament, a journalist and an air-traffic controller. “I will act independently.”

The Parliament’s transport committee, which organized the hearing that also addressed road, maritime and rail policies, will recommend that the full 785-seat assembly back Tajani, said Georg Jarzembowski, a German member who was among the lawmakers that questioned the new commissioner about the Alitalia case.

In early May, when he was still transport commissioner, Barrot stepped up threats to reject the loan to Alitalia. Barrot said the financial weakness of the carrier, which that month reported a wider first-quarter pretax loss of 215 million euros, raised doubts about the loan’s compatibility with EU rules meant to prevent distortions of competition as a result of government cash injections in companies.

Commercial Terms

EU rules require Italy to prove its loan was offered on commercial terms to win approval from the commission, which has waged a years-long battle against the Greek government over aid to Olympic Airlines SA and its predecessor, Olympic Airways.

Tajani pledged to treat all state-aid cases in a neutral way, saying “there are no differences between Alitalia, Olympic Airlines and any other airline” when it comes to applying EU law.

He also rejected the idea of recusing himself from the Alitalia case. Tajani said he has no economic interest in the carrier and European commissioners must regularly take decisions affecting their home country.

Italian Finance Minister Giulio Tremonti has defended the government’s steps to keep Alitalia in business, arguing that aid is necessary to achieve the goal of an eventual sale. The government and the company have named bank Intesa Sanpaolo SpA to advise on the sale.

Government Subsidies

In 2001, the commission hastened the bankruptcy of Belgium’s Sabena SA — the first collapse of a major European airline — by restricting government subsidies. That decision was led by the late Loyola de Palacio, a Spaniard who was EU transport commissioner at the time.

Alitalia won EU permission to receive Italian government aid in 2001, making the carrier ineligible for further handouts until 2011 under European rules. The commission approved a recapitalization plan for the airline in 2005 after concluding that there was no state aid involved.

The Brussels-based commission is due to complete its current probe within 18 months.

To contact the reporter on this story: Jonathan Stearns in Strasbourg, France at jstearns2@bloomberg.net

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.

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.

It’s the end of the affair for Australia and continental carriers, writes Peter Needham.

Where have all the European airlines gone? One by one, the airlines based in continental Europe that used to fly to Australia have departed permanently. They are still represented here but they no longer fly their own aircraft into this country. The trend has accelerated over the past decade, with the final example, Austrian Airlines, pulling its aircraft out of Australia last year. Only two European airlines – British Airways and Virgin Atlantic – still fly to Australia with their own aircraft.

News this week that Franco-Dutch airline Air France-KLM is moving to take over Italy’s Alitalia raises a few names rich in Australian aviation history. KLM Royal Dutch Airlines started flights to Australia in 1938, with a one-way Sydney-to-London fare priced at slightly more than a year’s salary for the average Aussie. The journey took eight days. Alitalia began services from Italy to Tokyo and Sydney in 1960. Thousands of Italians who migrated to Australia in the 1940s and 1950s made their first trip back to the old country on Alitalia. Alitalia was quite colourful at the time – one passenger described its economy class as “like a flying Italian restaurant”.

UTA French Airlines used to fly here, too, before Air France absorbed it in the early 1990s. AOM French Airlines, taking advantage of the withdrawal of Air France from Sydney, began flying to Australia via Colombo in 1995. AOM, world’s biggest operator of DC10-30 aircraft at the time, was a colourful operator. On an AOM flight to Europe, I visited the galley in the early hours to get a glass of water, only to surprise two flight attendants (of opposite sex) locked in a passionate embrace while another swigged cognac from a bottle.

European airlines to have withdrawn from flying to Australia under their own colours over the past 20 years include Alitalia, Lufthansa, Air France, AOM, JAT Yugoslav, KLM, Olympic Airways and Austrian Airlines. Some of those carriers no longer exist or have merged. (In the case of JAT, even its home country no longer exists.) Other airlines, such as Lufthansa, still sell their tickets here but on a code-share or interline basis, which means passengers heading to Europe must fly on another airline to an intermediate point to join the airline of their choice. Book a flight to Europe with Lufthansa and you could fly from Australia on Singapore Airlines, South African Airways, Virgin Atlantic, United Airlines, Cathay Pacific or Air China. You’ll join a Lufthansa flight somewhere but you certainly won’t depart Australia aboard a Lufthansa aircraft.

The decision by Europe’s airlines to withdraw from Australia has much to do with the climbing price of fuel and the difficulty of turning a profit on the route, particularly in business class. It also reflects Australia’s geographical position. From Europe, it’s the end of the route (unless an airline elects to continue to New Zealand before turning back). Many European airlines find it more economical to fly to major hubs in Asia, such as Bangkok, Singapore, Hong Kong or Kuala Lumpur. There, passengers heading for Australia transfer to Asia-based airlines and fly the rest of the way.

Major new routes to Europe through the Middle East have emerged. Airlines from oil-rich states wield much financial muscle. They include Emirates (based in Dubai) and Etihad (Abu Dhabi). Both are expanding rapidly and have direct, same-airline services from Australia to Europe. Emirates serves more than 100 destinations, including London, Manchester, Glasgow and most major European and Australian capitals. It will start flying a giant new Airbus A380 aircraft on the Dubai-Sydney-Auckland run from next February. Etihad, which links Australia with London, Manchester and other European cities, was recently reported to have earmarked $22 billion for 100 new aircraft.

European airlines are merging, a trend set to continue as the EU becomes one market. Small national carriers can’t survive unless they join bigger airlines, either by merging or through alliance. At press time, struggling Alitalia is likely to accept the overtures of Air France-KLM. It reacted coldly to an earlier approach by Russia’s Aeroflot. Air France and KLM merged about five years ago. Mergers are seldom smooth because much national pride is wrapped in airlines. Spain’s Iberia has been up for grabs for some time but British Airways has so far been barred from taking it over.

The speed with which airlines can redeploy their aircraft to more lucrative routes was demonstrated vividly by Austrian Airlines. Austrian’s record in Australia was successful – starting when Lauda Air began flying here in 1991 with just one weekly flight. Lauda kept adding services to cater for demand and continued to do so after being taken over by Austrian Airlines. By 2004, Austrian was doing so well out of Australia, its services were tipped to reach twice-daily frequency. Australia and New Zealand became Austria’s third biggest non-European tourism source, after the US and Japan. Austrian’s general manager South West Pacific, Richard Froggatt, was awarded the Knight’s Cross First Class, a high Austrian honour usually reserved for heads of state and poets laureate.

By last year, the party was over. Austrian withdrew all its aircraft from Australian routes. It now favours the Middle East, Central and Eastern Europe.

Will European airlines return? The main hope lies with Canberra, which is keen to negotiate a more liberal “open skies” aviation agreement with Brussels. That might – just possibly – lure one or two European airlines back here.

European airlines, in common with counterparts around the world, are joining global alliances to gain economies of scale. The two biggest pacts are the Star Alliance and oneworld. Star Alliance groups 20 airlines, including such heavyweights as Lufthansa, United and Singapore Airlines, as well as Air New Zealand and Austrian. Its newest member, Turkish Airlines, will join this week. Members of oneworld include Qantas, British Airways, American Airlines and Cathay Pacific.

British Airways co-operates closely with Qantas on the route. They share a “joint services agreement” that allows them to operate virtually as one carrier, co-ordinating their scheduling, marketing and customer service activities and pooling revenue.

Virgin Atlantic has not yet joined one of the big alliances, making it a bit of a maverick. It flies daily between Sydney and London Heathrow, via Hong Kong. A spokesman said Virgin Atlantic enjoyed a healthy passenger mix of leisure, corporate and visiting friends and relatives travellers on the route.

SKY ALLIANCES

* European airlines, as with their counterparts around the world, are joining global alliances to gain economies of scale. The two biggest pacts are Star Alliance and Oneworld. Star Alliance includes heavyweights Lufthansa, United Airlines and Singapore Airlines, as well as Air New Zealand and Austrian Airlines. Oneworld’s members include Qantas, Cathay Pacific and American Airlines.

* British Airways and Virgin Atlantic are the only two European airlines still using their own aircraft to fly to Australia. BA shares a “joint services agreement” with Qantas that allows them to operate virtually as one carrier, co-ordinating their scheduling, marketing and customer service activities and pooling revenue.

* Virgin Atlantic has not yet joined one of the big alliances, making it a bit of a maverick. It flies daily between Sydney and London Heathrow, via Hong Kong.

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.

An Italian deal isn’t a forgone conclusion, though. The European Commission has taken a strong stance against the use of state funds to bail out money-losing airlines. In 2005, for instance, Brussels ordered troubled carrier Olympic Airlines to repay $250 million to the Greek government for breaching competition laws.

At the same time, any privately funded domestic rescue plan for Alitalia would have to overcome the same hurdles that killed the Air France-KLM deal. Along with outstanding union difficulties, the Italian carrier’s aircraft need to be upgraded at an estimated cost of $1 billion. Long-standing management problems — nine chief executives have run the company over the last 15 years — also must be resolved before Alitalia returns to the black.

Eyes on Iberia With so many problems, it’s no wonder Air France-KLM shareholders welcomed the end of takeover negotiations. While the Franco-Dutch carrier left the door open to restart talks, market watchers figure the company will instead turn its sights to potential deals with Europe’s other midsize airlines [BusinessWeek.com, 8/14/07].

Peter Morris, chief economist at Ascend, a global air transport consultancy in London, believes Spain’s Iberia (IBL) tops the list of possible takeover targets. “It’s a prize because of its links to Central and South America,” he says. “That’s a huge growth region that would fit into the consolidation plans for either Air France-KLM or Lufthansa.”

Unlike floundering Alitalia, Iberia reported pre-tax 2007 profits of $696.6 million on sales of $8.6 billion, well ahead of its $409.2 million pre-tax profit the previous year. The Spanish airline’s return to health — and the rich potential of its route structure — has long caught the eye of other European airlines, but no takeover deal has been consummated. If Air France-KLM makes a run at Iberia, it could awaken stiff competition from British Airways (BAY.L), which upped its stake in the Spanish airline to 13.5% on Mar. 18. British Airways has danced around Iberia for years, but also has other issues on its plate [BusinessWeek.com, 4/2/08] that could forestall a pitched takeover battle.

Gobbling up Iberia could be just the ticket for Air France-KLM, which has twice tried and failed to buy Alitalia — and clearly has an itch to continue expanding. For Italy’s former state carrier, on the other hand, the endgame is near. If no suitable suitors come forth, it may be time to say arrivederci to Alitalia.