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Battle for alliance with Alitalia grows more intense  Oct 23, 2008

ROME: Alitalia, which nearly collapsed last month, has become the unlikely object of a deepening French-German struggle for an alliance even as an Italian government rescue of the airline runs into new obstacles.

An investor group buying Alitalia's profitable assets is meeting executives of Air France-KLM this week and Lufthansa next week as both airlines battle for a toehold in Italy.

British Airways, which until recently emphatically denied any interest in Alitalia, is also considering a commercial alliance.

Mocked as the airline no one wanted as it lurched from two failed auctions toward a bankruptcy filing, the prospects for Alitalia have been improved by a government-backed bailout that would result in a debt-free and privately owned airline. But a major question is how much it could bounce back after Alitalia passenger traffic fell 28 percent in September.

"Alitalia's greatest quality right now is its 'X factor' - no one knows what this airline is capable of now," said Doug McVitie of Arran Aerospace, a consulting firm.

"It's like the beauty of an unwrapped Christmas present - it could be empty and broken for all you know, given this is Alitalia, but there is an element that it could play a greater strategic role in the sector," he said.

Italian news reports have said that Lufthansa set up a "secret" meeting to lobby Alitalia unions on Wednesday while CAI, the Italian investor consortium that plans to buy Alitalia, met with Air France-KLM. Union officials denied that they had met with Lufthansa.

Analysts say Lufthansa has the edge in talks after winning the open support of the Italian government and unions, though CAI has denied favoritism. Prime Minister Silvio Berlusconi had been angered by what he considered a low-ball price and unacceptable conditions in an offer from Air France-KLM.

A senior Air France-KLM official, who declined to be identified because the confidential talks were continuing, said, "We have not had our last word."

Lufthansa and Air France-KLM want a piece of Alitalia to cement their position in the booming Italian travel market and prevent Alitalia from being acquired by a rival airline.

"It's a question of making sure that Alitalia doesn't fall into the hands of your competitors," said McVitie, the industry consultant. "So while it may not have great value in itself, it has strategic value."

But all the enthusiasm over linking up with Alitalia may prove to be premature as its bailout runs into delays and new hurdles despite overcoming union opposition.

Under the rescue plan, CAI would buy Alitalia's newer planes and airport slots and merge them with those of Air One to start up the combined airline as a smaller carrier.

Air France-KLM or Lufthansa could buy a 20 percent to 25 percent stake. The Italian government would take over Alitalia's other assets.

The start-up was initially scheduled for early November. That will be delayed because CAI has yet to present a formal offer for Alitalia's assets. CAI's preliminary offer is valid until Oct. 31.

Alitalia's bankruptcy commissioner, Augusto Fantozzi, has said he hopes that the deal can be concluded in mid-November, two weeks before cash reserves of the airline run dry. Any further delays will require Alitalia to seek a new loan to keep flying, Fantozzi said.

CAI, meanwhile, is still waiting for regulatory approvals before presenting its formal offer, said an executive of Intesa Sanpaolo, which is one of the group's 16 investors.

The offer from CAI is also being delayed because it is seeking a flying license for the new airline. Moreover, after reluctantly agreeing to back the CAI plan to avert a liquidation of Alitalia, its unions have begun to voice complaints again.

La Repubblica reported Thursday that the European Commission, the executive arm of the European Union, would approve CAI's takeover plan but not an Italian government loan of €300 million, or about $385 million.

"This story is turning into one without an end in sight and with increasingly uncertain outlines," said Fabrizio Tomaselli of SDL, one of Alitalia's nine unions.

Battle for alliance with Alitalia grows more intense
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