ANALYSIS: European strugglers battle for fresh start

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Two of Europe's most battle-weary carriers are hoping to have again found a way through to safety after finding themselves back in the wars again.

Renewed financial pressures have again left Alitalia and Olympic Air fighting for survival. Olympic may have found an escape route after it was given the green light at the second time of asking to merge with Greek rival Aegean Airlines. Italian carrier Alitalia meanwhile has turned to existing shareholders and others, including state-owned postal service Poste Italiane, for a capital increase to put it back on firmer footing after its liquidity pressures mounted.

While far from being the only loss-making carriers in Europe, the two are among the most emblematic of perennial strugglers that have historically relied on state help to remain afloat.

Greece was involved in long-running, mostly unsuccessful, battles with the European Commission over various state aid given to Olympic Air's predecessors. European regulators meanwhile judged capital injections made in Alitalia between 1996 and 2000 to be state aid, though cleared a subsequent recapitalisation in 2005. While the Commission ruled a €300 million ($405 million) bridging loan made to Alitalia in 2008 was illegal, it said Italy should recover the money from the old Alitalia rather than the private investors that established the successor operation flying today – much to the chagrin of rivals including Ryanair, which unsuccessfully challenged the ruling in the European courts.

Both carriers have also found themselves back in the mire despite similar restructuring moves designed to draw a line under losses and put the airlines in private hands. Olympic Air was formed from the flight-operations assets of its troubled predecessor Olympic Airways and acquired by Greek firm Marfin Investment Group in 2009. A consortium of local investors, Compagnia Aerea Italiana, meanwhile acquired the assets of Alitalia in late 2008 and launched the successor carrier in combination with Air One at the start of 2009.

While this successor model has worked elsewhere – notably Swissair replacement Swiss International Air Lines – new private owners have so far proved powerless to revive Alitalia and Olympic Air's fortunes. The Greek airline has lost $171 million on revenues down 20% over the last three years, while the Italian carrier has racked up collective net losses of $1.1 billion since its relaunch as a private operator. It says much though for the historic difficulties of Alitalia that this marks a improvement on the $2.7 billion the old carrier lost in the four years prior to its restructuring – and this during a much tougher economic climate.

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That Greece has been at the centre of the eurozone crisis and Italy not that much further removed could hardly have dealt a tougher hand to the new owners of Alitalia and Olympic Air. Passenger numbers have fallen for the last five years at Athens International airport and are down a quarter over the last four years.

Those challenges have been at the heart of Olympic move to turn to rival Aegean for a solution and for the Commission's ultimate acceptance – having blocked a 2011 proposal – of the merger. In clearing the merger, the Commission concluded that financial difficulties would force Olympic Air to exit the market "in the near future" if not acquired by Aegean.

It delivers a damning verdict on Olympic's viability as a standalone entity: "Olympic is a failing firm and would go out of business soon. Olympic has never been profitable since its privatisation in 2009 and has received considerable financial support from its sole shareholder, Marfin, ever since. A thorough analysis of Olympic's business prospects has confirmed that the company is highly unlikely to become profitable in the foreseeable future under any business plan."

It therefore argues that with or without the merger, Olympic would disappear as a competitor to Aegean. Notably in the two years since its earlier merger attempt, Olympic's retrenchment means the number of overlapping routes served by the two carriers has fallen from 17 to seven.

Alitalia shareholders, meanwhile, have backed plans for a €300 million capital increase which will give the Italian carrier much-needed financial breathing space. Existing shareholders will have 30 days to exercise share options. It is not yet clear whether Air France-KLM will ultimately increase its 25% stake in Alitalia. The carrier, already working through its own restructuring efforts, has said any assistance would have "strict conditions attached".

One firm that has stepped in though is Poste Italiane – owned by the Italian finance ministry – which is ready to support up to €75 million of any unsubscribed shares. The government says there are "industrial synergies" between the companies because Poste is linked with the carrier Mistral Air, which performs mail and passenger transport services.

Such support though has raised the heckles of rivals once more. "We have always been opposed to state aid. It’s protectionist, undermines competition and favours failing airlines that have not got to grips with economic reality," says British Airways parent IAG of Alitalia's capital increase. "We would urge and expect the Commission to take interim measures to suspend this manifestly illegal aid."

For its part, the Commission says it expects Italian authorities to notify it of the envisaged measures. "Only after receiving the notification will we be able to assess its compatibility with EU state-aid rules," it says.