Italy works on yet another new plan for Alitalia

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Having finally turned his attention to Alitalia, Italian prime minister Romano Prodi is pushing for a "structural alliance" with another carrier to solve the airline's problems.

Prodi has given Alitalia the green light to open negotiations with other carriers, and has also said he will come up with a new restructuring plan in January, giving him three months to try and kick start restructuring efforts that have floundered in the face of labour opposition and political meddling.

Prodi has yet to develop a clear strategy for the flag carrier, warns David Jarach, professor of air transport marketing at Bocconi University in Milan. Jarach points to talk of a sale to a Far Eastern or Middle Eastern carrier as to how little the government understands the industry. Skyteam partner Air France-KLM has been touted as a possible partner, but the French carrier has always made clear that it will only agree to a major investment in Alitalia once it has restructured. A deal with a domestic player is a possibility - there are persistent rumours of a tie-up with Air One.

Alitalia made a net loss of €221 million ($279 million) in the first half of 2006 and fell €82 million short of its revenue targets for the first eight months of the year, partly due to strikes in January. But, despite its woes, Alitalia could still enter 2007 with over €1 billion in reserve.

It already has available cash flow of over €800 million due largely to a controversial recapitalisation in late 2005. The sale of the Rome airport property portfolio, expected to be announced before year-end, could net as much as €200 million. It has a book value of just €7 million but was valued at €120 million at mid-year when it was put up for sale and has since attracted 32 bids.

The carrier is, however, in urgent need of capital investment in its ageing fleet, acknowledged in its updated business plan for 2007-9. Alitalia still has 75 Boeing MD-82s. Maintenance issues, labour unrest and crewing problems have all hit the carrier's image, and Jarach warns this is hitting revenue. "Yields are flowing away to other carriers," he says, pointing out business class traffic is shunning the carrier.

The previous government split the company in two, with AZ Fly and AZ Servizi, and proposed a cost cutting programme which has since stalled.