Air France-KLM has identified potential ongoing annual synergies of E370 million ($490 million) within three years of its tie-up with Alitalia, after Italian investor group Compagnia Aerea Italiana chose the carrier as its new strategic partner.

After a lengthy courting of both Air France-KLM and Lufthansa, CAI announced its selection of the SkyTeam partner a day ahead of the formal relaunch of the new Alitalia. It has been established out of assets of Alitalia and Italy's second largest carrier, Air One.

Under the deal Air France-KLM is taking a 25% share in the airline through a E323 million reserved capital increase. It will have three of the 19 seats on Alitalia's board and will also have two seats on the nine-member executive committee of Alitalia. There will also be a partnership manager responsible for overseeing the co-operation and generating synergies.

Air France-KLM expects the level of potential synergies to feed through progressively over the next three years, largely through network optimisation and revenue management, and from the development of joint ventures. Air France and Alitalia already have a long-standing co-operation on routes linking France to Milan and Rome, which will be expanded to cover all of Italy, while a joint venture will be implemented between KLM and Alitalia on flights between Italy and the Netherlands.

From year two or three of the co-operation the airlines estimate ongoing synergies at an EBIT level of E370 million - including E80 million from the medium-haul network E140 million from the long-haul network and E130 million from commercial.

A four-year lock-up period means no Italian shareholders will be able to transfer shares externally to Air France-KLM or the Alitalia shareholder group until January 2013. This lock-up will be followed by a period of further share-trade restrictions until October 2013.

The partnership will be based on a multiple-hub strategy, it adds, with Rome Fiumicino and Milan Malpensa being added "on an equal basis" to the hubs at Paris Charles de Gaulle and Amsterdam Schiphol.

Air France-KLM chairman Jean-Cyril Spinetta says: "In view of the many challenges facing our sector, co-operation is more than ever a necessity and we have now made a further step towards this.

"We are very happy with this extended partnership with the new Alitalia. It represents a genuine growth opportunity for our two airlines and our agreement is in the interests of our shareholders, our customers and our staff."

The agreement is subject to Alitalia shareholder approval and clearance by competition regulators. Competition clearance, says Air France-KLM, could come during the first quarter.

Italian investor group CAI courted both Air France-KLM and Lufthansa as it sought an industrial partner for the new company. The German carrier ultimately offered Alitalia a co-operation deal within Star Alliance, but stopped short of submitting a formal offer to invest in the airline.

Source: Airline Business