Italian flag carrier Alitalia is hoping a European Commission (EC) approved recapitalisation, coupled with a raft of restructuring measures, will enable it to return to profit next year.

The Italian flag carrier has not made an operating profit since 1998 and moved only marginally into the black in 2002, due to asset sales and compensation paid by KLM for the abrupt ending of a partnership. In 2004, its net loss surpassed €800 million ($970 million). Although the first signs of a modest recovery were seen in the first half of this year, Alitalia’s controversial 2005-8 business plan, which splits the group into two – AZ Fly (flight operations) and AZ Services (ground operations), does not envisage reaching a break-even situation before the end of 2006.

While some analysts feel this is somewhat optimistic, the EC’s decision in early June that the €1.2 billion recapitalisation of AZ Fly under the plan would not constitute state aid has provided it with a lifeline, even though this latest ruling has some conditions attached. The EC statement added that the state’s minority participation in the capital increase must take place at the same time, at the same price, and under the same conditions as the private investment. The state would also not be allowed to guarantee the private sector rights issue if not fully subscribed.

A formal and unconditional guarantee from Deutsche Bank, which as yet only exists in the form of a letter of intent issued in April, “rules out the incidence of state aid”, the EC said. It also determined that the €400 million emergency state bridging loan authorised in July 2004 has been used properly, and that state holding company Fintecna can invest in AZ Services.

“On the basis of a thorough and detailed analysis, the EC has concluded that these recapitalisations do not involve state aid,” says transport commissioner Jacques Barrot. European legacy and low-fare airlines take issue with this statement, pointing out that Alitalia has already received nearly €3 billion in state aid in 1997 and 2002. The European Low Fares Airlines Association (ELFAA) has been particularly vocal, since competition from its members in the Italian market has been blamed by the Italian carrier’s management for Alitalia’s woes. ELFAA has warned that this decision sets a dangerous precedent and that other struggling flag carriers could get “state aid” if it is couched in similar terms. ELFAA president Stefan Vilner comments that “Alitalia has proved completely incapable of restructuring and adapting to the conditions of the liberalised market”. Vilner also says that the EC’s statement completely failed to answer questions raised by competitors about the fate of Alitalia’s debt (€1.8 billion at the end of June), and €450 million worth of state-funded redundancy payments.

Until the fine print of the rights issue is available, it is impossible to say if it will comply with EC demands, but no amount of bluster from the competition will now divert the airline from its chosen course. At an extraordinary assembly in late July, Alitalia won approval from its shareholders for the capital increase. Approval was also received for postponing the 2002-7 Convertible Bond Issue by three years, eliminating the nominal value of shares and swapping every 30 existing shares for one new share and, more crucially, reducing the company capital from €1.43 billion to €291 million to cover losses. The recapitalisation, which is the cornerstone of Alitalia’s rescue plan, is now likely to be completed by October or November.

Alitalia’s plight has not been helped by a rapid succession of management changes and labour problems – Giancarlo Cimoli is its third president-chief executive in less than two years and one cabin crew union, SULT, still refuses to talk to management and continues with its industrial action. However the airline has won pilots union approval for more flexible working conditions at its Milan Linate and Malpensa bases.



Source: Airline Business