Alitalia appears to be a victim of the 'first come, first served' principle. Brussels has rejected the Italian carrier's amended restructuring plan yet cleared Air France's final tranche of state aid. But the legal challenge to Air France's aid has moved a step further.

The Commission informed Alitalia in May that the restructuring plan accompanying the proposed L3,000 billion (US$1.8 billion) capital injection by holding company IRI was not compatible with its market investor principles. The Commission is now evaluating whether the capital injection can be approved as state aid instead. IRI has already paid in half of the L3,000 billion.

The ruling was made despite Alitalia adding more cost reductions to the plan, following the Commission's March request that Alitalia find more savings in the light of higher than expected 1996 losses.

The main impetus behind the Commission's rejection of the plan was the projection by the Commission's advisers, Ernst & Young, that the rate of return on the injection would be 14 per cent by 2000. The Commission had stated that the rate of return would need to reach 30 per cent for the capital to be approved under the market investor principle.

The rejection follows Alitalia's failure to cut routes and personnel costs sufficiently in the plan to avoid upsetting its unions. The plan's projections that 1,300 pilots and cabin attendants would opt to leave the company via redundancy or early retirement seem optimistic, as only 650 personnel have volunteered so far.

One Italian consultant says Alitalia is a victim of the Italian government's 'delinquent attitude' in wider political matters. 'The Commission is using Alitalia to tell Italy that it can't keep behaving with such little respect for European rules.'

The Commission's stance towards Alitalia seems harsh in light of its previously more lenient attitude towards airline state aid. 'There has been an evolution in the Commission's mentality towards state aid,' says Bertrand d'Yvoire of Paris based consultants Consultaire. 'Alitalia is paying for adverse reactions to previous state aid cases and for being too slow in restructuring.'

One senior Commission official concedes that 'it's true that it's becoming more and more difficult to defend a lax attitude towards state aid'.

Alitalia's difficulties in restructuring are in stark contrast to the Commission's clearance on 16 April of the final FFr1 billion (US$172 million) tranche of Air France's FFr 20 billion state aid package.

Air France should beware of complacency, however, as a court appeal against its state aid handout finally moves forward. The European Court of First Instance in Luxembourg held an oral hearing into the French carrier's rescue package on 6 May, nearly three years after an initial complaint challenging the Commission's decision was filed. Should the Court decide to annul the authorisation, Brussels would face the task of re-examining Air France's state aid package.

The plaintiffs - British Airways, British Midland, KLM, SAS, TAT, Euralair and Air UK - argue that the Commission's decision regarding state aid was 'not based on sound analysis of the facts' and that the amount given to Air France was 'disproportionately high', says SAS' Brussels area manager Hans Ollongren.

State aid conditions should have been imposed on the whole of the Air France group, including former European subsidiary Air Inter, argues BA's competition and regulatory affairs manager Steve Aylwoard. A final ruling is not expected before year end.


Source: Airline Business