Alitalia and Air France are preparing a response to competition concerns raised by the European Commission (EC) over their proposal to operate joint services between Italy and France.

Following an examination of the alliance, which the carriers launched in November with codesharing and frequent flyer links, the EC sent each a "letter of serious doubt" outlining its areas of worry. Both say such a move is a normal step and not a surprise - and admittedly is not as strong as a "letter of objection" which would totally block a deal - but it will mean the carriers changing aspects of the arrangement to allow others to compete on services between the two countries.

The carriers want to profit share on the market between Italy and France, with Alitalia initially having a 40% revenue share rising to 50%within two years, but this will require EC approval. The codeshare and frequent flyer tie-ups began in January.

A main EC concern was that other carriers should be able to interline with Alitalia/Air France on routes beyond their main Paris, Milan and Rome hubs at levels lower than the published IATA fare. It also highlighted better access to the linked frequent flyer programme for other carriers and slot availability, particularly at Milan Linate.

The slots issue is not as acute as in some other cross-border links, such as the Austrian Airlines/Lufthansa deal where access to Frankfurt is severely constrained, with good availability at Rome and Milan Malpensa and some availability at Paris Charles de Gaulle. To gain EC approval for their deal, Austrian/Lufthansa have to relinquish up to 40% of their slots to new entrants on city pairs between the two countries.

On specific routes, the Commission is concerned over competition between Paris and Rome, Milan and Venice, where Alitalia and Air France dominate the market.

In his statement, EC Competition Commissioner Mario Monti said: "The final outcome of the case will depend on Air France's and Alitalia's response and particularly on their ability to create conditions to favour the emergence of new competitors on the affected routes, failing which passengers would have little or no choice and potentially higher prices."

Alitalia says it is studying its response to the EC letter and that the carriers will meet competition staff in August or September to present their suggested amendments. "We are working on our multiple hub alliance," says Air France. "We are very confident a compromise will be found as it was with other airline alliances."

The Air France link is a key component in Alitalia's alliance strategy which included joining SkyTeam in November. Another element of the recovery plan established by chief executive Francesco Mengozzi has seen the EC approve the carrier's recapitalisation. Despite this approval, which involves a capital injection of €1.43 billion ($1.44 billion) that raises the government's stake in the airline to 62%, the move has been questioned as state aid in a letter to the EC sent by British Airways, KLM, bmi british midland, Lufthansa and SAS. However, the have not lodged a formal complaint.

Another Mengozzi ambition is finally to privatise Alitalia. That desire appears to have taken a decisive step forward with the government's announcement, as part of a broader privatisation package, to sell at least 30% of Alitalia in the next 18 months depending on "favourable market conditions".

Source: Airline Business