Five firms have been short-listed for a large stake in Alitalia, but the carrier's financial position is in danger of deteriorating sharply as it drifts in a state of limbo waiting for new owners.

The bidding process has reached the second round, with six of the initial 11 bidders missing the shortlist. The five remaining bidders include Ap Holding, Management & Capitali, MatlinPatterson, Texas Pacific Group and Unicredit Banca Mobiliare.

The bidding process has largely been dominated by private equity firms, but observers are watching to see whether Air France and Lufthansa decide to team up with one of the bidding parties.

David Jarach, professor of air transport marketing at Bocconi University in Milan, predicts that if it wanted to enter the bidding, Air France could link with Italian equity fund Management and Capitali. Industrialist Carlo De Benedetti, who controls Management and Capitali, has close links to the French government. The Capitali bid also includes funds from Goldman Sachs and Cerberus, which owns aircraft leasing company AerCap.

Lufthansa insists it has no plans to bid, although there has been speculation it may team with Italian bank Unicredit, which has close links to Germany through its ownership of Munich-based HVB Bank. Lufthansa also has ties to Italian carrier Air One, which is owned by Carlo Toto through Ap Holding.

Texas Pacific, meanwhile, is looking into compensating for its lack of local know-how by teaming up with Alitalia's pilots. Texas Pacific and MatlinPatterson are both US-based private equity firms.

The bidders are now free to examine Alitalia's books to get a clearer idea of what they are bidding for. The company says losses for the full year will be around €380 million ($492 million), double the €167 million loss from 2005.

And there are signs that revenues are coming under pressure in the winter season. Traffic dipped by 2.3% in December compared with a year ago, more than matching a fall in capacity of 2%. Against this background, the company has ditched its business plan for the 2005-8 period, saying it is "not feasible", citing a catalogue of woes that includes strikes, capacity cuts, competitive pressure, fuel prices and a failure to implement cost cuts.

"They are absolutely out of control," warns Jarach. "They are waiting for new owners to do the dirty work."

In early February the government decided to replace chief executive Giancarlo Cimoli with an expert in company law, Bernardino Libonati. This came shortly after the government met union officials to block threatened strike action - a meeting that Jarach warns will send the wrong message to investors.

While airlines are well known for their ability to burn cash at alarming rates when revenues fall, Alitalia says it has enough liquidity to cover the rest of 2007. It also has an extra ace up its sleeve in the shape of airport properties in Rome and Milan that it is in the process of selling off.

Cash reserves are around the €900 million mark. Italy hopes to sell at least a 30% stake in its ailing flag carrier.

"They are absolutely out of control. They are waiting for new owners to do the dirty work" David Jarach, professor of air transport marketing, Bocconi University, Milan

Source: Airline Business