Andy Nativi/GENOA

KLM has confirmed that it has begun talks with the Italian Government over a possible merger with Alitalia.

The informal discussions are understood to centre on the financial and operational terms of a merger, plus two obstacles that derailed earlier negotiations - the privatisation of the Italian carrier and the full exploitation of the new Milan Malpensa Airport.

On the Italian side the talks are being led by the Treasury, which took control of a 53% stake in Alitalia from holding company IRI last year. It is thought to have sketched out two main options - the favoured one being the privatisation of Alitalia combined with a "friendly" takeover of KLM.

Italian press reports say the operation would seek to address the difference in value between the two airlines - Alitalia's market capitalisation was twice that of KLM when previous merger discussions collapsed last April - by placing a 30-35% premium on KLM shares, to be paid for by the issue of new Alitalia shares.

The move would mark a climbdown by the Italian Government, which had previously refused to "overvalue" KLM.

The resultant company would feature an "Italian" shell above a merged airline, with the Italian and Dutch Governments each having stakes of around 15%. The new airline would have a predominantly Dutch management.

New Alitalia chief executive Francesco Mengozzi has not yet met KLM counterpart Leo van Wijk, but KLM says the Italian Treasury has been "very active". Mengozzi was appointed chief executive following the resignation of Domenico Cempella, who is understood to have opposed the Treasury's intervention and to have favoured a deal with Air France.

Despite the informal nature of the talks with KLM, Alitalia's unions - opposed to the imposition of a Dutch-led management - have already condemned the moves.

A second option apparently on the table would see Alitalia privatised before any merger with KLM. Such a plan would be complicated by Alitalia's mounting debts and fleet-renewal requirement, with a recent report commissioned by pilots suggesting $500 million to $1 billion is needed.

Source: Flight International