Its Merger Off, Alitalia Seeks a Recap Plan

Italy's troubled state airline takes $152m fleet-value impairment charge in reporting big 2007 loss.
Stephen Taub and Roy HarrisMay 28, 2008

Italy’s troubled state-run airline, Alitalia SpA, warned that it needs a recapitalization “as quickly as possible,” after posting a 2007 loss that results in part from a $152-million impairment-related reduction in the value of aircraft in its fleet

Alitalia, which earlier blamed the $777-million loss on soaring fuel prices, strikes, and competition from low-fare carriers, has tied many of its problems to the failed attempt to merge the airline with Air France-KLM Group. An Italian government loan of $465 million (300 million euros) was granted last month, to provide the airline with operating cash and give new Prime Minister Silvio Berlusconi time to find a buyer.

But that won’t resolve the airline’s financial problems. And its board is evaluating various possibilities to get the company through the financial crisis, Alitalia said. Shareholders meet on June 27, and the agenda includes approving the balance sheet, among other things.

“The strongly negative impact of uncertainty, together with continual erosion of the company’s commercial credibility with marked repercussions on sales, the resulting critical aspects of implementing actions required by the budget, and the deterioration of the market scenario, heavily affected by continual and ever higher increases in fuel costs — all these factors require an asset situation able to sustain the company’s forecast operations,” the airline said in its press release.

In reducing the balance-sheet value of 67 aircraft, Alitalia said the breaking up of negotiations with Air France-KLM led it to conduct an impairment test as required by International Accounting Standard 36, requiring the amount to reflect fair market value. When the merger-based business plan fell through, “the board decided to apply an impairment test directly on individual planes in the fleet,” Alitalia said. “To this end, the company brought in an independent expert…to calculate the estimated recoverable value of the 110 aircraft belonging to Alitalia on the basis of their fair value, subtracting the sales costs, updating what the same expert had calculated for the balance sheet” at year-end 2006 and for the 2007 six months.

Alitalia said that the overall market value of the whole fleet now “is substantially in line with the accounting value.”