Capital Markets

Alitalia’s Bailout May Be Bogus, EU Says

Commission will probe whether the $465 million Italian state loan violates competitive protections under European rules.
Stephen TaubJune 11, 2008

The European Commission will launch “an in-depth investigation” into whether Italy illegally bailed out its state-owned airline, Alitalia.

The EU asserted in a press release that it currently believes that the loan from the Italian state — which the airline can incorporate into its equity capital, at its option — “could constitute aid that is incompatible with the common market.”

In April, the Italian government granted Alitalia a loan of $465 million (300 million euros) to provide the international carrier with operating cash. The EU noted that the option that the airline followed of incorporating the cash into its equity capital “is intended to enable the company to maintain the value of its capital so as to avoid bankruptcy proceedings and allow its possible privatization.” The EU added, though, that this measure could constitute state aid in violation of EU rules, and could therefore give the company an unjustified advantage over its competitors.

“As Alitalia has already benefited from rescue and restructuring aid, Italy cannot, in principle, grant it any more aid,” the EU statement added.

The commission said it will examine in detail the exact nature of this measure and the conditions under which the aid was granted to determin whether it constitutes proper state. “In this context, the commission will assess whether a private investor would have acted in the same way as the Italian government,” it said. The investigation, added the EU, will allow all interested parties to express their points of view, and help provide a basis for a final commission decision.

“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 last month.

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