Miracle Postponed

Silvio Berlusconi is struggling to put together an Italian solution for Alitalia.
Economist StaffAugust 14, 2008

“WE WILL perform another miracle and will offer Italy a profitable national airline.” That was the promise from Silvio Berlusconi, Italy’s prime minister, this week as his government postponed the announcement of a long-awaited plan to rescue Alitalia, the country’s lossmaking flag-carrier. The “miracle” was to have been discussed at a board meeting on August 8th and revealed soon afterwards, but will now be a secret until September. The stated reason is to avoid disrupting the summer holidays with strikes and cancelled flights. But many people reckon the plan is being delayed because it is controversial and, in some ways, incomplete.

Alitalia is in such dire straits that only a recent loan of €300m ($480m) from the government is keeping it flying. Air France-KLM made an offer for Alitalia in March, but withdrew its bid after failing to reach agreement with Alitalia’s unions—and after Mr Berlusconi said during his election campaign that selling Italy’s flag-carrier to a French rival would be unacceptable.

Intesa Sanpaolo, the bank subsequently given the job of finding new Italian investors for Alitalia, quickly found that there was no chance of getting anyone to put money into the airline in its current form. “That was a dream,” says a person familiar with the bank’s thinking. Instead, it has devised a plan to split Alitalia in two.

One part would be a new, privately held company, with no debt and fresh equity of €1 billion contributed by a dozen or so Italian industrialists, including Gilberto Benetton, Luigi Aponte and the Marcegaglia family. The new firm would take over Alitalia’s best assets and some from Air One, a smaller Italian airline with a newer fleet. If all went as planned, the new airline would become profitable from 2009 and would float on the stockmarket in 2010.

The new investors, of course, want nothing to do with Alitalia’s disastrous past. So the government would own the “old” company (it owns 49.9% of Alitalia), which would retain the airline’s €1.1 billion of debt and its unwanted assets. Three-quarters of Alitalia’s 20,000 workers would move to the new company and the rest would stay with the old. “The new, appetising company would be sold and the bad company would simply be a liability for public-sector finances,” concludes Enrico Letta, an opposition politician.

It is unclear whether Giulio Tremonti, the finance minister, would accept such a division. Having just won parliamentary approval to cut spending by €30 billion, he is likely to resist having Alitalia’s liabilities dumped on the public finances. And the European Commission, which is already investigating the loan to Alitalia as a case of illegal state aid, is likely to object. Greece tried a similar split with its lossmaking flag-carrier in 2003, notes Rigas Doganis, an aviation-industry commentator. Brussels found that the split was a way to provide cover for continued state aid.

Observers also question how committed the Italian investors are. A condition of Intesa Sanpaolo’s plan is that a big foreign airline be brought in as a partner for the new Alitalia, and Mr. Benetton recently said that such an alliance was vital for the project’s success. Lufthansa, Europe’s second-biggest airline, is the likeliest candidate, but has not confirmed any interest.

If the government can corral new investors for Alitalia, it will then have to decide how to split the firm. The law says Alitalia would have to go through a procedure similar to bankruptcy in order to split itself in two and have its debt stay with one half, says Edoardo Staunovo Polacco, a lawyer who specialises in bankruptcy. The government wants to revise the law to speed things up, but has so far denied that Alitalia will be placed in bankruptcy.

After being elected, Mr Berlusconi warmed towards Air France-KLM, but it was too late. Many in his party must now bitterly regret the missed opportunity—the French airline would, after all, have bought Alitalia, debts and all. They must be hoping that Air France-KLM will return to the table or that Lufthansa will make a bid. That really would be a miracle.