Monday, September 23, 2013

Air France-KLM Discusses Whether to Increase Its Stake in Alitalia: WSJ

September 23, 2013, 4:29 p.m. ET


The Wall Street Journal

Alitalia SpA is grappling with steep losses, shrinking demand and the possible insolvency of some investors. Now its biggest foreign shareholder, Air France-KLM SA, is deciding whether to ante up or bail out.

Air France-KLM executives have long said that they wanted to decide by year-end whether to increase the carrier's 25% stake in Alitalia. The Franco-Dutch carrier said Monday after a board meeting that members want more information from Alitalia's management.

Air France-KLM wants to keep a foothold in the large Italian market but faces financial constraints of its own after posting two years of losses.

Alitalia's new chief executive, Gabriele Del Torchio, aims to raise more than €300 million, or roughly $400 million, under a plan to turn a profit by 2016 and is considering a capital increase. If that happens, Air France-KLM would face the choice of taking a bigger stake, holding its position or having its holding diluted by other investors.

Mr. Del Torchio's task will get complicated on Oct. 28, when Alitalia's corporate shareholders will be free to sell shares purchased when Alitalia emerged from bankruptcy reorganization in 2008. At least one investor is facing possible bankruptcy because of Italy's economic crisis and others are stretched too thinly to invest more.

Alitalia is one of several European airlines that have struggled since losing government protection because of deregulation in the 1990s. Scandinavia's SAS AB, Finnair Oyj, LOT Polish Airlines SA and Transportes Aéreos Portugueses SA are trying to survive increased competition from merged carriers, including Air France-KLM, and leaner budget airlines, such as Britain's easyJet PLC and Ireland's Ryanair Holdings PLC. 

Air France in 2009 bought into Alitalia as the Italian carrier emerged from bankruptcy. Alitalia in 2010 joined the SkyTeam global alliance, which is led by Air France-KLM and Delta Air Lines Inc.   More recently, the Italian carrier struck a marketing deal with Etihad Airways of Abu Dhabi.

Alitalia executives view a takeover as potential lifeline. "The market is consolidating and I think there is a case for Alitalia to move into a larger group," former Chief Executive Andrea Ragnetti said before resigning in February.

Outsiders have been drawn by Italy's rich mix of tourists and business travelers.

But Alitalia's appeal has dwindled as its share of its home market has eroded in recent years amid political interference, labor unrest and shifting government policies. Today, Deutsche Lufthansa AG and its subsidiaries operate roughly 44% more weekly flights into Italy than Alitalia operates outbound, according to Innovata, a British consulting firm. Meanwhile, EasyJet and Ryanair together have grabbed about one-third of Italy's domestic market.

Stopping that kind of erosion was the logic behind Air France-KLM's investment of €323 million. Pierre-Henri Gourgeon, who was the carrier's chief executive at the time, hailed the pact as a "nearly ideal case" because his airline gained influence in the slimmed Italian carrier without shouldering any of its debt. Mr. Gourgeon said his company, formed by the 2004 merger of Air France and KLM Royal Dutch Airlines, would have sufficient heft to serve Alitalia passengers and draw others from its hubs in Paris and Amsterdam.

But Mr. Gourgeon was fired in 2011 as the Air France unit sank into losses. The operation now is struggling to cut costs and protect its own traffic. And some top executives at Air France-KLM question whether they need to own part of Alitalia, people briefed on internal talks said.

"Size is not a panacea for problems nor a guarantee of success," said Chris Tarry, an independent airline consultant in London. "The bigger you are, the bigger your losses can be."

Alitalia hasn't reported a profit since it was rescued in late 2008 with an injection of more than €1 billion from shareholders including such leading Italian companies as bank Intesa Sanpaolo SpA, tire maker Pirelli & Co. and IMMSI SpA, which owns scooter maker Piaggio.

Under its new owners, Alitalia restructured inefficient operations, renegotiated labor contracts and sold assets. But pressures from Italy's economic crisis and rising competition outweighed the improvements.

Alitalia raised €95 million from a convertible bond in February but needs much more money to remain solvent. The amount fell short of the €150 million the airline had sought to raise because some shareholders were either unwilling or unable to participate.

Alitalia posted a first-quarter net loss of €157 million on revenue of €729 million. It carried net debt of €1.02 billion and had only €159 million of available liquidity. The airline expects to release second-quarter results on Thursday.