Latest Reorg Proposal Calls For Merger With Air One SpA

The buzzards have been circling over struggling Italian flag carrier Alitalia SpA for some time... and on Friday, airline executives capitulated to the inevitable, and filed for insolvency and protection from their creditors.

Bloomberg reports the Italian government assisted with Alitalia's decision, modifying the country's bankruptcy laws Thursday to accommodate what will likely be a massive bankruptcy case. But some investors believe the airline may emerge from insolvency as a streamlined, profitable carrier.

A group of investors, headed by Piaggio SpA Chairman Roberto Colaninno, has proposed the "Phoenix" plan for Alitalia. Like the mythical bird, that proposal would allow Alitalia to rise from the ashes of its own demise... but only after the airline sells off its unprofitable units, slashes jobs... and merges with its largest domestic rival, Air One SpA.

Those investors would put up about $1.5 billion of their own money to buy and finance the merged airline, which would then own about 65 percent of the Italian market. The next step is for Italian officials to name a special commissioner to organize the sale of Alitalia's assets, and implement the Phoenix plan.

"This is a needed first step toward returning the company to profit," said Edoardo Liuni, an analyst at IlNuovoMercato in Rome. "The next, fundamental move will be to choose the right international partner."

They may not have to look far. As ANN reported, the French-dominated Air France-KLM Group submitted a $1.17 billion offer to take over Alitalia earlier this year, which was accepted by the Alitalia board. The bid followed several attempts by the Italian government to sell off its stake in the troubled airline, including a failed auction involving just two bidders -- Air France-KLM, and rival Italian carrier Air One.

Though the Air France deal had its merits (namely, insuring the survival of the Italian carrier) it also would have meant the French takeover of an Italian airline -- a scenario described as "hard to digest" in one Italian editorial. There were also accusations that Air France-KLM severely underbid the carrier -- valuing Alitalia shares at just .10 euro -- and unions didn't like the buyers' plans to cut 2,100 jobs.

As a result, Air France-KLM threw up its hands in April, and walked away from the table... but with a new buyer now in the game, the group announced Thursday it could be persuaded into buying a stake in the new company.

Those unions who opposed Air France's job-cutting plans may have also since reconsidered that opposition, too. The reorganization plan currently in place at Alitalia -- put forth by recently-elected Italian Prime Minister Silvio Berlusconi, and backed by the country's second-biggest bank, Intensa Sanpaolo -- called for as many as 7,000 jobs to be cut.

That was before Alitalia declared insolvency... so that figure may just be a starting off point.

FMI: www.alitalia.com/, www.airfrance.us, www.klm.com