Money Losing Airline's Value Drops

Two airline companies interested in purchasing Italy's flag carrier, Alitalia, offered plans, planes and capital this week in hopes of luring a deal.

Suitors Air France-KLM and Air One each made offers to the Italian government for Alitalia on Monday. The deal will ultimately be decided by Prime Minister Romano Prodi, who indicated that no clear decision has been made over the choice. Deputy Prime Minister Francesco Rutelli also said none of the offers were appealing, according to Reuters.

Global giant Air France-KLM offered an infusion of $1.08 billion -- while Air One, a much smaller entity, said it would pump in $1.44 billion through a capital increase for the state-controlled airline.

Shares in Alitalia fell Friday on news the best offer was only $0.50 per share, and slid again on Monday and were suspended with a value of $.98 by 0421 EST. That places the market value of the airline at around $1.4 billion -- down from about $1.94 billion when the government put it on the block for sale a year ago. Alitalia also comes with $1.73 billion of debt.

So... with such a bleak financial picture, why would anyone want Alitalia? The carrier's primary asset is its dominance of the business route from the financial capital of Milan to Rome.

As ANN reported, Air France-KLM revealed itself as a suitor for Alitalia earlier in December after snubbing all earlier attempts by the Italian government to find a buyer for its 49.9 percent stake. In a possible sign he's leaning towards Air France-KLM, Prodi will meet with French President Nicolas Sarkozy on Thursday.

The Franco-Dutch airline said Monday it had made a non-binding share exchange offer and that it would buy all Alitalia's convertible bonds. It gave no details, or a timeframe for the deal. The "Alitalia-effect" also hit shares in Air France-KLM, which dropped around two percent at $33.97 -- giving it a market capitalization of nearly $10.2 billion.

Air France-KLM’s offer would quickly inject at least $1.079 billion into Alitalia through a capital increase open to all shareholders and fully underwritten by Air France-KLM. That could allow the Italian government -- which is limited by the European Commission from giving any more money to the revenue-losing airline -- to take a minority ownership in the new group.

"Air France-KLM confirms its determination to support Alitalia in its recovery and to re-launch it as a strong national flag carrier with world coverage. The enlarged group will then be able to rely on three strong, complementary brands providing customers with an unparalleled network," the airline group said.

Air France-KLM added it would not make any new changes over those already outlined by Alitalia -- meaning up to 1,700 jobs could be lost. On the flip side, the group would renew plans to revitalize Alitalia's fleet; the carrier now flies MD-80s on short- and medium-haul routes, and Boeing 767s on longer runs.

Air One chief Carlo Toto told Corriere della Sera newspaper his company plans to buy 130 Airbus aircraft to renew Alitalia's fleet, if Air One wins the bid.

Toto added he would be willing to cede 20 percent of the company's Rome to Milan slots to meet antitrust regulations. His bid is backed by Italy’s largest retail bank, Intesa Sanpaolo.

Alitalia’s attractiveness for Air France-KLM may have improved, as rival Lufthansa gets closer to picking off Spain's Iberia. Air One already partnered with Lufthansa.

FMI: www.alitalia.com/, www.airfrance.us, www.klm.com, www.flyairone.it/en/Corporate/CartaIdentita.aspx