Alitalia investors agree cash call to keep stricken airline flying

Reuters

* Board backs 300 mln euro capital increase to avertbankruptcy

* Shareholder Air France-KLM yet to decide whether to backcash call

* Move seen as buying time before talks on long-term future

By Alberto Sisto

ROME, Oct 11 (Reuters) - Italy's near-bankrupt Alitalia wasthrown a lifeline on Friday when its board members - includingcautious top shareholder Air France-KLM - approved acapital increase as part of a government-led 500-million-eurobailout.

The 'yes' vote means Alitalia's planes can keep operatingbeyond the weekend, something that had looked in doubt aftermajor creditor Eni threatened to cut fuel suppliesunless the airline could show it had solid financialunderpinning.

But with Alitalia, which last turned a profit in 2002,spending some 10 million euros a day according to analystestimates, the new cash injection will not last long. It isregarded as a stop-gap solution before politically sensitivetalks with Air France on a possible combination of the two.

After failing to persuade some of Italy's national companiesto help, Italy's cash-strapped government only finalised theemergency funding plan late on Thursday.

Alitalia said the state-owned post office will put in 75million euros for any unsubscribed shares in a 300-million-eurocapital increase offered to existing shareholders, while banksIntesa Sanpaolo and Unicredit will guaranteeto subscribe for up to 100 million euros not taken up.

The two banks will also provide a bridge facility of 100million euros to meet Alitalia's immediate needs that will beconverted into equity as part of the cash call or repaid.

A further 200 million euros will be provided in the form ofnew and existing credit lines, Alitalia said in a statement.

Top shareholder Air France-KLM, with a 25 percent stake andin the middle of its own restructuring, said it would only makea decision on whether to take part in the cash call afterAlitalia's shareholder meeting scheduled for Monday.

"The decision by the Air France-KLM board members to supportthe emergency plan does not in any way presuppose our decisionon whether to subscribe to the capital increase," a spokesmansaid. The Franco-Dutch group had said earlier on Friday it wouldplace tough conditions on giving any help.

The carrier was barred from a full takeover of Alitalia inlate 2008 by then prime minister Silvio Berlusconi who insteadstrung together a disparate group of investors. In theintervening five years Alitalia has lost 700,000 euros a day.

Now the government and Alitalia's shareholders are ready tolet Air France up its stake and possibly even take over thegroup, but the parties have so far failed to agree financialcommitments and business strategy.

"BAND-AID"

Business leaders said the state-funded plan lacked a clearstrategy to make the airline a long-term viable business.

"If it's an emergency band-aid to stop the bleeding, so beit. But we'll need to have a serious think about a plan in themedium and long term once and for all," said Giorgio Squinzi,the head of business lobby Confindustria.

Air France-KLM Chief Executive Alexandre de Juniac is opento taking over its Skyteam alliance partner to bolster itsaccess to the Italian travel market, Europe's fourth largest.But approval from his board, which includes the French state andsceptical members of Dutch KLM, is not certain.

"Air France-KLM have the strength and the upper hand becausethey are the only partner that can continue with Alitalia now,but they will do so on their own terms which will be fairlydraconian," said airline industry analyst James Halstead,managing partner at UK-based Aviation Strategy.

"They will want to be able to make decisions withoutinterference from politicians, government and other shareholderswho may have other agendas," he added.

The Rome government is realising it may not be able to holdon to its flag carrier, once a national icon which had itsuniforms designed by Armani but is now seen as a symbol of thecountry's economic malaise.

However, with the current loan arrangement, Rome is tryingto strengthen its negotiating position with Air France-KLM,analysts say, even though no other option makes business sense.

"The state is re-nationalising its flagship airline withtaxpayer's money," said Andrea Giuricin, a transport analyst atMilan's Bicocca university. "This solution will only allowAlitalia to survive, certainly not grow."

At stake: What the government says is a strategic asset,14,000 jobs, and fears that some of Alitalia's domestic routes -which play an important role because of Italy's patchy rail androad links - could be cut if a foreign buyer took over.

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