U.S. Markets closed

Alitalia job cuts plan unlikely to win Air France rescue

An Alitalia plane approaches to land at Fiumicino international airport in Rome October 14, 2013. REUTERS/Max Rossi

By Agnieszka Flak and Cyril Altmeyer

MILAN/PARIS (Reuters) - Cash-strapped Italian airline Alitalia is planning the first mass firing since its it was privatized in 2008 to cut costs, but a source said it was unlikely to go far enough to persuade top shareholder Air France-KLM to rescue it in a cash call.

Alitalia's Chief Executive Gabriele del Torchio, a turnaround specialist, is expected to unveil his plan at a board meeting scheduled for 1700 GMT (10:00 AM EST) on Wednesday. Several sources said it may include up to 2,000 lay-offs as well as salary cuts to make Alitalia more efficient and profitable.

That would leave shareholders just one day to decide whether the plan merits their participation in a 300 million euro ($400 million) cash call to keep the Italian carrier aloft.

Air France-KLM (AF.PA), which has already written off the value of its 25 percent stake to zero, says it will inject more cash only under "very strict conditions".

A source close to the matter said the likelihood of the Franco-Dutch group taking part in the cash call was "very low", because it sees Alitalia's debt - 813 million euros at the end of September - as too high. The airline's future was in the hands of banks who needed to cut its debt, the source said.

"The industrial plan (including 2,000 job cuts) is heading in the right direction, but the financial plan doesn't guarantee Alitalia's medium-term future," the source said.

Air France-KLM saw Alitalia's goal of breaking even at the operating level in 2014 as unrealistic, the source added on condition of anonymity. "The banks hold the key to Alitalia's future. They should agree to cancel part of the debt."

Air France-KLM and other investors have until Friday to consider the strategy, an update to an initial July plan by Del Torchio, and decide whether they want to subscribe to the capital hike.

"Alitalia's management is most likely looking at job cuts of up to 2,000, mainly targeting temporary staff," one source close to the talks said, adding however the figures were not final. The airline declined to comment.

Three sources added that Alitalia may likely delay the Friday deadline by which shareholders would have to subscribe to the cash call. One mentioned November 21 as a possible new date.

Air France-KLM is in the midst of its own restructuring. Credit Suisse analysts said in a report published last week after a meeting with Air France-KLM executives that the firm was seeking a 20 percent cut in operational capacity at Alitalia.

A spokeswoman for Air France-KLM declined to comment.


The Italian government, which sees Alitalia as a strategic asset, has been holding out the prospect that another partner could be found - perhaps from Asia - to keep the airline flying if Air France-KLM walks away.

Potential candidates Etihad Airways, Lufthansa (LHA.DE) and Aeroflot (AFLT.ME) have all distanced themselves for now.

"If Air France don't (subscribe), their stake will fall to around 7 percent and then we can look for a partner in South-East Asia," Transport Minister Maurizio Lupi told journalists on Tuesday. He mentioned Aeroflot and Air China <601111.SS> <0753.HK> as possible investors, but did not provide details.

One source close to the matter said Alitalia's priority right now was its financial health, and the search for a foreign partner would likely not begin until next year.

Despite becoming leaner since it was privatized, Alitalia has still been hit hard by competition from low-cost carriers and high-speed trains.

Since cutting more than a third of its workforce when it was privatized in 2008, Alitalia has added 1,200 positions, all on a permanent basis. Today it employs 14,000 people, with 90 percent on permanent contracts.

The company has already placed some staff on state-backed temporary layoff schemes to avoid job losses. Any job-cut proposal would need backing from unions who are so far opposed.

"We are not prepared to ... discuss further redundancies at Alitalia," several unions said in a joint statement last week.

Del Torchio's proposals could generate savings of up to 400 million euros ($536 million), Italian media said, potentially helping to revive the carrier, which has made a profit only a few times in its 67-year history.

Analysts say Alitalia needs a strong partner willing to invest billions of euros to shift its focus to the more lucrative long-distance market from domestic and regional routes.

"The cuts and this new plan will only make sense if the company then invests in a long-haul fleet and a true revamp of its strategy," said Andrea Giuricin, a transport analyst at Milan's Bicocca University.

($1 = 0.7442 euros)

(Additional reporting by Paola Arosio in Milan, Matthias Blamont in Paris and Alberto Sisto in Rome; Editing by Peter Graff and Giles Elgood)