Air France-KLM (AF) Group is leaning against participating in a capital increase at Alitalia SpA as it seeks to preserve funds and the Italian airline shows no sign of a turnaround, three people familiar with the talks said.
While Air France-KLM directors on Alitalia’s board support a rescue to avert a bankruptcy of the Rome-based carrier, the French airline is resisting the purchase of new stock, said the people, who asked not to be identified as the talks are private. Air France-KLM, whose 25 percent stake would drop by more than half if it doesn’t subscribe to a capital increase, has about a month to decide.
The capital increase is part of a 500 million-euro ($677 million) bailout engineered under government supervision last week as Alitalia’s reserves dwindled, competition intensifies and its fuel supplier threatened to halt deliveries. Air France-KLM itself lost money last year and is eliminating thousands of jobs to turn around domestic operations, raising objections to fund a partner that has been unprofitable for years.
“Alitalia has a persistent track record of losses and requirements for new capital,” said Damian Brewer, an analyst at RBC Capital Markets. “So if Air France refrains from putting cash in, so what? The dilution’s done. But in most investors’ minds, it’s already written down to zero.”
Air France-KLM’s stake in Alitalia, acquired in 2009, would require the airline to commit about 75 million euros to anchor its holding. The capital increase will comprise 300 million euros of the package.
Alitalia’s board met yesterday. Cedric Leurquin, a spokesman for Air France, declined to comment. The airline’s stance on Alitalia is preliminary and the company may reconsider its commitment if conditions change, two of the people said.
The French airline gave a taste of its reluctance for an Italian bailout in September, when the board met to consider raising its stake and ended up saying it needed more information from its Italian partner before making a decision.
Italy’s postal company Poste Italiane SpA agreed to contribute 75 million euros, UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP) will guarantee as much as 100 million euros for eventual unopted rights in the capital increase for Alitalia, which is losing 1.5 million euros a day.
Failure to invest now would dilute Air France’s stake to about 11 percent, Transport Minister Maurizio Lupi said Oct. 13 in a televised interview with SkyTg24. It would also strip from Air France the veto powers it now has against decisions on major partnerships with other airlines, the minister said.
Air France in 2009 paid 323 million euros for 25 percent of the Italian airline, which had gone bankrupt and was given a fresh start stripped of its debt, merging its assets with those of Air One SpA.
Regardless of its stake in Alitalia, Air France as a partner in the Skyteam alliance can still reap the benefits of pulling passengers from Italy through Paris or Amsterdam for long-haul flights to other parts of the world.
Alitalia has suffered on both short- and long-haul. On domestic and European routes, competition has mounted from EasyJet Plc (EZJ), which has doubled its presence in Italy since 2008 to 24 aircraft and1 40 routes from 17 Italian airports.
On long-distance flights, Alitalia’s offerings have weakened to a point that Emirates now also serve the Milan-New York route.
There may exist limited incentive for Air France-KLM to invest further in Alitalia, given the carrier’s precarious condition and little risk of a competitive overture that would push Air France aside, said Yan Derocles, an analyst at Oddo Securities in Paris, who has a “neutral” rating on Air France.
“Air France can afford to pass up investing on this occasion,” said Derocles. “In the next six to 12 months it’s hard to imagine any other airline operator having an interest in Alitalia, so there’s no credible threat out there.”
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