Alitalia’s Higher Loss Risks Deterring Air France Investment

Alitalia SpA’s crisis deepened as its deficit rose and reserves shrank, forcing the board to seek fresh capital and potentially souring Air France-KLM Group’s appetite to lift its stake and support the Italian partner.

Board members for the Italian flag carrier are seeking at least 100 million euros ($135 million) in fresh capital after the first-half net loss swelled 46 percent to 294 million euros, the Rome-based carrier said in a statement yesterday. Liquidity reserves that include credit lines fell to 128 million euros from 159 million euros at the end of the first quarter.

Air France-KLM, which has held a 25 percent stake in Alitalia since 2009, has pondered raising its holding, and said this week it needs more information before deciding. Alitalia, which has been been losing money amid a weak Italian economy and competition from discount carriers, has undergone a management reshuffle this year after Chief Executive Officer Andrea Ragnetti resigned in February following widening losses.

“Clearly the mounting losses pose a challenge,” said Donal O’Neill, an analyst at Goodbody Stockbrokers. “Despite the apparent synergies it may have with Alitalia, it would be deleterious, in my view, for Air France-KLM to invest in a business that faces significant competitive threat on both its long haul and short haul operations.”

Convertible Bond

Air France declined as much as 1.6 percent to 7.22 euros and traded at 7.25 euros as of 10:57 a.m. in Paris, valuing the airline at 2.2 billion euros ($3 billion)

The Italian airline proposed investors boost funding by completing a subscription of 55 million euros through a bond convertible into stock. Shareholders, including Intesa Sanpaolo SpA, Italy’s second-largest bank, and toll-road operator Atlantia SpA, will meet Oct. 14 to vote on the increase.

Air France members on the Alitalia board opposed the plan, news agency Ansa reported, without saying where it got the information. An Air France spokesman declined to comment. Air France said Sept. 23 it would await more information from the Italian carrier’s board before committing to any move.

Hiring Advisers

The relatively small capital increase being sought suggests the move is only a short or mid-term solution, said Yan Derocle, an analyst at Oddo Securities in Paris.

Air France has hired Lazard Ltd. and Mediobanca SpA as advisers to consider its options on Alitalia, Italy’s Messaggero reported this week, without saying where it obtained the information. Alitalia in turn has hired Gruppo Banca Leonardo as seeks to end operating losses in 2014.

While owning Alitalia would give Europe’s largest airline access to one of the regions’ biggest aviation markets and help feed trans-Atlantic routes, the need for capital comes as Air France’s domestic unit struggles to stem its own losses. The Paris-based carrier last week scrapped a target of reaching break-even at Air France as it sought to cut 2,800 more jobs.

Italy’s Infrastructure and Transport Minister, Maurizio Lupi, met with his French counterpart yesterday to discuss the situation. He has said the government is not against Air France doubling its stake, while seeking guarantees on jobs and investments for the flagship carrier.

Falling Traffic

The Italian airline’s passenger traffic retreated 4 percent to 10.7 million passengers in the first six months, with revenue falling to 1.62 billion euros. Net financial debt for the carrier reached 946 million euros, including 600 million euros for aircraft liabilities, it said. Alitalia’s board will reconvene on Oct. 3, the airline said.

In July, Alitalia management, which in March promised to reach break-even in 2013, put the requirement for additional financial resources at 300 million euros this year.

Air France could work with a partner, such as Etihad Airways PJSC, to raise its Alitalia stake. James Hogan, Etihad’s CEO, said Sept. 24 that the airline is willing to pursue additional equity investments if they add value.

Etihad, the third-biggest Gulf carrier, has been an ally of Air France since 2012, and may be a potential Alitalia investor after taking stakes in European operators including Air Berlin Plc and Aer Lingus Group Plc. A tie-up would enhance Italy’s connections with Asia via Abu Dhabi, complementing links to the west through Air France-KLM bases in Paris and Amsterdam.

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