Ghost of Berlusconi Haunts Alitalia as Letta Crafts Rescue Plan

At a Rome campaign rally before Italy’s national elections in 2008, Silvio Berlusconi told cheering supporters that a group of national entrepreneurs was willing to save Alitalia SpA “for the love of their country.”

The infatuation has since vanished alongside Berlusconi’s political clout and the billions spent on a failed revival of the national carrier. Now Prime Minister Enrico Letta is again harnessing corporate Italy to pitch in, arguing that Alitalia, which hasn’t reported a profit in a decade, is a “strategic” asset for the euro-region’s third-largest economy.

Letta brokered a 500 million-euro ($688 million) rescue for Alitalia this month that involves the country’s postal service and two largest banks. The move resembles Berlusconi’s own foray in 2008, when the former prime minister convinced more than 20 Italian investors to buy the airline for about 1 billion euros including debt, only to see the turnaround falter as competition and mounting losses pummeled Alitalia.

The latest bailout “was motivated by political reasons to do a short-term rescue that will only help Alitalia survive a few months before the issue rises again,” said Ugo Arrigo, a professor of public finance at Milan’s Bicocca University.

Scooter, Steel

Led by Roberto Colaninno in 2008, the owner of the Vespa scooter maker Piaggio & C. SpA, the group dubbed by Berlusconi as the “courageous patriots” included the Benettons and the Riva family, owner of Europe’s biggest steel plant.

The government-engineered deal planted the seeds of today’s losses because it denied the carrier a deeper overhaul. Alitalia was granted antitrust exemption for three years for routes including its then lucrative Milan-Rome link, which is under attack from high-speed train services.

It also led to politically motivated decisions that hurt the company, such as scaling back Milan -- the nation’s business capital -- as a hub in favor of Rome’s Fiumicino airport, said John Strickland, a director at aviation advisory JLS Consulting.

“That is completely counterintuitive to a commercial decision,” said London-based Strickland. “They opened the door to make their problems worse.”

The 2008 Alitalia bailout cost at least 4 billion euros, Arrigo estimates. The figure includes losses, state-subsidized lay-off programs, lower tax revenue for the government and a rebuffed takeover offer by Air France-KLM Group in 2008 valued at the time at 747 million euros plus the assumption of debt.

Bad Shape

Alitalia’s resources have been depleted by mounting losses and competition from low-cost carriers including EasyJet Plc. Losses at the Rome-based carrier swelled to 294 million euros in the first half as revenue fell 4 percent to 1.62 billion euros. A sales slump deepened over the last month as concerns over the airline’s future deterred travelers.

If Alitalia had been restructured adequately five years ago, “the company would be in a much better place than it is today,” said Strickland.

Keeping together the band of patriots has proven harder for Letta than for Berlusconi. The Ligresti and Riva families have been plagued by legal woes, with some members of the Ligresti family, which once controlled the nation’s No. 2 insurer, charged with false accounting and market manipulation.

The Riva family, Alitalia’s second-biggest shareholder after Air France-KLM, is accused of causing an environmental disaster at the company’s Ilva steelworks plant in the southern town of Taranto. Their original 10.6 percent stake has been sequestered as part of the investigation.

Political Death

Berlusconi himself faces possible expulsion from the Senate in the coming weeks after his definitive conviction in August for tax fraud tied to evasion by his television company Mediaset SpA. Letta this month defeated an attempt by Berlusconi to bring down his six-month coalition government.

Alitalia is not the only example of state intervention. The government decided this month to keep Ansaldo Energia, Finmeccanica SpA’s power-plant construction unit, in Italian hands by using a state lender to acquire control. That follows a bill proposed by a senator in Letta’s Democratic Party to change Italy’s takeover law after Spain’s Telefonica boosted its stake in the country’s biggest phone company, Telecom Italia SpA, last month.

While Letta has the backing of national corporations, getting Alitalia’s biggest shareholder in line has been harder. Air France-KLM has resisted contributing to a capital increase as it saw the value of its 25 percent stake plummet.

Few Choices

“The only choice at the moment would be a full takeover by Air France because Alitalia doesn’t have the necessary resources to invest in long-haul flights, which may grant profits in the future,” said Bicocca University’s Arrigo.

Alitalia’s latest valuation means Air France has lost 96 percent of its investment in the Italian carrier since it paid 323 million euros for its stake in 2009, beating out a rival bid from Deutsche Lufthansa AG, after the airline was put into bankruptcy and reorganized in 2008.

The latest bailout has also irked foreign rivals, which British Airways parent International Consolidated Airlines Group SA calling the package a subsidy it plans to contest.

The plan to have the Italian postal service take a stake in Alitalia “is blatant state aid,” said IAG Chief Executive Officer Willie Walsh.

“Unprofitable airlines with no prospect of becoming profitable continue to drag down airlines that are trying to do the right thing,” Walsh said. “We have seen the Italian solution to the Italian problem the last time around and this appears to be another Italian solution.”

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE