Alitalia Must Make Profit Case Before Etihad Agrees to Buy Stake

Alitalia SpA must convince Etihad Airways PJSC that it can turn a profit and not simply enhance traffic flows to the Gulf, the Abu Dhabi-based carrier said as it continues to examine the Italian company’s books.

Investing in Alitalia would bring Etihad access to Europe’s third-largest market for outbound travel via a network that would complement its existing partnerships to the north, Chief Executive Officer James Hogan said today. At the same, time losses that swelled to 294 million euros ($405 million) in the first half of last year would have to be reversed, he said.

“We have to be convinced as an investor stepping in that we can move the airline back to profitability,” Hogan said at an earnings briefing. “That’s the work we’re undertaking at the moment in conjunction with the Alitalia management team.”

Hogan had a “very good” meeting with Alitalia board members during a visit to Rome last Friday, as well as with Italian transport and finance ministers, he told reporters. Due diligence is proceeding, with a decision on whether to take a minority stake possible in the next couple of weeks, he added.

“We’re very clear about what we would expect as investors, we’re very clear to understand how they consider the airline to be restructured, and we’re working through that,” he said. “In regard to the financial restructuring, that’s obviously in play at the moment and we can’t comment.”

‘Not a Race’

Etihad, the No. 3 Gulf carrier after Dubai-based Emirates and Qatar Airways Ltd., is considering a cash contribution of about 300 million euros to Alitalia as the Italian company seeks vital funding, people familiar with the talks have said.

Air France-KLM Group, previously Alitalia’s top investor, declined to support a capital increase last year after losses at its partner ballooned and a turnaround push fizzled out.

Investment from Etihad would requires a deal delivering network expansion, cost restructuring at Alitalia and a positive relationship with management, Hogan said.

“We have not committed in any form to investing or not,” he said in an interview. “It’s not a race. Part of coming to a point of view in the next couple of weeks is we have to determine what we believe is appropriate to their shareholders and what we’re able to do under European law.”

Etihad’s net income surged 48 percent to $62 million last year as equity investments and code-share deals delivered $820 million in revenue, or one-fifth of the total, it said today.

‘Key Pillars’

The company owns stakes in Air Berlin Plc, Virgin Australia Holdings Ltd., Air Seychelles Ltd. and Aer Lingus Group Plc. It won approval in November to buy 24 percent of Jet Airways (India) Ltd. and is awaiting clearance to invest in Darwin Airline of Switzerland and Air Serbia, the former Jat Airways.

“Germany and Australia have been the two key pillars but we expect India, with our relationship with Jet Airways, to be very powerful this year,” Hogan said said.

Alitalia would give Etihad an eighth minority holding, making it unique among major carriers which favor full takeovers or arms-length relationships via global alliances.

“There’s a strong network relationship between Air Berlin in the north and Alitalia in the south and if we enter into a partnership there’s us operating in the east out of Abu Dhabi,” he said. “At the same time they have a strong relationship with Air France and so do we. So, when we look at the top line of network, we do see an opportunity to collectively improve.”

Air France Accord

The carrier also code-shares with 47 airlines, creating what it calls a “virtual network” of almost 400 destinations.

Hogan is in the process of rolling out a second batch of code-share accords with Air France extending an existing pact to global locations, and will add a revenue-sharing element where antitrust rights allow, he told Bloomberg.

Deeper cooperation with Air France will give Etihad better access to markets in South America, as well as Europe, where the Paris-based company is the biggest airline by passenger traffic, Hogan said. Air France will gain links in the Middle East, Australasia, Southeast Asia and -- in future -- India.

Hogan said his company still has no interest in joining a global alliance, including the Air France-led SkyTeam, and will instead continue to work on building its investments and broadening revenue sources by adding diverse travel interests.

That’s prompted the consolidation of operations under a new structure, Etihad Aviation Group, which will include the main airline business, an airport-management unit and the newly formed Hala travel and tourism operation, the company said.

Etihad plans to raise $1.6 billion in aircraft financing this year, Chief Financial Officer James Rigney said by phone.

The first of 10 Airbus Group NV A380 superjumbos Etihad has on order will join the fleet in December, with deployment plans for the model including routes to London, New York, Sydney and Melbourne, according to Hogan.

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