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Why Air France-KLM Bought 25% of Alitalia

4 minute read
Jeff Israely

It is not the fire sale that some doomsayers had predicted. But Alitalia’s announcement last week that it would auction off the company’s collection of 163 modern-art paintings was another reminder, as if one were needed, of how far Italy’s national carrier has fallen. On flights during the 1960s, stewards used to display the prized (though necessarily small) works by such painters as Futurist avatars Giacomo Balla and Gino Severini for the pure aesthetic pleasure of its passengers; these days, a reputation for poor service is part of what has driven the company to the brink of collapse.

And Alitalia is losing much more than its artwork. On Monday afternoon, the board of Air France-KLM approved a deal to acquire a 25% stake in the Italian carrier for $414 million. Linking up with another major foreign airline was widely considered the only way that Alitalia could survive following years of cost overruns, labor unrest and political meddling that has led to more than $3 billion in state aid since 1998. (See pictures from Italy.)

Citing national pride, then opposition leader Silvio Berlusconi had railed against a complete takeover by the French-Dutch carrier last year. But this fall, after returning to the Prime Minister’s office, Berlusconi was forced to face the reality that Alitalia’s coffers were running dry. A consortium of Italian businessmen were encouraged to step in to salvage Alitalia in a deal that merged it with Italy’s No. 2 carrier, Air One, But the implicit understanding was that a foreign partner would also have to be found.

Politicians from Italy’s rich north tried to block the deal because Air France has promised to shift Italy’s main hub from Milan’s Malpensa back to Rome. On Monday, Milan mayor Letizia Moratti pleaded in vain for Alitalia’s managers to reconsider a partnership with German carrier Lufthansa.

The sale, which may be the first step toward an eventual takeover by the French-Dutch carrier, gives Air France-KLM a big say in decision-making at Alitalia and greater access to Italian routes, which are ripe with potential for both international and domestic travelers. Unlike most other European countries, Italy’s geography (1,350 kilometers (840 miles) north-south from Turin to Reggio Calabria, and two major islands) fuels steady national flights. Despite the current worldwide economic crisis, Italy also remains a destination for tourists as well as the families of Italian emigrants and their descendants around the world.

One international airline consultant with inside knowledge of Alitalia said the deal was inevitable despite years of waste and posturing. The companies are already linked through the SkyTeam alliance (along with Delta, Korean Air and others), and Air France and KLM have their own recent merger experience to work from as take in Alitalia. “This is the first real substantive positive step toward a viable long-term solution,” said the consultant, who requested anonymity because of his company’s work with the parties involved. “Everything before has been just kicking the can down the road, and political folly.”

In Italy, there was a mix of relief and anger. Labor unions, which struck as recently as last Wednesday, have virulently opposed the new consortium, which has trimmed the 20,000 work force by some 3,000, and cut pay and benefits to those employees who remain. Unions say that joining up with Air France is essentially the death knell for the Italian carrier. More labor unrest is expected. But many ordinary Italians will finally be satisfied that an apparently viable solution had been found to avoid more public investment or outright failure of the national carrier.

The change will become official when a Jan. 13 flight from London Heathrow to Rome Fiumicino takes off. The plane making the trip will have the familiar red and green stripes on its tail, and the crew will sport their old uniform pins. But this will be the “new” Alitalia, under private ownership, merged with upstart competitor Air One, and now partly owned by its French-Dutch rival. No more Futurist paintings to be sure, but perhaps Alitalia once again has a future.

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