Italy's flag-carrying airline, Alitalia, has seen some rough days. Having not been profitable for the last decade, Alitalia restructured in 2008 only to be back on the brink again today. But the consequences of this financially troubled airline extend beyond Italy itself and to other major carriers as well.

Is the buyer back?
With Alitalia's disastrous financial history, it's tough to see which airlines would actually want it. But Air France-KLM (OTC:AFRAF) has an extensive history with the Italian carrier, having been a shareholder for much of Alitalia's history.

Currently, Air France-KLM holds a 25% stake in Alitalia, but the Italian government wants Air France-KLM to kick in some more capital. Right now, Air France-KLM is playing hard to get and for good reason -- the Franco-Dutch carrier really only sees Alitalia as being financially sustainable if significant cuts are made.

The latest comments by Air France-KLM CEO Alexandre de Juniac support the idea of a merger of Alitalia into Air-France-KLM to create a three-hub group of airlines. However, Air France-KLM still wants conditions attached to the deal to ensure Alitalia's financial sustainability.

Political firestorm
The history of Alitalia is as much about politics as it is about aviation. Currently, both the Italian government and Alitalia's unions are opposed to Air France-KLM's proposed cuts. Not only would these cuts amount to downsizing Italy's flag carrier reducing some of the country's international exposure, they would also mean major job losses.

With these cuts as a sticking point, Air France-KLM remains unwilling to contribute more capital and the Italian government is left searching for options. Some have included having Italy's other state-owned companies take stakes in Alitalia. A recent plan approved by Alitalia's shareholders calls for a capital raising of 300 million euros by extending stock options to existing investors. Among the potential buyers is Post Italiane, the state-owned post office, which could acquire up to a 12% stake in the airline based on unclaimed shares. Additionally, some reports suggest that Air France-KLM may invest enough additional money to maintain its 25% interest and four board seats.

But the political battle is spreading outside of Italy. International Consolidated Airlines Group (OTC:ICAGY), which owns British Airways and Spanish flag carrier Iberia, has asked the European Union to intervene in the Italian government's stake support of Alitalia deeming it "illegal." ICAG supports their view, saying, "[State aid is] protectionist, undermines competition and favors failing airlines that have not got to grips with economic reality."

An ongoing issue
Even after this latest capital raise, Alitalia still needs to address long-term financial sustainability. The airline needs to make money to be sustainable and its poor history, both before and after restructuring, shows no signs of that happening under the current structure. Unless the Italian government is allowed to continually inject money into Alitalia on a perpetuous basis, Alitalia will face the same cash crunch again and have to return for more money.

The Air France-KLM solution is not an easy one to stomach for Alitalia's workers or the Italian government but it is probably the most realistic chance Alitalia has of long-term solvency.

From the perspective of Air France-KLM, a good relationship with Alitalia is beneficial to its business. Italy represents a major travel destination and drives tourism traffic through Air France-KLM. We must also not dismiss the benefits that go to other airlines from Alitalia's survival.

Delta Air Lines (NYSE:DAL) is part of the SkyTeam alliance which includes among its members Air France-KLM and Alitalia. Both Delta and Air France-KLM can easily stitch together their route networks with Alitalia's network to provide access to the Italian market. If Alitalia were to collapse, Air France-KLM and Delta would have to seek out more alliances with smaller Italian carriers to remain effective competitors for the Italian market.

Troubled carrier
When it comes to airlines, Alitalia is a top example of financial disaster. But the most recent cash crunch for the airline has led to another try at making Alitalia financially sustainable. Talks with Air France-KLM are ongoing but have been unable to create a solution satisfying all parties. In the meantime, more capital injections from state owned companies could provide a stopgap measure but is also drawing criticism from another airline.

Airline investors should watch for any new developments out of this situation and whether they set Alitalia up as a financially sustainable airline or just push the problem into the future.