After reorganizing in an effort to streamline operations back in 2008, Italian flag carrier Alitalia has found itself back in a position of being desperate for capital. Even though a capital injection plan is being crafted, much remains in the Alitalia story, and it affects airlines beyond Italy's borders.
Although not without its own troubles, French flag carrier Air France-KLM (NASDAQOTH:AFRAF) is in better financial health than Alitalia. This, combined with Air France-KLM's being a longtime partner and 25% owner of Alitalia, had the Italian flag carrier looking to get some of its much needed capital from Air France-KLM.
But because of Alitalia's poor record of generating profits, Air France-KLM wanted major changes at Alitalia before it would inject more capital. These changes included things like debt restructuring, management replacement, and the biggest sticking points -- job cuts and network size.
After both sides refused to budge, an alternative capital raising plan was devised that would ask for capital from Alitalia's private shareholders in the form of a rights issue. Additional capital would then be contributed by Italy's state-owned post office.
The CEO of International Air Group (NASDAQOTH:ICAGY), Willie Walsh, commented in The Dallas News on the state support of Alitalia:
Alitalia is distorting the market. It is making it difficult for airlines that have restructured and do not have the support of their friendly governments. It's distorting the market, and it's preventing people form making proper returns.
International Air Group, which owns British Airways and Iberia, has asked the EU to look into the Italian government's support of Alitalia. Investors should view a decision that causes the blockage of state aid to Alitalia to be a major hurdle for the airline's survival unless major restructuring has been done.
At the end of October, Air France-KLM wrote off the value of its 25% stake in Alitalia, with Air France-KLM CEO Alexandre de Juniac saying he was "offended and discouraged" by the events surrounding Alitalia. This has been followed by reports in multiple European newspapers that Air France-KLM will not take part in the capital increase at Alitalia.
Air France-KLM has been a longtime partner with Alitalia, and both airlines are currently in the SkyTeam alliance that also includes American partner Delta Air Lines (NYSE:DAL). But the refusal of Air France-KLM to inject more money into Alitalia may have the Italian airline seeking a new partner.
"If Air France believes in Alitalia, it will participate in the capital increase. If it doesn't, it will give Alitalia and the government the possibility to find an international partner," Italian Transport Minister Maurizio Lupi said.
However, the question remains: What other carrier would want to inject money into Alitalia in its current state? Air France-KLM and its SkyTeam partners have a lot to gain from having access to Alitalia's routes, but the hard stance Air France-KLM took in the negotiations clearly shows that no for-profit airline would want to invest in Alitalia with Alitalia's current cost structure.
Alitalia's in a position where the current structure of the airline renders it unprofitable but neither the Italian government nor the airline's unions can agree on reforms to make the airline financially sustainable. As the airline is requiring more capital, even longtime partner and shareholder Air France-KLM has said no after failing to get the reforms it deems necessary.
Unless Alitalia gets a partner from a rival alliance, something unlikely to happen without major changes at Alitalia, there would be little financial benefit for Alitalia to leave the SkyTeam alliance. So, for now, it looks like Air France-KLM and Delta Air Lines will still be able to put passengers on the Alitalia routes. But the Alitalia situation will need to be addressed at some point. After all, if the airline keeps losing money, these capital injections will become a routine occurrence.