October 9, 2008 / 1:29 AM / in 9 years

Air France revels as merger end-game nears

PARIS (Reuters) - Banks are collapsing, economic storm clouds are gathering yet the cabaret is in full swing and the joint is really jumping. The Great Depression? No, a lavish 75th birthday bash thrown by Air France in Paris on Tuesday.

<p>An Alitalia plane passes an Air France plane on the tarmac of Fiumicino International Airport in Rome, September 25, 2008. REUTERS/Max Rossi</p>

Europe’s largest airline, and the world’s largest by revenues following its merger with Dutch KLM four years ago, put on a stylish and self-confident 1930s spectacle befitting one of the few certain survivors of a shake-out in European airlines.

Dotted with politicians and air hostesses in vintage uniforms, the party at the vast glass-domed Grand Palais exhibition hall would have cost a fortune had Air France-KLM not persuaded its suppliers to stump up the bulk of its cost.

But there could have been no clearer contrast to the global financial crisis after a week in which it was safer for investors to put money in an airline than a bank, and which in turn could speed up the end-game in airline consolidation.

After months of pressure from high oil prices, shrinking credit and now fears of recession, Europe’s airline industry is increasingly polarized between the haves and have-nots among both traditional legacy carriers and low-cost airlines.

Air France-KLM, Germany’s Lufthansa and British Airways are all hovering over the map of Europe, with Alitalia, Austrian Airlines and SAS in talks to be bought and France and Germany seen likely to divide most of the spoils.

“The crisis definitely will speed things up. Not everyone can be bought. Those that can’t be bought may not survive,” a top European airline board member told Reuters.

SLOW NEGOTIATIONS

Air France-KLM is competing with Lufthansa to link up with Italy’s flag carrier Alitalia, whose bad assets have been purged by the Italian government in a bailout that few would have suspected as a taste of things to come in banking.

Maneuvers continued behind the party scenes on Tuesday as the chairman of a group of Italian investors ready to lead the airline rescue, Rocco Sabelli, visited Paris for talks with Air France-KLM before heading off to Lufthansa and BA.

Air France-KLM and Lufthansa are both ready to take stakes of up to around 20 percent in the CAI investor group, while BA says it is interested only in a commercial partnership.

But despite reports of a frenzied auction, the battle for Alitalia is still at the phoney-war stage because Italy has yet to decide to agree how much weight to give Rome and Milan, according to officials on both sides of the negotiations.

“We haven’t seen a business plan or industrial proposal. There are no negotiations. Things have to be sorted out on the Italian side first,” said a senior airline official.

The problem is complicated by disagreements over the future of Milan’s city Linate airport, which runs the profitable Rome-Milan shuttle but also draws some European flights away from the Italian business capital’s other airport, Malpensa.

The dilemma for Air France-KLM is that while its strongest support comes from Rome, it makes some sense to place a hub in Milan, tapping a rich business market. The airline is at best neutral as long as the longstanding Linate issue is cleared up.

“You have to bring medium-haul flights into the same airport as long-haul ones or it’s not a hub,” one senior official said.

None of the people involved in the negotiations agreed to be named because of the politically sensitive nature of the talks.

Air France-KLM backed a Rome hub proposed by Alitalia’s old management when it agreed to buy the whole airline earlier this year. That deal collapsed and the French have signaled more flexibility as Lufthansa lines up support in Italy’s north and Italian Prime Minister Silvio Berlusconi leans toward Germany.

Written off by rivals a few weeks ago when its coffers were empty and its fleet nearly out of fuel, Alitalia’s return from the dead provides a tempting opportunity for its larger rivals.

Air France-KLM, Lufthansa and BA each want to capture a new flow of passengers onto their own networks or global alliances.

“It’s attractive since Italy is the fourth biggest market (in Europe). There is a good business market in the North and a destination market in the South. You pick up people from Milan and you take people to Rome,” the European board member said.

“Depending on how much Alitalia still controls its market and how much loyalty it commands through its Frequent Flyer scheme, then it’s worth paying a bit to get access to that.”

Editing by Richard Chang

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