War is raging among carriers over control of European skies

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Air France-KLM on December 11 lodged a formal complaint with the European Commission regarding the conditions under which Lufthansa intends to takeover the Austrian flag carrier Austrian Airlines.

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Air France-KLM on December 11 lodged a formal complaint with the European Commission regarding the conditions under which Lufthansa intends to takeover the Austrian flag carrier Austrian Airlines.

Air France-KLM has taken part during Fall to the initial bidding process leading to the privatization of Austrian Airlines but had unfortunately to come to the conclusion that it was not in a position to submit a financial proposal in accordance with the instructions imposed by the Österreichische Industrieholding AG (English: Austrian industry-holding stock corporation).

The Franco-Dutch airline group claims that the agreement reached in December 2008 between the Austrian authorities and Lufthansa does not follow the instructions imposed during the bidding process on Air France-KLM, and is in particular conditioned to a €500 million debt cancellation by the Austrian state and based on a potentially lowered equity price for the state shareholder. The agreement signed by Lufthansa and officials of the Austrian government’s privatization agency gives the German carrier the state’s 41.56 percent share in Austrian Airlines. That deal carries a price tag of €366,000 (US$465,000) but foresees additional payments of up to euro162 million depending on whether, and to what degree, Austrian turns profitable again. Lufthansa has also offered to buy the rest of Austrian Airlines for euro4.44 per publicly held share.

This is not the only front Air France-KLM had to face Lufthansa in the battle for European sky. Latest reports indicate Italian unions and politicians appear to be tipping the scales toward Lufthansa and leaving Air France-KLM behind over Alitalia.

CAI, a consortium of top Italian businessmen, came to Alitalia’s rescue with a 427 million euro purchase of its best assets to prevent the carrier being liquidated.

After weeks of suspense, Alitalia was kept flying after pilots and cabin crew members decided to back CAI’s rescue offer. But Italy’s powerful unions could still disrupt a deal with a foreign airline. Major unions like CISL and CGIL say they prefer Lufthansa because of its multi-hub strategy.

CAI said Air France-KLM and Lufthansa are still battling it out for a stake of as much as 25 percent in Alitalia. Despite media reports that Air France-KLM had already sealed the deal, CAI chief executive Rocco Sabelli said the competition was still open. A decision will be made by the year end, with the aim of having a foreign partner in place when Alitalia is relaunched as a smaller carrier on Jan. 12, he said.

CAI had also finalized the purchase of tiny Italian airline Air One, whose operations will be folded into those of Alitalia. It also aims to reduce the average age of Alitalia’s fleet to 8.6 years in 2009 from 12.4 years.

British Airways is also in the running to become a partner, but CAI said it favored Air France-KLM or Lufthansa because they were interested in taking a stake in Italy’s national airline, while BA only wanted a commercial partnership.

Italian Prime Minister Silvio Berlusconi, whose drive to save Alitalia spurred the creation of the CAI group, said he would prefer a foreign rival to strike a commercial alliance with Alitalia rather than buy an equity stake.

Prime Minister Berlusconi has declared that Lufthansa is his preferred choice after saying that Air France-KLM’s failed deal, which he thinks wanted to acquire Alitalia on the cheap. Sensing the feeling chief executive of Air France-KLM, flew to Rome and agreed to back CAI’s decisions on hubs and the network if they were profitable.

Lufthansa, leading the pack in the European airline sector, has agreed to buy Brussels Airlines and is in talks to acquire SAS also. Some thinks Alitalia would gain from allying itself with a major partner rather than waiting to see where it is left in the end.

Now real restructuring will center around Northern Europe by Lufthansa, when they are done Air France-KLM can pick up what is left like Olympic Airlines and Malev Airlines which they look ripe for pickings.

Lufthansa wants Alitalia so that competitors won’t have the Italian market and with Alitalia alliance they can fill the 15 Airbus A380s that it has ordered.

But, Alitalia remains a tough sell given its history of labor action and failed restructuring efforts. But then again they are shopping in a buyer’s market and they’ll have to take whatever they can get.

(with wire inputs)

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Editor in chief is Linda Hohnholz.