Air France, Alitalia Reveal Venture Talks

Posted 23 November 2006 @ 02:26 pm EET     Print     Reprint     E-Mail     Comments

ROME (AP) - Air France-KLM and the financially troubled Italian airline Alitalia said they have begun tentative talks on a possible alliance, prompting Italian government suspicions about French intentions.

The potential tie-up is expected to be discussed by French President Jacques Chirac and Italian Prime Minister Romano Prodi at a summit Friday in Lucques, central Italy, a spokesman for the French presidency said.

There has long been talk of a link between Air France-KLM and Alitalia, hit by frequent financial crises, but the French company has laid down restructuring of the Italian carrier as a condition.

Prodi in an interview appearing Thursday in the French newspaper Le Figaro said he had "many doubts" about a deal between the two airlines, adding that he wanted to know "the true intentions of Air France".

Shares in Air France-KLM fell sharply, losing 6.79 percent to reach 30.06 euros, following reports of preliminary talks between the two carriers, even though Air France-KLM had also announced a 7.8-percent gain in second-quarter operating profit.

In Milan Alitalia shares were up 4.32 percent at 0.98 euros in mid-morning trade.

Air France-KLM chief executive Jean-Cyril Spinetta said in Paris that his group had "begun a phase of exploratory exchanges" with Alitalia to study a possible restructuring at Alitalia and the savings that might result from an alliance.

Spinetta said the contacts were taking place at the request of Alitalia, which recently forecast a net loss this year that would exceed the 167-million-euro (216-million-dollar) shortfall recorded in 2005.

Air France and Alitalia have had commercial links since July 2001, and Spinetta said "relations with Alitalia have always included the prospect of an eventual merger".

He said "I am of the conviction that a tie-up between the two groups would create value", adding that "Air France-KLM is proof that the merger of companies from different countries can create value".

He said Air France wanted in particular to know if an Alitalia restructuring plan was likely to bear fruit and if the two carriers "shared the same vision of future strategy".

Alitalia later said exploratory exchanges with Air France "aimed at finding satisfactory solutions to strategic questions, were still in an initial phase and were not exclusive".

Prodi in his interview with Le Figaro asked of Air France: "Does it want to create a great European air transport group in which Italy has a place, or simply grab the Italian air transport market, which is large and rich?"

Air France-KLM meanwhile attributed its 7.8 percent rise in second quarter operating profit to strong passenger traffic but also revealed that net profit had slumped on exceptional factors.

Operating profit for the July-September period rose to 568 million euros (734.9 million dollars) despite a 29.0-percent increase in the cost of fuel from the equivalent figure last year.

Net profit fell by nearly half to 374 million euros from 717 million euros because the figure 12 months ago had been boosted by a capital gain of 419 million euros from the sale of a stake in airline booking system Amadeus.

Excluding this factor, net profit rose by 25.5 percent.

Brokers Societe Generale said the factors that had supported the share this year were now represented in the price and that the share could suffer from persistent concerns among some investors that Air France-KLM might form an alliance with Alitalia.

Air France-KLM stood by a target for a marked increase in its operating profit this year from the figure of 936 million euros in 2005-2006, managing director Pierre-Henri Gourgeon said.

Sales rose by 8.8 percent to 6.13 billion euros in the second quarter.