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Alitalia chooses Air France-KLM

The board of Alitalia on Friday unanimously chose Air France-KLM as its preferred bidder for privatizing the ailing state-run airline, but the ultimate decision will be made by the government next month.

The board said in a statement that the Air France-KLM plan offered the "appropriate solution," noting the carrier's position as the airline with the highest revenues in the world.

"The Air France-KLM plan would generate significant synergies in Alitalia's favor, creating the conditions to relaunch the company for the long-term and guaranteeing an improvement in the quality of service to passengers and in operating performance," the board said in the statement.

The board asked the government for its "full support," and urged officials not to let the deadline for making a final decision lapse beyond next month.

Following a daylong meeting, the board made the announcement after the close of markets on a turbulent day of trading for Alitalia. After rising 2.95 percent to US$1.15 on opening, shares dropped throughout the day, closing at US$1.09.

Air France-KLM said that it would publish a statement once it has considered Alitalia's board decision.

Air France's main rival was the much smaller Italian airline Air One. While Air One has support in Italy as an Italian solution, analysts have said that Air France-KLM's size would increase the likelihood of a successful takeover.

Addressing critics of an outside takeover, the board said that Alitalia's Italian identity would continue to be the airline's "fundamental heritage," which "would be developed for the benefit of the new group."

The Alitalia board noted that Air France-KLM has already proven that it can successfully manage a merger, as it did with the French and Dutch airlines, and pointed to its revenues of US$33 billion and a market capitalization of around US$7.2 billion.

Air France-KLM's plan calls for returning Alitalia to profitability by 2010, and includes total investments of US$9.35 billion through 2015.

The Air France-KLM bid prioritizes the modernization of Alitalia's aging fleet, which currently is costly both to fuel and maintain. Like the competing bid from Air One, as well as Alitalia's own industrial plan, it calls for layoffs.

Air France-KLM said this week that it would make an immediate capital increase of US$1.08 billion to revamp cabin design, in-flight entertainment and ground services "to restore Alitalia's image and its stature as an international company."

The Franco-Dutch carrier also said it aimed to purchase 100 percent of Alitalia stock through an exchange offer, as well as all of Alitalia's convertible bonds, which total more than US$1 billion. It did not disclose details of the share-swap ratio, nor the timing of the offer.

By comparison, the offer by Air One, Italy's second-biggest airline, included a total investment of US$7.63 billion by 2012, including a capital hike of at least US$1.44 billion.

Air One has said Alitalia can break even by 2009 through a fleet renovation and a five-year, US$4.32 billion investment on 130 new planes. Both plans have called for layoffs.

Air One said in a statement it remained "deeply convinced" that its own plan was the best way to turn Alitalia around, adding that it would seek to present its proposal directly to the government, with whom the final decision rests.

The government owns a 49.9 percent share and has been looking since last year for a buyer.
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