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Air France-KLM defers decision on help for Alitalia

An Alitalia plane passes an Air France plane on the tarmac of Charles de Gaulles International Airport in Roissy near Paris, January 8, 2013
An Alitalia plane passes an Air France plane on the tarmac of Charles de Gaulles International Airport in Roissy near Paris, January 8, 2013

By Matthias Blamont and Tim Hepher

PARIS (Reuters) - Air France-KLM deferred a decision on whether to offer more help for struggling Alitalia on Monday, saying it needed more information about its Italian partner's finances.

Air France-KLM said a board meeting - held hours after Italy opened the door to a takeover by inviting the Franco-Dutch carrier to double its 25 percent stake - had discussed its own management's view of loss-making Alitalia's predicament.

"The board considered it vital to hear the information that Alitalia's executive management should provide at a forthcoming meeting of the Italian company's board of directors," Air France-KLM said in a statement afterwards.

Alitalia's board is due to meet on Thursday.

The terse declaration dampened speculation of an imminent Franco-Dutch bid for Alitalia, which faces an estimated cash shortfall of some 400 million euros ($540 million).

Italian Transport Minister Maurizio Lupi said earlier that Rome would not oppose an increase in Air France-KLM's stake to 50 percent.

"I expect that Air France will strongly reaffirm that Alitalia is a strategic asset for Air France, and therefore that there will be a strengthening of Air France's role," he said on the sidelines of a conference in Milan.

"We ask that Air France does not consider Alitalia and (Rome airport) Fiumicino as an appendix, but a strategic asset for the development of European air transport."

Lupi is a political ally of former Italian prime minister Silvio Berlusconi who opposed proposals to have Air France-KLM take control of Alitalia in 2008, and instead asked a group of Italian investors to take over the loss-making carrier.

The Italian shareholders become free to sell their shares when a lock-up expires in a month's time.

Experts say Air France-KLM's options include maintaining its stake by participating in a possible 200 million euro capital increase, raising its stake, or turning its back on its Skyteam alliance partner by refusing to take part in the capital hike.

While Rome is pushing for extra investment, it could be a hard sell with the Franco-Dutch firm's shareholders and workers, as it cuts costs and jobs in a bid to bring down its own debts.

But the company is also seen as keen to protect the value of its existing investment while maintaining access to Europe's fourth-largest travel market.

POLITICALLY SENSITIVE

Alitalia has cut costs aggressively in recent years, but remains severely hampered by low-cost competition in its European markets, poor demand on its domestic routes due to Italy's debt crisis and the rise of high-speed trains, as well as a lack of capital to invest in long-haul fleets.

Earlier this year, Air France-KLM provided its share of a 150 million euro shareholder loan to keep Alitalia afloat.

Chief Executive Alexandre de Juniac pledged in July not to put up more money without tough conditions.

The decision is also politically sensitive as Air France, 19 percent owned by the French state, announced 2,800 further job cuts last week, prompting a call for strikes.

Before the board talks, a union source briefed on the discussions said: "In the past few weeks, the management of Air France-KLM have been more open towards an increase in the stake rather than just taking part in a capital increase."

A banking source, however, said an increase in the stake was the least likely option. Others said the management of the Dutch side of the operation, which merged with Air France to create Air France-KLM in 2004, was particularly reluctant to back it.

"It is impossible in the current context," the source said. "The only question to ask right now is whether Air France-KLM wants to see its stake diluted."

Jitters over the decision pushed Air France-KLM shares down to close 1.2 percent lower at 6.9 euros.

"Air France-KLM wants to protect its franchise but the priority is to deliver on its plans to reduce debts," said airlines analyst Stephen Furlong at Davy Research in Dublin.

"Exposure to Alitalia has always been fraught with challenges and it would be surprising if Air France-KLM agreed to increase their stake."

Etihad Airways, owned by the government of Abu Dhabi, has been floated in some Italian news reports as a potential alternative foreign backer for Alitalia, although it has already announced a large expansion of operations in India.

($1 = 0.7402 euros)

(Additional reporting by Agnieszka Flak, Giulio Piovaccari, Lisa Jucca; Editing by Mark Potter and Kevin Liffey)

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