The three bidding consortia for Italian State-run airline Alitalia will submit their business plans and non-binding offers for at least 39.9% of the company on April 16, but at the moment there is no obvious front runner, industry experts said on April 13.

There are three consortia left in the running for Alitalia - an all-Italian team of AP Holding SpA, led by Air One Chairman Carlo Toto, and backed by Intesa Sanpaolo SpA, Italy's second largest bank by market capitalization; U.S. private equity group TPG and U.S. asset management group Matlin Patterson, paired with Italian merchant bank Mediobanca; and Russian carrier OAO Aeroflot-Russian Airlines, which is bidding with Italian bank Unicredit SpA.

"It seems reasonably even," said Morgan Stanley analyst Penny Butcher. "It's going to be a tenuous battle between unions' satisfaction and the government's target price and budget."

On the face of it, the all-Italian consortium would seem to have the upper hand because the Italian government, which put Alitalia up for sale late last year, has said its buyer must keep the company's Italian identity for eight years.

"Certainly Air One has more clout with the government and politicians, and might look more favorable to the unions," said Butcher, but "it seems like the other two bidders have more money at hand now."

Although the bidding groups have not disclosed clues about their potential offers for the company, Italy's Transportation Minister said on April 12 that the buyer would have to fork out over EUR3 billion: half to buy the ailing company that has a net debt of EUR1.1 billion, and half to restructure it.

Although Russia's Aeroflot was a surprising latecomer to the auction, only announcing its intention to bid on April 2, it also holds a certain appeal for Alitalia's powerful unions.

"What we like about Aeroflot is the same thing we liked about Air China. They want to grow, and they lack a base in Europe," Fit-Cisl union spokesman Patrizio Corvi said, adding the partnership would allow Alitalia to expand its own international flights.

At the end of 2006, there had been speculation that Air China could look to partner with Alitalia, a notion that some Italian government ministers said at the time looked favorable.

The unions are key to any deal. Alitalia is burdened by huge labor costs at a time of high fuel costs and as it faces stiff competition from low-cost carriers and other European rivals. Agreeing with Unions to cut the labor costs will be the new owners most urgent, but most difficult task.

Already, Alitalia's own maintenance staff feels vulnerable: Claiming their contracts have not been renewed in four years, the 10,000-strong ground staff declared a strike for next week, one of many in the past few years.

"The unions are going to be an obstacle to any turnaround plan," said Rasbank analyst Carmelo Pappalardo.
"The unions are capable of going on strike the first day the new management comes in, and staying on strike for five weeks," added Butcher.

Unions fear job cuts if Air One's Toto comes to the helm while still leader of Italy's second largest airline, Corvi says. "[Alitalia and Air One] have the same synergies, they both want to grow," said Corvi.

Observers have also questioned the U.S. private equity consortium's ability to deal with Alitalia's intractable unions, even though this consortium is flush with equity.

TPG could also be distracted by its interests in other airlines. Last week, it bid for Spanish airline Iberia Lineas Aereas de Espana SA, while it is also part of a consortium that is bidding for Australian carrier Qantas Airways Ltd.

The shadow of Europe's largest airline by revenues, Air France-KLM also still hangs over the process, even though it is not part of any bidding consortium.

The airline has several times reiterated that it wouldn't be interested in Alitalia until the Italian airline's balance sheet is sorted out. But observers say it could come in once that happens.

Butcher noted that since Aeroflot and Air France are both in the SkyTeam Alliance, the latter "by default" could gain some control over Alitalia that could parlay into a takeover after someone else has straightened out the company's finances.

"Eventually Air France could buy out one of the banks and the two of them could run [Alitalia] with a fifty-fifty co-share agreement," said Butcher.

That would be bad news, say the unions.

"[Air France] would turn Alitalia into a satellite of Air France to transport passengers to Paris," said Corvi. "I have a bad feeling that powers are at work so that Air France will be the real winner."

"That wouldn't be a great future for Alitalia," Corvi said, adding that Air France has both extensive international flights and a large maintenance crew, areas where it would likely cut staff at Alitalia.

While the Italian government has set out to keep Alitalia Italian and to appease union fears to a degree, analysts are hoping the final decision will be made on business sense alone.

"I don't think the government is in a position to favor one [bidder] over the other," said Rasbank's Pappalardo. "At the end of the day, Merrill Lynch is the advisor and its choices, hopefully objective, will come before questions of Italianness or other obstacles from the government."