Air France-KLM Group and Deutsche Lufthansa AG, Europe's two biggest airlines, are holding talks with Alitalia SpA as the Italian government seeks a buyer for the unprofitable carrier, two people with direct knowledge of the matter have said.

Alitalia plans to include the French and German companies on a list of potential bidders that will be drawn up at a board meeting on Oct. 8, said the people, who declined to be identified because the talks are private. Alitalia's Citigroup Inc advisers will brief board members on takeover options at the meeting, the Rome-based carrier said on Oct. 4 in a regulatory filing.

The government is trying for the second time to sell its 49.9 percent stake in the country's largest airline. An attempt failed in July after rival Air One SpA and investment fund TPG Inc withdrew, blaming government-imposed preconditions. Russia's OAO Aeroflot also pulled out. The Italian carrier has lost more than two billion euros (US$2.8 billion) in the past four years, Bloomberg News said.

Restructuring

"Restructuring Alitalia as a foreigner is considerably harder because you'd get a quick coalition of unions, parliament and public opinion against you," said Chris Avery, a London-based JPMorgan analyst. The first auction's terms said the buyer must protect jobs and maintain the carrier's Italian identity.

Alitalia shares rose 1.2 percent to 81.5 euro cents in Milan, valuing the company at 1.13 billion euros. The stock has declined 22 percent this year.

Air One is also likely to be identified as a potential buyer, the two people familiar with the matter said. The No. 2 Italian carrier has declared interest in buying its competitor. While discussions with Air France are more advanced than those with Lufthansa, they are at a very early stage and will not necessarily produce an offer, one of the people said.

"A deal will be done with Air One," Avery said, predicting that neither Air France nor Lufthansa will end up making a firm bid.

Air France and Lufthansa both played down their interest in Alitalia. Air France, based in Paris, "has not officially declared itself a candidate," spokesman Francis Gantier said.

Lufthansa spokesman Andreas Bartels declined to comment on whether the Cologne-based airline is in talks with Alitalia.