What if Alitalia Fails?

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You appreciate their elegance, even on the picket line. Alitalia pilots and flight attendants, dressed in their crisp black-and-green uniforms and aviator sunglasses, have spent decades stylishly shepherding the world to Italy, and Italians abroad. More recently, the handsome crews have also done their part — with plenty of help from Alitalia's inept senior management and shortsighted Italian politicians — to steer the airline on a crash course toward bankruptcy.

Hemorrhaging up to $3 million a day, Alitalia has become the poster boy for all that's wrong with Europe's worst state-run companies. With the pilots association and stewards union scuttling the latest attempt to salvage the airline last week, Alitalia seems to be nearing the end.

On Monday, the head of the national airline regulator announced he will begin grounding flights within a few days if a new deal isn't reached. The sense of impending doom, said the pilots' main negotiator, was part of a plot. "Someone wants to create a company that produces the forms of serious psychological pressures on pilots that can cause airplane crashes," he said.

Alitalia has been in need of a shakeup for years. The company hasn't turned a profit since 1999, forcing the Italian government to set up a series of bailouts that have drawn the ire of European Union competition regulators. In December 2006, then Prime Minister Romano Prodi put the government's 49.9% share of Alitalia on the selling block. Several potential buyers pulled out, and a takeover bid by Air France–KLM was blocked by the unions and the open disdain of then opposition leader Silvio Berlusconi.

The latest offer, which had the blessing of Berlusconi, who's back in power, came from a consortium of Italian businessmen ready to invest up to one billion euros in the more profitable sectors of the company. (The money-losing units would file for bankruptcy protection.) But after unions rejected the plan, the investors pulled their offer off the table.

There's still a slim possibility Alitalia can be saved. Air France–KLM or German carrier Lufthansa might make a new offer, or the Italian consortium could reconsider if the labor syndicates show more leeway. But the likelier scenario is that Italy's national carrier goes under for good.

The short-term consequences of that are serious: up to 18,000 employees could suddenly be looking for a job, while key domestic routes vital to the Italian economy would go underserved. In broader terms, Alitalia's demise would be yet another blow to the country's image abroad and to confidence at home. Berlusconi, who has maintained a hard line since negotiations imploded, has banked much of his credibility on resolving the crisis and keeping Alitalia under Italian ownership.

Michele Polo, a professor of economics at Milan's Bocconi University, says liquidation may now be the only option remaining. Polo doesn't see the logic in trying to keep the airline afloat just to maintain its Italian identity, and he expects that Italy's No. 2 airline, AirOne, and foreign carriers will almost certainly fill the profitable Rome-Milan route, while low-cost carriers will jump on other Italian destinations. "The market will do its job," he says. "This kind of evolution would bring more competition." A significant number of laid-off Alitalia employees would eventually be rehired by other airlines, he says.

Economist Andrea Goldstein notes that Alitalia in the 1970s was considered an avatar of the efficient European public company. There is a certain irony, Goldstein says, that it faces its death as the free-market oriented U.S. government steps in to bail out much of America's financial-services industry and China revs its own state-run economy. "There is a paradox that as the state elsewhere returns to play a prominent role in managing national economies, in Italy the state is too weak to handle this situation," says Goldstein. The Italian economy seems to suffer from the worst of both worlds: inadequate state and inadequate market. At least they do it in style.

(Click here for photos from Italy.)