Top shareholder Air France-KLM refused a plea for cash on Thursday to rescue Alitalia, saying a new business plan was not enough to save the stricken Italian carrier unless its creditors also write off some of its huge debts.

Alitalia, which was privatised in 2008, has been unprofitable for more than a decade and has been stuck in a months-long tussle with Air France-KLM over whether to keep their strategic and financial partnership alive.

Italian officials say they hope they can still find another international airline to invest and save the carrier, but time is running out after Air France-KLM walked away from the 300 million euro ($403 million) call for more cash.

Air France has already written off the value of its 25 percent stake in Alitalia to zero. By rejecting the cash call while converting some bonds to equity, it will allow its stake to be diluted to just 7 percent, meaning it no longer has veto power over potential new investors.

The board of Alitalia approved a revamped business plan late on Wednesday pledging tough cost cuts, with sources estimating savings from the plan at between 200-400 million euros.

But Air France-KLM concluded that the restructuring was not deep enough and that Alitalia cannot be saved unless it also gets relief from creditors, who should write off some of its 813 million euros in debt.

“Even if the industrial component of the new plan presented yesterday by Alitalia is a step in the right direction and is receiving Air France-KLM’s full support, the necessary financial restructuring measures are still not yet met,” Air France-KLM said in a statement.

“Air France-KLM will not subscribe to the capital increase.”

Italian investors and two large domestic banks have already pledged 240 million euros in the cash call, enough to keep Alitalia flying for a few months but not enough to invest in larger aircraft and more lucrative intercontinental routes.

The Italian government, which has declared Alitalia a national strategic asset and is concerned about possible job losses, said it would support the carrier in its search for an ally. Top Italian investor Intesa SanPaolo said there was strong interest in Alitalia from Europe and beyond.

“It will now be possible for (Alitalia) first of all and for the government, as far as it is involved, to begin the search for another international carrier interested in a strong partnership with Alitalia,” Transport Minister Maurizio Lupi said.

However, a concrete alternative has yet to emerge after potential candidates Etihad Airways, Lufthansa and Aeroflot all distanced themselves for now.

Strategic Partner

Analysts said Air France-KLM could still revive its interest in Alitalia via a takeover offer for the Italian group next year – if Alitalia manages to free itself of some of its debt.

The Franco-Dutch group, struggling with its own restructuring, has said in the past it would consider taking control of Alitalia, a partner in the SkyTeam alliance, to bolster access to the Italian travel market, Europe’s fourth largest.

Were Alitalia to seek a different partner, analysts said it would need to pay around 200 million euros in penalties to exit SkyTeam – a group of 19 airlines with a seat-sharing agreement.

“All SkyTeam members are blocked by the French from seeking a deal with Alitalia, while all outside carriers would need to cover the penalty for breaking up the alliance, which makes it neither desirable nor feasible,” one high-level Italian political source said.

In its plan, Alitalia said it would cut the number of its medium-range aircraft and increase international and intercontinental flights to boost revenues, making it a more attractive business proposition for a new investor.

To avert a clash with Italy’s belligerent unions, Alitalia did not elaborate on whether its planned cost cuts involved heavy job losses or salary cuts. Sources have said the plan could require the first mass lay-offs since more than a third of staff were let go during privatisation five years ago.

Air France-KLM can ill-afford to plough more money into Alitalia unless it can be reassured that the Italian group is commercially and financially stable in the long term.

“Alitalia needs large investments and Air France-KLM’s refusal brings closer the possibility of Alitalia falling under special administration,” said Andrea Giuricin, a transport analyst at Milan’s Bicocca University, referring to a temporary state-led scheme to help financially stressed companies.

“The French seem to expect that Alitalia’s debt can be restructured that way.”

Additional reporting by Giselda Vagnoni, writing by Agnieszka Flak. Editing by Lisa Jucca and Giles Elgood.

Copyright (2013) Thomson Reuters. Click for restrictions.

Photo Credit: An Alitalia plane passes an Air France plane on the tarmac of Charles de Gaulles International Airport in Roissy. Reuters / Charles Platiau