By Eric J. Lyman
ROME, July 28 (Xinhua) -- Alitalia, Italy's beleaguered flagship airline, has been struggling for more than a decade from rising labor costs, foreign competition, and massive debt. Now it appears the Rome-based airline might be done in by a domestic rival Alitalia once spurned.
Alitalia has spent recent years in and out of merger talks, surviving a long series of restructuring plans and labor strikes, trying to curb eroding passenger traffic, and working to refinance a growing mountain of debt.
Over the last 18 months, the company -- kept afloat in part via two massive loans from the Italian Treasury -- has been trying to find an international partner that will allow it to keep its name and most of its autonomy.
Now, that plan could be on the rocks because of the rising profile of Air Italy, a small regional airline that Alitalia indirectly rejected as a potential partner in 2011.
Air Italy -- which as a regional carrier never had more than a dozen aircraft (around an eighth the size of Italia) -- had been a subsidiary of Sardinia-based Meridiana, the company Alitalia rejected seven years ago.
Earlier this year, Air Italy and Meridiana merged under the Air Italy name and with an injection of cash and expertise from powerhouse Doha-based Qatar Airways, it announced plans to challenge Alitalia as Italy's main air carrier.
To be sure, Air Italy remains a fraction the size of Alitalia by any measure: revenue, passenger traffic, fleet size, staff, or routes covered. But analysts told Xinhua the company has the tools it needs to pull off the challenge.
"The risk for Alitalia is not that Air Italy will displace it in its own right," Giovanni Dragini, author of "Capitani Coraggiosi," a book about Alitalia's struggles, said in an interview. "The risk is that it will reduce revenue enough on key routes, specifically long-haul routes, that Alitalia will no longer be attractive to potential buyers."
If Alitalia fails to stave off the challenge from Air Italy, Dragini said, the larger airline will probably go bankrupt. But if Air Italy fails in its challenge, it can most likely survive in the regional niche it occupied for most of its history.
The Italian media has reported that German air carrier Lufthansa and London-based discount carrier easyJet are the leading contenders to take control of Alitalia, though a final deal has been evasive mostly because of the company's too-large staff and massive debt, reportedly totaling more than 3.3 billion euros (3.9 billion U.S. dollars).
Alitalia is seeking to eliminate 900 million euros (1.1 billion U.S. dollars) in debt, the amount the company borrowed from the Italian Treasury this year, into shares in the company.
But the European Union has said doing so could constitute unfair government aid. Regardless, the debt burden has forced Alitalia to reduce the number of cities it serves, leaving what Mario Seminerio, an investment manager and frequent commentator on economic issues, called a "vacuum that Air Italy is rushing to fill".
Seminerio told Xinhua that Air Italy "is looking to encroach on Alitalia's market share on more profitable inter-continental routes".
To facilitate that the company moved its headquarters from Olbia, on the island of Sardinia, where Meridiana had been based to Milan, where it launches long-haul flights from the under-utilized Malpensa Airport.
The new airline also has an easy way to expand its fleet by leasing air craft from much larger and better equipped partner Qatar Airways.
"There is still a window open to Alitalia to turn its fortunes around, but it will not stay open for long," Seminerio said.