2006/176/EC: Commission Decision of  7 June 2005  on Alitalia's industrial restructuring plan  (notified under document number C(2005) 1651)   (Text with EEA relevance)
Date: 2005-06-07
Institutions: European Commission
Subjects: Italy, State aid, aid for restructuring, air transport, control of State aid, financial aid, industrial restructuring, transport company

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 7 June 2005

on Alitalia's industrial restructuring plan

(notified under document number C(2005) 1651)

(Only the Italian version is authentic)

(Text with EEA relevance)

(2006/176/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Com-
munity, and in particular the first subparagraph of Article 88(2)
thereof,

Having regard to the Agreement on the European Economic
Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments
pursuant to the provisions cited above (1), and having regard to
their comments,

Whereas:

I. PROCEDURE

(1)

On 15 October 2004 Italy notified the Commission of
Alitalia's industrial restructuring plan, in particular the
planned recapitalisation of the company and the invest-
ment which the State holding company Fintecna SpA
in its groundhandling services.
intended to make
Following the Commission's request of 21 October for
additional information, Italy transmitted information to
the Commission by letters of 21, 23 and 29 December
2004 and at meetings held on 27 October, 26 November
and 14 December 2004.

(1) OJ C 44, 19.2.2005, p. 10.

(2)

(3)

(4)

By letter of 20 January 2005 (SG (2005) D/200261), the
Commission informed Italy of its decision to initiate the
procedure provided for in Article 88(2) of the Treaty
against these measures.

The Commission initiated the procedure by decision of
19 January 2005 (hereinafter referred to as the ‘decision
to initiate the procedure’), which was published in the
Official Journal of the European Union (2) on 19 February
2005. The Commission called on interested parties to
submit their comments on the measures in question
within one month of the date of publication, that is to
say by 19 March 2005.

It

The Commission received comments from interested
parties on 17, 18 and 22 March 2005 (3), all of whom
confirmed that
their comments did not contain any
transmitted these comments,
confidential material.
including those received after the deadline, to Italy by
letters of 18 and 30 March 2005, giving Italy the oppor-
tunity to respond to the comments within a period of
one month.
In order to ensure the greatest possible
transparency of the procedure, the Commission decided
to take account also of comments received from inter-
ested parties after the deadline and transmit them, on
30 March 2005, to the Italian authorities together with
the comments received from interested parties within
the deadline. The Commission received Italy's response
to the comments from interested parties and to the deci-
sion to initiate the procedure by letters dated 18 and
20 April 2005.

(2) See footnote 1.
(3) The European Low Fares Airline Association (ELFAA) submitted its

comments on 22 March 2005.

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(5)

Moreover, a meeting with the Italian authorities was
held on 8 April 2005. This meeting was followed by the
dispatch in the same letters of 18 and 20 April of addi-
tional information requested by the Commission. Further
information,
including that requested by the Commis-
sion on 20 April, was supplied by letters of 22 and
28 April, 31 May and 1 and 6 June 2005.

II. BACKGROUND

the

future;

the
Italian authorities provided the
Commission, in the framework of its analysis of the
recapitalisation plan, with information showing that
these undertakings were being honoured;

b) the Italian authorities also gave a written undertaking
on 13 July 2004 that the State's share of Alitalia's
stock would be a minority one within twelve months
of the implementation of the rescue aid, that is to say
before 8 October 2005.

II.1. The situation in July 2004 and the notification

II.1.2. The restructuring measures notified

II.1.1. Alitalia's financial position in recent years

(8)

(6)

Its balance sheet

Alitalia, 62,3 % of which is currently controlled by the
Italian State, has seen its financial situation worsen
considerably since 2003.
for 2003
showed further losses (before tax and financial and
exceptional charges) totalling €379,5 million compared
with a loss of €118,5 million in 2002. In 2004 its turn-
over dropped by 6 % compared with 2003, however
with a strong impact of the way in which airport taxes
were entered into the accounts. All in all, the net result
for 2004 as a whole is expected to be a loss of
€850 million. However, the result of the fourth quarter
of 2004 (-€104 million before tax and exceptional
charges) is better than that of 2003 (-€151 million). It
was against this background that, by decision of 20 July
2004, the Commission approved rescue aid (4) (herein-
after referred to as the ‘decision to approve rescue aid’)
of a maximum of €400 million consisting of a State
guarantee of liquidity loans bearing 4,43 % interest per
annum and repayable not later than twelve months after
the last disbursement of funds. According to the report
by Alitalia's directors on the state of the company's
accounts at 30 June 2004, the loan was intended to
cover the company's financial needs until March 2005.

(7)

The Italian authorities have given several undertakings in
the framework of the Commission's decision of 20 July
2004, in particular:

a) Alitalia assured the Commission that none of the
season
routes opened from the 2004 summer
involved an increase in capacity as compared with
the investments already agreed on 31 December
2002, and that all these routes were economic; it also
confirmed that it did not currently practise predatory
pricing on these new routes, nor would it do so in

(4) OJ C 125, 24.5.2005, p. 7.

On 20 September 2004 Alitalia's board of directors
adopted a new plan (‘Industrial Plan 2005-2008’) to
address the company's serious economic difficulties. It
includes a comprehensive set of measures intended to
ensure the company's economic viability by increasing
productivity and working hours and through cost
control, better use of the fleet, etc. The new plan also
provides for the separation of Alitalia's two activities,
namely air transport (AZ Fly), which will retain the
company's present legal form, and support, for which a
subsidiary (AZ Servizi) will be set up to cover mainte-
information technology and
nance, groundhandling,
shared services. The plan includes shedding 3 679 staff
in Italy, using schemes provided for this purpose such as
the ‘Cassa Integrazione’ which has been extended to
cover the aviation industry in order to limit the social
repercussions of such measures.

(9)

Alitalia's restructuring involves two recapitalisations:

a) for AZ Fly with support from the State and from
private investors contributing some €1,2 billion in
early 2005 following approval of the accounts for
2004 at
the shareholders' annual general meeting
planned for 27 and 28 June 2005;

activities,

b) for AZ Servizi, which is to be assigned Alitalia's
information tech-
groundhandling,
maintenance,
nology and shared services
involving
approximately €220 million between 2005 and 2007
from the State-owned holding company Fintecna,
before the proposed transfer of Alitalia's activities to
private partners, possibly in separate sectors. Recapi-
talisation will
subscription of
take the form of
ordinary shares and preference shares ensuring a
preferred dividend.

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II.1.2.1. T h e r e ca p i ta li sa t i on of AZ F ly

situation, whether the two recapitalisations proposed are
compatible with the common market.

(10) As with the recapitalisation in 2002, the State's contri-
bution should be on the same terms as that of the
private sector. Italy has declared its willingness to give
undertakings similar to those given on that earlier occa-
sion. However, since this notification has been made in
letters of intent announcing their
advance, the banks'
willingness to guarantee the successful conclusion of the
operation in terms of the involvement of private inves-
tors were not yet available at the time of the notification.
Other details of the operation, such as reducing the
capital prior to recapitalisation to cover past losses, still
have to be worked out. These could of course affect the
share which the State could underwrite while still
honouring its undertaking to privatise Alitalia.

II.1.2.2. T h e r e ca p i ta li sa t i on of AZ S e r v i z i

(11)

The two parties, Alitalia and Fintecna, have signed two
letters of intent and have agreed, with the aid of their
respective consultants, on a scheme which will yield a
profit of approximately 25 % on the funds invested by
Fintecna up to 2008; however, certain aspects of the
operation still have to be negotiated between the parties.

II.2. The Commission's initial assessment

in the

decision to initiate the procedure

(12)

From the information in its possession, the Commission
could not rule out the possibility that these recapitalisa-
tions constitute State aid on the grounds that they do
not comply with the principle of a private investor oper-
ating in a market economy. Since Alitalia already
received restructuring aid authorised in 1997, confirmed
in 2001 and paid between 1996 and 2001, it cannot,
according to the ‘one time, last time’ principle, receive
further aid.

(13) With regard to the €1,2 billion recapitalisation of AZ
Fly, the Commission therefore wished to receive defini-
tive guarantees that the private sector was also actually
involved and that
the undertaking to privatise the
company which Italy had given in July 2004 was being
honoured.

(18)

(14) With regard to the takeover of AZ Servizi by the State
holding company Fintecna, the Commission wished to
ascertain, with the aid of independent experts, that the
operation would be profitable once the implementation
details had been finalised, including as regards the future
contractual relationship between the two companies and
taking account of the existence of preference shares.

(15)

The Commission therefore decided to initiate the formal
investigation procedure in order to check, as soon as
possible given the company's overstretched cashflow

(16)

compatibility. New restructuring

The Commission also wished to give interested parties
the opportunity to comment on any aspect of Alitalia's
restructuring and recapitalisation plan which they
believed should be brought to its attention. Should the
recapitalisation measures covered by the present decision
be considered state aid, all the Community rules on this
subject would have to be applied in order to determine
aid would
their
certainly infringe the ‘one time,
last time’ principle as
Alitalia already received state aid in the past and because
the requisite ten-year period since the end of the last
restructuring plan of 2000-01 has not yet elapsed. The
Commission has also noted that a condition for the
restructuring aid authorised in 1997 was that no further
aid of this type could be paid to Alitalia. Finally, a
similar undertaking was given by the Italian authorities
for the present recapitalisation when the rescue aid was
authorised in July 2004.

(17)

In its decision to initiate the procedure, the Commission
stated that, to the extent that the recapitalisation and the
advantages granted to Alitalia were considered to consti-
tute State aid within the meaning of Article 87(1) of the
Treaty, it doubted that this aid could be compatible with
the common market under the derogations provided for
in Article 87(2) and (3) of the Treaty.

III. COMMENTS FROM INTERESTED PARTIES

III.1. Preliminary remarks on the comments from

interested parties

The Commission notes that
the interested parties (a
number of airlines and an association representing a
number of airlines)
the planned financial
criticise
support in part, namely the recapitalisation of AZ Fly
and the takeover of AZ Servizi by Fintecna, in respect of
which the investigation procedure was initiated by deci-
sion of 19 January 2005, but in particular the use by
Alitalia of the rescue aid and especially the company's
development with regard to the routes operated and its
fares policy.
In the account below, which covers the
various comments submitted, the Commission has taken
pains to distinguish these two aspects. The Commission
recalls that in order to ensure the greatest possible trans-
parency in its decision-making process and also in the
event that an aspect of the recapitalisation were to be
considered as aid and have to be evaluated as such, it
has given interested parties the opportunity to submit
their comments on the rescue aid, although the proce-
dure initiated does not address this point.

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III.2. Comments submitted by the interested parties

connection with the privatisation of its South Amer-
ican interests;

(19)

(20)

III.2.1. Comments

submitted jointly by

eight European

companies on 17 March 2005

The eight airlines (Austrian Airlines, British Airways,
Finnair, Hapag Lloyd Flug, Iberia, Lufthansa, Scandina-
vian Airlines and TAP, hereinafter referred to as ‘the
eight companies’) are of the opinion, as expressed in
their joint letter of 17 March 2005, that the conditions
for granting rescue aid have not been met, that Alitalia's
restructuring plan entails new aid, and that the combina-
tion of these two facts produces significant spill-over
effects.

III.2.1.1. Comme nts c onc e r ni ng th e r e ca p i ta li sa -

t i ons

The eight companies take the view that the Commission
focuses too much on the reduction of the State's share
in Alitalia and that the compatibility of AZ Fly's recapi-
talisation, the takeover of AZ Servizi and the public
support measures are also questionable. In their opinion,
the private-investor principle does not seem to be
complied with inasmuch as Alitalia is unable to guar-
antee a sufficient return on investment. In an annex, the
eight companies note the following:

(a) the undertaking given in connection with the rescue
aid (point 41 of the decision to approve rescue aid)
to privatise Alitalia within twelve months has not
been maintained. The separation of AZ Fly and AZ
Servizi
renders this principle applicable only to
AZ Fly whereas the activity of AZ Servizi also bene-
fited from the aid (point 58 of the decision to initiate
the procedure). Accordingly, the plan submitted by
Alitalia is inappropriate and an ‘appropriate’ plan
should be submitted by 12 June 2005;

(b) the evaluation of profitability submitted by Fintecna
(inappropriately called ‘Finmeccanica’ in the letter) is
incorrect. The eight companies are of the opinion
that the part of the capital of AZ Servizi held by
AZ Fly must be taken into account in calculating the
State share in AZ Fly's capital and that the calcula-
tion of the hurdle rate should be reviewed;

(c) the presence of conditions to which is subject Italy's
obligation to privatise AZ Fly (point 28 of the deci-
sion to initiate the procedure) is not acceptable; in
their opinion,
the State's maximum share in the
operation (€750 million) should immediately be
reduced,
in particular because no account can be
taken of the possibility of ‘unforeseeable and unfa-
vourable market conditions’; they recall that in the
Iberia case (5) the Commission had not accepted the
the
request of
to defer
the Spanish authorities
in
company's privatisation because of problems

(5) Commission Decision 96/278/EC of 31 January 1996 concerning
the recapitalisation of the Iberia company (OJ L 104, 27.4.1996,
p. 25).

(21)

(22)

(23)

(24)

(d) the decision to initiate the procedure is

silent
regarding possible other elements of State aid such
as the extension of the social support scheme for
workers made redundant (points 18 and 19); since it
appears that these elements have not been notified
they constitute unlawful aid that must be recovered.
The eight companies recall that in the Iberia case
cited above the Spanish company had to bear all its
restructuring costs from its own resources; the same
procedure should be applied to Alitalia and the costs
of reducing its staff should be set out in a new
restructuring plan;

(e) the eight companies further point out that certain
facts have not been presented in sufficient detail; for
instance, in point 48 of the decision to initiate the
procedure it is not clear whether the two A319
acquisition options mentioned therein were decided
on 30 May 2000; it is not permissible to exercise
these options on the basis of the aid granted to
rescue the company.

III.2.1.2. Comme nts

on

c omme r c i a l

de v e lop -

me nt and the rescu e aid

The eight companies consider that the crucial point is
Alitalia's use of techniques to increase its capacity and
open new routes, found to be running at a loss because
of Alitalia's aggressive pricing policy.

They take the view that the new routes could be opened
to eastern Europe thanks to the theoretical closure of
existing routes which are in actual fact operated by part-
ners such as Air France and Alitalia Express and on
which Alitalia can sell seats unrestrictedly and cash in on
the proceeds thanks to unrestricted code-sharing agree-
ments.

The eight companies argue that the opening of new
routes to Skopje, Zagreb, Timisoara, Budapest, Sarajevo
and Saint Petersburg in November 2004 makes no
economic sense; most of these are strongly linked with
‘ethnic’
traffic flows during the summer months and
Alitalia has pursued the fares policy of opening these
routes well beyond this phase to fill seats on its own
aircraft, which
to be
caused
loss-making.

routes

these

has

The eight companies conclude that the continuous aid
provided to AZ Fly maintains
an unsatisfactory
status quo which has the effect of delaying any decision
to consolidate and definitively reduce activity and in the
meantime passes the company's difficulties on to its
more efficient competitors. They therefore ask that the
Commission adopt the measures necessary to remedy
the situation.

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(25)

In Annex 2 to their letter of 17 March 2005, the eight
companies provide a comparison of the development of
Alitalia's services between the first week of June 2004
and June 2005:

(a) in domestic traffic, 20 destinations were served in
both cases; the frequencies increased by 17 % and
the seats on offer by 20 %;

The eight companies conclude that the aid was not
necessary in the fourth quarter of 2004 but in the
first quarter of 2005 by double the amount provided
for; according to them, the aid has thus become
unlawful and should be re-examined in light of the
new 2004 rescue and restructuring guidelines, under
which a refund must be paid within not more than
six (rather than twelve) months, that is to say before
15 June 2005 in this case;

(b) in intra-European traffic, 10 new destinations were
added (Birmingham, Manchester, Lyon, Krakow,
Skopje, Zagreb, Timisoara, Budapest, Sarajevo and
Saint Petersburg); the frequencies increased by 17 %
and the seats on offer by 10 %;

(c) according to the eight companies, the restructuring
plan notified within six months is in any case not
appropriate because, having given rise to the initia-
tion of a procedure, it is not to be ruled out that it
comprises State aid elements.

(c) in traffic outside Europe, two new destinations were
added (Delhi and Shanghai) but Accra was discon-
tinued; the frequencies increased by 22 % and the
seats on offer by 15 %.

(26)

The eight companies annexed tables to the letter in
support of their arguments on the following points:

(a) compensation of AZ's reduced capacity between
Rome, Milan and Paris by its partner Air France and
between Milan and London by its subsidiary Alitalia
Express;

(28)

(b) strong rise in frequencies to Central and Eastern
Europe (99 a week in June 2004; 207 planned in
June 2005);

(c) allegation of Alitalia's price leadership on destina-

tions in Central and Eastern Europe;

(d) allegation of acquisition of market shares by Alitalia
between October and December 2004 on destina-
tions in Central and Eastern Europe that are stag-
nating or in decline;

(e) allegation of acquisition of market shares by Alitalia
on destinations in Central and Eastern Europe in the
period from September 2004 to January 2005
compared with the same period in 2003-2004;

(f) allegations concerning the loss-making operation of

the Milan-Malpensa– Saint Petersburg route.

III.2.2. Additional

letter
18 March 2005

from British Airways

(BA) of

III.2.2.1. Comme nts on r e ca p i ta li sa ti on

In its letter sent to the Commission on 18 March 2005,
BA draws attention to the aid previously received by
Alitalia and authorised by the Commission; it argues that
in the current situation the planned recapitalisations do
not comply with the principle of a private investor oper-
ating in a market economy and that they constitute new,
incompatible aid. BA regrets that the data provided in
the decision to initiate the procedure are insufficient and
asks to be given more time to submit its comments on
any new documents.
the company
In this
mentions the conditions for the loans granted to Alitalia
and the transfer of debts to AZ Servizi.

regard,

III.2.2.2. Comme nts

on

c omme r c i a l

de v e lop -

me nt and the rescu e aid

(29)

BA confirms its comments formulated jointly with the
seven other airlines and takes the view that Alitalia has
used the rescue aid to develop its activities beyond the
permitted market share. BA feels particularly affected by
the Italy-Delhi route, for which the Italian market is
small and which mostly concerns the British market.

(27)

Finally, in Annex 1 to their letter, the eight companies
contest
rescue aid on the following
grounds:

the need for

(30)

BA also raises three different aspects:

(a) the aid, which among other things is intended to
cover the negative cash flow (points 15 and 39 if the
decision to initiate the procedure), is in actual fact
used to pay salaries and make up for the increase in
the price of fuel (point 23 of the decision);

(b) the aid was not used from 1 October 2004, but nor

was it used before 15 December 2004.

(a) the first point concerns transport rights from Milan
which for technical reasons, according to BA, puts
foreign airlines at a disadvantage as they are obliged
to operate from Malpensa whereas Alitalia can
continue to operate from Linate. BA further alleges
that, similarly, AZ Express enjoys preferential treat-
ment with a fourth daily flight
from Linate to
London whereas its competitors can operate only
three;

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(b) moreover, BA claims that Alitalia benefits from a
dominant share of a €40 million reduction in navi-
gation charges linked with domestic flights;

the procedure,
indicates that the Commission did not
genuinely wish to apply the rules on State aid in this
case.

(c) finally, BA argues that in 2004 the Italian authorities
tried to prevent it from becoming the price leader
on long-haul flights from Italy via London and that
this attempt was averted only because the British
authorities approached their counterparts over the
matter.

III.2.3. Additional letter from Austrian Airlines of 17 March

2005

(31)

information sent

In a letter with additional
to the
Commission on 17 March 2005, Austrian Airlines (OS)
reiterates many of
the arguments already adduced
together with the seven other airlines and those put
forward by BA. With regard to Alitalia's conduct on the
market and the rescue aid, OS emphasises however that
Alitalia's conduct has had a particular impact on its
market position as OS operates in a market which is
geographically nearby and which is already greatly
affected by other
forms of competition, which it
considers ‘normal’ because they do not involve State aid,
but which are nevertheless clearly felt, such as the
presence of
low-cost airlines and airlines based in
Central Europe such as Czech Airlines.

(32) OS enclosed with its letter copies of internal e-mails
with the intention of showing that Alitalia operates from
a position of price leader in a given market and on a
certain date; OS also enclosed a number of tables for
flights from Brussels comparing Alitalia and OS on some
twenty routes during the period from March to May
2005.

III.2.4. Comments from ELFAA of 22 March 2005

(33)

ELFAA (European Low Fares Airline Association), which
in March 2005 comprised ten airlines
(Norwegian,
Transavia, Hapag-Lloyd Express, Air Berlin, Flybe, Ster-
ling, Sky Europe, Wizzair, Sverige flyg and Ryanair),
submitted its comments to the Commission by letter
faxed on 22 March 2005.

(34) As regards procedure, ELFAA wishes to have access to
the dossier as an interested party and asks to be
consulted before any final decision is taken. It regrets
that the Commission had not postponed initiating the
procedure until it had received final information from
Italy and notes that this fact, combined with the absence
of the words ‘serious doubts’ from the decision to initiate

III.2.4.1. Comme nts on r e c a p i ta li sa ti on

(35) With regard to the substance of the decision to initiate
the procedure, ELFAA strongly opposes the measures
It cites the transfer of €1,6 billion
planned by Italy.
debts from Alitalia Fly to AZ Servizi, the State's support
amounting to €300 million for the social plan and the
planned recapitalisation of AZ Fly by the Italian State
amounting to €750 million.

(36)

(37)

III.2.4.2. Comme nts

on

c omme r c i a l

de v e lop -

me nt and the rescu e aid

ELFAA alleges that Alitalia has violated the conditions
laid down for rescue aid by announcing its intention to
expand its fleet, acquire a competing company and
opening new routes. ELFAA also mentions the airport
structures of which AZ has exclusive use without the
costs pertaining thereto being fully included in the costs
invoiced to the company, for which it invokes public
service obligations without justification under Council
Regulation (EEC) No 2408/92 of 23 July 1992 on access
for Community aid carriers to intra-Community air
routes (6); in this connection, ELFAA cites the recent case
of 18 routes between Sardinia and the mainland (7).

IV. COMMENTS SUBMITTED BY ITALY

Like the comments received from interested parties,
Italy's comments also distinguish between those relating
to the aspects for which the investigation procedure was
initiated (in other words the planned recapitalisation of
AZ Fly and Fintecna's shareholding in AZ Servizi) on the
one hand, and, on the other, the comments relating to
the verification of the rescue aid authorised in 2004, for
which the Commission had invited observations from
interested parties and from Italy, that is to say the expan-
sion of services and Alitalia's conduct on the market as
well as the way in which the funds guaranteed by the
rescue aid are used. Finally, some of Italy's comments
relate to other points raised by the interested parties that
are not covered by either of these two aspects.

(38)

the comments submitted by ELFAA,
Italy states that
dated 21 March 2005, are inadmissible because they
were submitted after the deadline of one month after
publication of the decision to initiate the procedure.
Italy has nevertheless also responded to these comments.

(6) OJ L 240, 24.8.1992, p. 8. Regulation as last amended by Regu-

lation (EC) No 1882/2003 (OJ L 284, 31.10.2003, p. 1).

(7) OJ L 75, 22.3.2005, p. 53.

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(39)

The Italian authorities have also sent the Commission a
note stressing the need for a swift and positive decision
by the Commission. They point out that the general
meeting of Alitalia's shareholders which has to approve
the accounts for 2004 is planned for 27 and 28 June
2005, that is to say on the deadline of 180 days required
by law following the closure of the financial year. They
also point out that the meeting of the board of directors
that has to approve the draft balance sheet is set for
20 May 2005 (8).
In the absence of a Commission
authorisation of the recapitalisation, or at least an indica-
tion in this regard, Alitalia does not rule out the possibi-
lity that, in view of the accumulated losses, the balance
sheet may have to be drawn up with a view to the
possible
the
company.

than continuity of

liquidation rather

IV.1. Comments submitted in connection with the

decision to initiate the procedure

IV.1.1. Comments on the recapitalisation of AZ Fly

(40) On this point, Italy notes that Alitalia has approached
several foreign and Italian banks to obtain a declaration
of intent to guarantee the successful execution of the
planned recapitalisation,
in the spirit of the letters of
intent obtained at the time of the recapitalisation of
2002 in compliance with the Commission's requests.
Italy states that it has obtained an undertaking to this
effect from Deutsche Bank which also covers the current
share held by the Italian State in respect of which it
cannot subscribe to the recapitalisation if it is to meet
the commitment of reducing its final share to below
50 % of Alitalia's capital. According to Italy, the wider
scope of this commitment compared with 2002 demon-
strates the actual feasibility of the privatisation. It argues
that the contents of this letter remove all doubts as to
the amount and exact conditions of the State's participa-
tion in the recapitalisation.

(41)

The Commission has received a copy of the letter of
intent dated 19 April 2004 sent by Deutsche Bank to
Alitalia whereby Deutsche Bank accepts to conclude a
contract to underwrite or have underwritten the success
of the recapitalisation operation for a maximum amount
of €1,2 billion, up to a maximum risk of €650 million
and in any event for an amount enabling the reduction
of the Italian State's share in the company's stock to
49,9 %. Deutsche Bank and AZ Fly have agreed that the

(8) The date for the meeting of the management board has been post-

poned to 26 May 2005.

price or the price range for the issue of the new shares
will be determined jointly and will represent a reduction
of at least […] (*) % of the quoted market price after
taking account of subscription rights.

(42)

Italy has provided the Commission with an analysis
carried out by Deutsche Bank specifying the circum-
stances of AZ Fly's recapitalisation in comparison with
similar operations carried out on various European
markets since 2003:

(a) the bank explains first of all that the background to
the recapitalisation is the past unfavourable results
for the company whose management is currently
focusing on reducing costs while also still facing a
difficult competitive situation involving pressure
from its competitors on the domestic market, and
the sharp rise in fuel prices in recent months, which
are factors that may adversely affect the company's
accounts. The success of the industrial restructuring
plan will
to
persuade the investors to subscribe to the capital
increase, especially in view of a substantial reduction
in the share of the current majority holding;

therefore be particularly important

funds

(b) the current structure of Alitalia's capital, consisting
involving
of small private shareholders and not
investment
transport,
in air
specialised
combined with the cyclical and volatile nature of the
sector,
it necessary to involve
specialised investors in the operation specifically
generated.
oriented
Attracting this demand means offering shares at a
sufficiently attractive subscription price;

therefore makes

towards

added

value

the

provided,

(c) analysis of some thirty recapitalisations effected on
most European stock markets since April 2003, with
details
to
amounting
€1 240 million, or 43,2 % of their previous capitali-
the difference between the
sation,
subscription price and the theoretical ex right price
(or TERP) (9) has on average been 22,8 % and 28,1 %
for restructuring companies (10);

average

shows

that

on

(d) in the case of Alitalia, the planned capital increase
represents 127 % of current capitalisation (approxi-
mately €943 million); it thus represents more than
1 500 days of exchange of securities on the stock
market in the recent period. The price difference in
similar cases with regard to this latter criterion, for
example for Heidelberg Cement, exceeded 38 %.

(*) The part of the text in brackets refer to business secrets or confiden-

tial information that have been left out.

(9) TERP (theoretical ex right price) is a weighted average between the
reference quoted market price and the subscription price of the new
shares. Every shareholder receives a pre-emptive right whose theore-
tical value is the difference between the reference quoted market
price and the TERP which assures the asset balance of the operation
for the old shareholders.

(10) Swiss Life Holding, Ahold, ABB, Royal & Sun Alliance, Heidelberg

Cement, Allianz.

L 69/8

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Official Journal of the European Union

8.3.2006

(43)

(44)

Italy points out that the […]% difference indicated above
applies to all the new shares issued and that it has not
received any other request
from Deutsche Bank for
specific conditions for the subscription of the shares to
be underwritten by it; nor does an agreement of this
type exist between Deutsche Bank and the Ministry of
the Economy.

The guarantee and management fees have been fixed at
[…]% of the value underwritten by Deutsche Bank or
the consortium; to this must be added a […]% commit-
ment fee. Also on this point, Italy has transmitted an
analysis carried out by Deutsche Bank showing that this
total fee [amounting to 5 %] (**) of the guaranteed value
is in conformity with normal practice for similar opera-
tions effected since the end of 2002:

(a) the bank reiterates the observations already made
with regard to the sector, the tightness of Alitalia's
securities market and the need to maximise demand
through measures which are an incentive for banks
to subscribe to the capital;

(b) on the basis of some thirty recapitalisation opera-
tions effected since November 2002 on most Euro-
pean stock markets, which are detailed in the infor-
mation supplied and which largely coincide with the
first list referred to, the average fee was 3,44 %. For
operations (11) comparable to that of Alitalia in terms
of
the market capitalisation and the
number of days of stock market trading, the average
was 4,96 %;

the size of

(c) for instance, in the case of the €800 million capital
increase of Fastweb SpA in February 2005, with a
better risk profile, the fee was 5,38 %; in the case of
Rhodia, a company comparable to Alitalia in terms
of number of days on the stock exchange, impact on
the capitalisation and difference with the TERP,
it
was 5,60 %.

(45)

In order to fully guarantee that their subscription will in
fact be on private-sector conditions, the Italian authori-
the following formal undertaking to the
ties
Commission on 22 April 2005:

sent

‘The Italian authorities undertake to effect
the
subscription of their part of the planned increase in
Alitalia's capital on the same market conditions as
those that will be offered to private investors, in par-

ticular with regard to the issue price and the rights
connected with the new shares issued, and at a level
bringing its own share in the company's capital to
49,9 % at the end of the operation. Moreover, the
Italian authorities, having taken cognisance of the
letter sent by Deutsche Bank to Alitalia on 19 April
2005 and forwarded to the Representation, under-
take to intervene in the capital
increase operation
only once the suspensive conditions of the commit-
ment made by Deutsche Bank in the aforementioned
letter have been met and the banks responsible for
the subscription have given a formal commitment
without reservations — except with regard to the
usual conditions connected with force majeure, acts
of war, terrorism and similar — to guarantee the
“successful outcome” of the recapitalisation opera-
tion. The
to
transmit to the Commission, immediately upon their
conclusion and prior to the subscription by the
Ministry of the Economy and Finance of the new
capital increase, the final contracts concluded with
the banks containing the above-mentioned formal
and unconditional subscription commitments. The
Italian authorities will
report
explaining the levels of actual subscription to the
aforementioned capital increase once the operation
has been completed.’ (12)

Italian authorities also undertake

also transmit

a

(46) Moreover,

Italy disputes the view that

the privatisa-
tion (13) of AZ Fly alone is contrary to the undertakings
contained in the decision to approve rescue aid. In this
regard, Italy refers to the text of the decision to initiate
the procedure (14) and to the private management
approach to the AZ Servizi operation; this applies both
to Fintecna's acquisition of the holding in AZ Servizi
and to the final objective of the transfer of the relevant
activities to third parties.

(47) With regard to the impact which unforeseeable and
unfavourable market conditions may have on the opera-
tion, Italy contests the reference which the interested
parties have made to the Iberia case; in that case, the
Commission had to exclude any possibility of new aid as
the company was not in that position. Italy argues that
the Commission has always considered the undertaking
to privatise as subject to market conditions that are not
unfavourable and unforeseeable (15).

(12) Letter sent to the Commission via Italy's Permanent Representation

to the EU.

(13) The Commission points out that this concerns a reduction of the
part of Alitalia's capital held by the State to below 50 % and that
the term ‘privatisation’ used by the Italian authorities does not
prejudge a possible classification of the undertaking in accordance
with Article 2 of Commission Directive 80/723/EEC of 25 June
1980 on the
relations between
Member States and public undertakings (OJ L 195, 29.7.1980,
p. 35).

transparency of

financial

(**) The exact data have been left out and replaced by this indication.
(11) Fastweb, Rhodia, Hagemeyer, SGL Carbon, Scor.

(14) Points 28 and 59.
(15) See Commission Decision 94/662/EC of 27 July 1994 on the

increase of Air France's capital (OJ L 258, 6.10.1994, p. 26).

8.3.2006

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L 69/9

(48) On 22 April 2004 Italy also transmitted to the Commis-
sion the update to Alitalia's industrial plan adopted by
its board of directors on 14 April 2004. The revised
plan is based on the same approach as the initial plan
and still distinguishes two stages, the improvement stage
in 2005 and 2006 and the relaunching stage in
2007-2008. While the second stage involves increasing
the company's services through the introduction of new
aircraft, the initial stage is aimed at guaranteeing conti-
nuity of operation, maximising existing capacity and
restoring productivity. The revised plan notes that there
has been a 30 % rise in the price of fuel compared with
the previous plan, that is to say an annual cost increase
of €75 million, and sets out more cautious expectations
on standard revenue from short- and medium-haul
flights because of
the arrival of competing low-cost
airlines on the domestic market. However, the revised
envisaged level of profitability
plan maintains
through more assertive cost control which should lead
to
approximately
€160 million in 2006 through better know-how within
the company thanks to its new management and the
sound development of initiatives already taken. Conse-
quently, the break-even point will be reached by the end
of 2006 and operating costs measured in CATK (unit
cost per available tonne kilometre) would diminish, as
envisaged in October 2004, by approximately […]%
over the period covered by the plan with a slightly more
favourable 2004 base;
calculated as
EBITDAR (16), would rise from […] % in 2005 to 14 %
in 2008 (in the initial plan the envisaged values were
[…] and 14 % respectively).

the margin,

additional

savings

annual

the

of

IV.1.2. Comments on the recapitalisation of AZ Servizi by

Fintecna

(49)

In this regard, Italy recalls that the Commission decided
to seek the assistance of Ernst & Young Italia to ascertain
whether such operations are compatible; it submits no
additional comments but confirms that negotiations
between Alitalia and Fintecna are still in progress. The
transfer of groundhandling activities from Alitalia to AZ
Servizi, which is preliminary to the recapitalisation, had
been planned for the end of April 2005 and has now
been implemented (17).

(50) With regard to the use of preference shares, Italy notes
that this is widely practised in Europe and it gives the
example of the articles of association of Volkswagen AG
and Unilever;
it also points to the importance of this
type of capital in companies such as Hugo Boss, Henkel
and Porsche, where it accounts for 40 to 50 % of the
shares and, although to a lesser extent, in certain other
companies such as Abertis, BMW, MAN and RWE.

(16) Earning Before Interest Taxes Depreciation Amortization and

Rentals.

(17) The transfer was announced on 29 April 2005 on Alitalia's website
which also provides details of the net balance sheet regarding the
transfer; the transfer takes effect on 1 May 2005.

(51)

In the opinion of the Italian authorities, AZ Fly's shares
in AZ Servizi should not be included in the calculation
of the hurdle rate; the company does not take part in
the increase in AZ Servizi's capital but, on the contrary,
will be gradually reducing its share.

(52)

In response to the allegation that Alitalia will transfer
debts to AZ Servizi, the Italian authorities recall that
liabilities, amounting to €1,7 billion,
these financial
consist of convertible bonds or debts secured on the
fleet; they should therefore fully remain with AZ Fly.

(53)

Italy has also specified the arrangements made between
Fintecna and Alitalia on the future distribution of the
return on the investment in AZ Servizi as provided for
in the letter of
intent of 13 October 2004 signed
between the parties (18). They have agreed that Alitalia's
present and future participation in the negotiations on
the possible transfer of AZ Servizi's activities and its will-
ingness to facilitate these, including through contractual
arrangements, to the extent that they do not entail a
worsening of
its contractual position with regard to
services or prices, should be offset by compensation
going beyond a purely mathematical share in AZ Servi-
zi's profits. Accordingly, Fintecna and Alitalia have
agreed that the share in the profits obtained by Fintecna
exceeding 25 % of the internal rate of return (IRR) (19) as
provided for in the industrial plan will be paid back to
Alitalia at the rate of […]% of the amount above this
sum. This evaluation will be carried out either on the
basis of
completed or, on
31 December 2008, on the basis of the flows obtained
by Fintecna and the evaluation of the economic capital
of AZ Servizi held by Fintecna. This evaluation will be
carried out according to the same method as that
adopted in the current industrial plan submitted to the
Commission and on the basis of a report by an indepen-
dent expert.

transfer, where

the

(54) With regard to the future contractual relations between
AZ Fly and AZ Servizi,
Italy specifies that the fares
charged for the various services will remain within a
market range, even if negotiations lead to fares that are
higher than those initially proposed by Alitalia. This has
led to a reduction of
for maintenance
services from […] to […]% to AZ Fly's benefit as the
maximum discount is normally obtained on the market
by a company which entrusts maintenance of its fleet to
a single service provider for a period of seven years.
Similarly, the […]% bonus negotiated with Fintecna for
invoicing groundhandling services keeps
the tariffs
within the market range.

the discount

(18) Last indent of point 35 of the decision to initiate the procedure.
(19) Internal rate of return (IRR).

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(55) On 1 June 2005, following the meeting of Alitalia's
board of directors of 26 May 2005, Italy also transmitted
to the Commission the final contract signed between
Alitalia and Fintecna which is intended to govern the
way in which Fintecna takes up its participation in AZ
Servizi.

€654,5 million. This value should be corrected upon the
transfer, even in part, of the securities held or after
evaluation by two consultants if the Treasury so requires.
The transfer was not accompanied by a payment but by
the grant by IRI to the Treasury of an interest-free credit
in the same amount.

(56)

(57)

Italy has specified that the other provision negotiated
between the parties, in other words the return to AZ Fly
of a part of the profit up to a maximum value of […]%
of the amount invoiced, that is to say €[…] million over
four years in the plan notified (20), corresponds exactly to
the compensation for these values; the current business
plans of AZ Fly and AZ Servizi are consistent with
regard to the prices of services invoiced/paid and to
future potential fares (for AZ Servizi) and returns (for
AZ Fly).

the valorisation of

Following the updating of the 2005-2008 industrial plan
approved on 14 April 2005, Italy assured the Commis-
sion that the plan had no material impact on AZ Servizi
and therefore did not affect
the
company and the yield on the investment planned by
Fintecna. Relying on documents drawn up by Medio-
banca, Italy stated that the final value remains that envi-
saged, the initial value of AZ Servizi will be €94 million,
rather than the expected €97 million, Fintecna's contri-
bution will be €216 million rather than the expected
€221 million, and its internal rate of return (IRR) will
remain at 25,3 %.

(58) As regards the status and nature of the independent
in addition to
Fintecna company, Italy has confirmed,
the information provided in point 33 of the decision to
initiate the procedure, that Fintecna does not benefit
from any derogation:
its board of directors, while
appointed by the shareholder — that is to say the State –
,
is answerable for its management choices to the
company and third parties; in the framework of the law
on bankruptcy, the company has the same status as
companies under private law; there is no longer any
general or specific statutory guarantee by the Italian
State for Fintecna, and the company has met all the
publication requirements obviating the single sharehol-
der's liability provided for in Article 2362 of the Italian
Civil Code.

(59) At the Commission's request,

Italy also explained the
nature of the link between Fintecna and the former IRI
S.p.A. After IRI was wound up on 27 June 2000, the
State reorganised and transferred its holdings. 53 % of
the Alitalia shares held by IRI was transferred to the
Treasury by decree of 21 December 2000 at a provi-
sional value of ITL 1 797 128 641 402, approximately

(20) In the revised plan, this value is €[…]; see point 109.

(60) At

the recapitalisation of Alitalia, authorised by the
Commission on 19 June 2002, a part was reserved for
the Treasury to incorporate into the capital the last two
tranches of the restructuring aid received. Because the
other shareholders were excluded from the right of
option, the established value per share (€0,96) was certi-
fied, in accordance with Article 2441 of the Civil Code,
by Deloitte and Touche, the auditors of Alitalia. This
value was also used to establish the final value of the
transfer of 2000 from IRI to the Treasury as provided
for by the decree of 27 June 2002 at an amount of
approximately €788 million. The decree also provided
that the interest-free loan credit would become due at
the latest on the date on which IRI's accounts for 2002
were approved.

(61)

Finally, a decree of 2 April 2003 established that
Fintecna had taken over IRI on 1 December 2002 and
had revised the conditions for the settlement of the loan/
credit as it had become less urgent to do so; the date of
settlement, and therefore the reimbursement by the
Treasury, was thus postponed to the time of transfer of
the Treasury's holding or at
the latest before the
approval of Fintecna's 2004 accounts, that is to say not
later than 30 June 2005.

IV.2. Comments on verification of the rescue aid

(62)

The Italian authorities point out, as set out in detail in
points 63 to 84, that the comments submitted by the
interested parties often appear to be based on an approx-
imate assessment of inaccurate information and focused
on an alleged increase in the capacity offered and preda-
tory prices on the routes operated. According to the
Italian authorities, moreover, the comments made by the
interested parties include unfounded ‘aggressive’ allega-
tions, for example the alleged existence of double aid in
1997 and 2002 and the assertion that new aircraft had
been acquired, which in actual fact had already been
decided in 2002.

(63) Moreover, Italy considers these criticisms are self-contra-
dictory because the parties on the one hand accuse the
Italian company of using the rescue aid to enhance its
capacity and on the other hand consider the aid as unne-
cessary because of its belated take-up.

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L 69/11

IV.2.1. Comments on the services offered and on Alitalia's

conduct on the market

(c) the […] additional daily minutes per aircraft for the
214 days of the season lead to […] TKO, that is to
say for 184 aircraft on 31 March 2005 […] million
TKO.

IV.2.1.1. Comme nt s on th e se r v i ce s offe r e d a nd

on c a p a ci ty

(66)

(64)

Italy points out first of all that Alitalia had from 2000
pursued a policy of downsizing with a steady diminution
of services on offer; consequently, the TKO (tonne kilo-
metre offered) decreased from 5,7 billion in 2000 to
5,1 billion in 2001 and to 4,2 billion in 2002 with a
concomitant
reduction in the average daily use of
aircraft (7 hours 41 minutes for a medium-haul aircraft
in winter 2003-2004 compared with a market average
of 8 hours 30 minutes). This had enabled Alitalia's
competitors to conquer substantial market shares on
certain expanding markets
such as China, Eastern
Europe and India. A recovery occurred only from 2003
(4,4 billion TKO) but especially from 2004 (4,8 billion
TKO); it is expected that the TKO will reach 5,5 billion
in 2005. This development has been in progress since
winter 2004-2005 and should lead to a strong increase
in the daily rate of use of aircraft in line with best prac-
tice in the sector.

(65)

To justify the increase of services on offer between
summer 2004 and summer 2005 (Alitalia's competitors
had indicated the first week of June of the two years as a
model week), Italy has provided the following table for
reference purposes:

Italy points out that if the fleet as it stood at 31 March
2004 (186 aircraft) had been maintained, the capacity
increase would have been even higher (+[…]% instead of
there has been increased use of
14,9 %). However,
services
combined with a decreasing fleet, as on
31 December 2005 the fleet had been reduced to […]
aircraft as a result of the phase-out of the MD 80-82
aircraft. This fleet and the capacity it offers correspond
to that of the entire Alitalia group,
including Alitalia
Express.

(67)

Italy has also confirmed that the acquisition of the two
Airbus A 319, which had been planned as an option,
had been decided before 31 December 2002.

routes

(68) However, there has been a strong increase in the rate of
use made of the fleet following the redesigning of the
network of
to optimise the deployment of
resources, aircraft and crews, and following the reorgani-
the
sation of maintenance procedures, with most of
activity taking place during the night. Accordingly, with
186 aircraft on 31 March 2004, Alitalia had a […]%
rate of use, equal to […] aircraft; with 184 aircraft on
31 March 2005,
it attains a rate of […]%, equal to
[…] aircraft.

TKO trend summer 2005 v summer 2004

SUM04

SUM05

Delta

Delta %

x 1 000 tonnes

(69)

Domestic

521 651

608 157

86 506

16,6 %

International

981 821 1 148 124 166 303

16,9 %

Intercontinental 1 385 817 1 562 744 176 928

12,8 %

2 889 289 3 319 025 429 737

14,9 %

This trend is due to the following:

(a) daily flight times changed between the two periods
from […] to […], with an average daily increase of
[…] minutes (21);

(70)

(b) on the basis of TKO in summer 2004 and the
the figure is

([…]),

flight

number of hours of
[…] TKO/mn;

(21) From […] to […] for short- and medium-haul aircraft; from […] to

[…] for long-haul aircraft.

it

is perfectly possible for

Italy concludes that
the
company to significantly improve its services on offer
while remaining within the boundaries of the capacity
commitments given when the rescue aid was approved.
The additional services offered were focused on the
markets with the strongest growth from and to Italy for
which there were no direct connections, a situation from
which Alitalia's competitors benefited: Eastern Europe,
China and India. According to Alitalia, these markets
have shown a growth rate to and from Italy respectively
of 6,3 and 7,3 % in 2004 and 2005 for Eastern Europe,
10,5 and 11,2 % for China, and 5,9 and 7,2 % for India.
With regard to Eastern Europe, Italy draws attention to
the fact that the growth of Alitalia on these markets has
had the effect of stimulating traffic demand, with the
increase in daily bookings exceeding the additional
services on offer from the company.

In respect of the special case of Delhi, cited by BA, Italy
denies the alleged substitution effect. Delhi represented
one of the main passenger flows from Italy without
direct connection (87 passengers a day in each direction
and major freight volumes); the market shows a strong
growth and has counter-seasonal characteristics with
peaks in winter, which is interesting from the point of
view of use of capacity.

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(71) With regard to the abandonment of particular flight
frequencies between Rome and Paris, Italy explained that
this was connected with Air France's request for a reba-
lancing operation in the context of the joint venture
agreement between the two companies; under the joint
venture, the share of frequencies operated by Air France
on this route rose from […]% in summer 2004 to […]%
in summer 2005.

IV.2.1.2. Comme nt s

on

th e

p r ofi t a bi li t y

of

r ou te s

(72)

Italy has indicated that the opening-up of new routes is
intended to enhance the company's profitability; to this
end, these routes, which make use of capacities that
have become available through the increased rate of use
of aircraft, should present a positive gross margin, that
is, marginal revenue exceeding marginal costs, even
though because of the decreasing marginal profitability
formula their average profitability is below that of the
rest of the network. The data supplied by Italy for the
end of September and the latest forecast for 2005 all
show a positive result.

(73) However, at

following the
the Commission's request,
analysis carried out by its consultants Ernst & Young,
which indicated negative gross margins on the new
routes to Scandinavia at the end of December 2004,
Italy has provided additional information. It notes first of
all that at the end of the year, and in particular in
October, revenue per available tonne-km (RATK) had
been particularly low, with a drop of 14,2 % compared
with October 2003 as a result of the concern caused by
the
Alitalia's precarious financial situation. Moreover,
difference in advance bookings diminished progressively
in September-October 2004 compared with the same
period in 2003, becoming negative at the beginning of
October for bookings for December.

(74)

(75)

Italy further indicates that, according to the standards
used in the sector, the effective profitability of a route
should be evaluated after three IATA seasons in order to
eliminate the effects connected with the opening of the
route and seasonal trends.

Finally, Italy indicates that, for a network carrier such as
Alitalia, profitability should be evaluated by including
also the additional margin generated by connecting
flights resulting from the new routes, or ‘feeder value’;
the data supplied show positive feeder values for all the
routes,
including the three Scandinavian routes which
have a negative direct margin (22).

(22) N.B.: For Fiumicino-Stockholm, Italy provides a feeder value of
€[…] million above that indicated by Ernst & Young, making the
route a positive one; this difference is justified (see the expert's
conclusions) by the strong increase in connecting flights traffic
during the winter season of 2004-05.

IV.2.1.3. Comme nt s on p r i c i ng p oli c y

(76)

In response to the competitors' criticism of Alitalia's
price leadership policy, the Italian authorities explain
that the company has based its business strategy on
matching the reference competitor's prices to prevent
the competitors from benefiting from having a competi-
tive pricing advantage vis-à-vis the most price-sensitive
customers. Deviations from the price matching policy
are due either to the launching of new routes or to
promotional campaigns limited to a couple of weeks.

(77)

Italy explains that these practices are perfectly normal
on the international aviation market and that all of Alita-
lia's competitors systematically adopt this strategy for
the same reasons (23). In light of the decision to grant
rescue aid, Alitalia had restricted its recourse to promo-
tional practices compared with market practices.

(78) Of 175 routes, whether direct or indirect, new or other-
wise, and for a particular period, indicated by the eight
companies and OS in their comments, according to the
information provided by Alitalia there were 159 (91 %)
on which Alitalia's fare is higher than (18 % of cases),
equal to (in most cases, namely 69 %) or less than €6
lower than its competitor's fare (2 % of cases).
In
16 cases, that is to say 9 % of all routes, Alitalia's fare is
less than the competitor's fare: 11 cases (6 %) concern
promotions on new destinations, of which two from
Saint Petersburg and eight to or from Zagreb; conver-
sely,
five cases (3 %) concern promotions on routes
existing before summer 2004. By mid April 2005, when
the Italian authorities submitted their reply, they pointed
out that such promotions as price leader had ended.

(79)

Finally, with regard to the alleged flights operated with a
negative gross margin on the Malpensa-Saint Petersburg
route, Italy explains that:

(a) the average revenue per passenger for Alitalia is
more than €[…] per segment, and not €150 per
return flight as claimed by the eight companies;

(b) between January and March 2005, Alitalia carried on
average not 30, as claimed, but […] passengers per
flight;

(23) Italy cites the example of Austrian Airlines (OS) which opened its
Vienna-Varna route in winter 2004 with a promotional fare of
€299 in Austria, without an indication of the period of validity, as
against €399 for its competitor Bulgarian; the date of validity was
fixed only on 29 March 2005. Moreover, OS launched its Vien-
na-Turin route on 9 April 2005 at a fare of €249 compared with
Alitalia's €299.

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(c) Alitalia's variable costs are €[…] per flight and per
in other words lower than the figures

passenger,
claimed;

(d) the estimated gross margin for 2005 (€[…] million
is

revenue, excluding feeder value)

or
[…]% of
clearly positive.

IV.2.2. Comments on the use of
through the rescue aid

the

credit guaranteed

(80)

Italy notes that the aid was fully implemented in the
period envisaged by the decision to approve rescue aid,
that is to say before 31 March 2005. Italy has therefore
indicated that the full repayment should theoretically be
due on 31 March 2006, that is to say 12 months after
the take-up of the last instalment of the loan. However,
the Italian authorities have agreed to ensure that the
rescue aid is
refunded within eight working days
following the recapitalisation of AZ Fly and in any event
before 31 December 2005.

(81)

The Italian authorities take the view that the expenditure
criticised above (fuel, remunerations, etc.) form part of
the operational costs necessary to keep the company
going and are therefore strictly disbursements in accord-
ance with the 1999 guidelines.

(82) With regard to the use of the loan over time, the Italian
authorities point out that the decision to approve rescue
aid does not lay down any provision requiring that the
aid should be used in specific periods and that the way
in which its use is managed in the period covered by the
Commission's authorisation does not entail any addi-
tional advantage for the beneficiary company and does
not constitute a new measure. Consequently, the point
in time when the loan is used is compatible with the
Commission's decision to approve rescue aid.

(83)

Italy puts forward two further arguments in support of
the legality of its recourse to rescue aid and the level
thereof. The first argument concerns the average level of
cash assets which an airline should have; in the past, this
level was equal to approximately six weeks of the turn-
over, though the current trend is towards 10-12 weeks
due to the events of 11 September 2001. The accounts
at the end of 2003 of the major airlines show that they
have held an average of 17 % of their turnover in cash
and equivalents, with variations from 9 to 28 %;
in
Alitalia's case, it claims, 17 % is tantamount to approxi-
mately €700 million. The €500 million cash assets actu-
ally held by Alitalia can therefore still be considered a
reasonable level.

the weakest airlines. As a result, Alitalia's suppliers have
adopted an extremely ‘cautious’ attitude towards it. In
this connection,
Italy has transmitted letters from a
number of its suppliers which confirm this trend. For
instance, attention may be drawn to the following:

(a) in June 2004, the leasing company GECAS agreed to
deliver the B777 as planned only on condition of
maintaining a guarantee bond of USD […] million
initially due to Alitalia; similarly, the lease-back of
four ERJ-170 aircraft was possible only on condition
of raising from six to nine months the deposit paid
for each aircraft;

(b) between March and September 2004, several fuel
suppliers (Q8, Total and Shell) required the payment
of deposits and/or pre-payments for a total sum of
approximately €[…] million;

(c) a number of ‘acquirers’, that is institutions managing
credit card transactions, especially in North America,
have asked for an increase in the reserves set aside
by Alitalia under the contracts in force to cover the
risk in the event of
customer
insolvency. For
in April 2004 First Data asked for an
instance,
increase of Alitalia's deposits from USD […]
to
[…]million. Overall, the amounts held by these firms
vis-à-vis
approximately
now
USD 25 million worldwide.

Alitalia

total

Finally, Italy mentions the legal proceedings instituted
before the Court of Milan by the airport management
seizure of
company SEA which has
€28 million from 16 current bank accounts, which has
effectively blocked Alitalia's cash position until the assets
are released.

led to the

IV.3. Other comments

it points out

Italy considers that

(85) With regard to the comments from the interested parties
that concern neither the recapitalisations nor the verifi-
cation of the rescue aid, in particular BA's comments on
the situation in Milan,
these are
unconnected with the procedure and are therefore inad-
missible. Nevertheless,
the fact,
complained of by BA, that it is not possible to operate a
fourth daily flight at Milan-Linate is simply due to the
fact
there are no more slots available. Alitalia
Express itself has had to use another slot for that destina-
tion, a slot which Italy regards as lawfully transferred
under Council Regulation (EEC) No 95/93 of 18 January
1993 on common rules for the allocation of slots at
Community airports (24). On the other hand, Italy recalls
that Alitalia has for more than ten years been fruitlessly
seeking to obtain a new slot to London-Heathrow.

that

that

(84)

Secondly, Italy also refers to the strong shocks to which
the aviation sector has been exposed, which have further
accentuated the above-mentioned trend, in particular for

(24) OJ L 14, 22.1.1993 p. 1. Regulation as last amended by Regulation
(EC) No 793/2004 of the European Parliament and of the Council
(OJ L 138, 30.4.2004, p. 50).

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8.3.2006

(86)

Similarly, Italy denies that it has practised sixth-freedom
fares control, unlike other Member States, such as
Germany and the United Kingdom. In fact, the reason
why ENAC took fare control measures in summer 2004
on the basis of the bilateral agreements in force was to
put an end to a discriminatory situation in which the
Italian companies could not apply fares lower than those
practised by the German and British airlines on their
markets whereas the latter could do so on the Italian
market. Following the Commission's intervention,
the
Italian authorities suspended this practice on a reciprocal
basis with the other Member States.

(87) With regard to the comments submitted by ELFAA, Italy
denies the existence of any advantage in the form of
direct financial compensation to Alitalia. It notes that
the company uses the airports in full conformity with
national and Community rules. As for the comments
regarding public services, Italy has since January 2004
operated the Rome-Cagliari route without any financial
compensation from the State even though such compen-
sation was initially provided for in the call for tenders.
The company complained to the Commission about the
new imposition of 18 public service obligations on
routes between the Italian mainland and Sardinia, and
the matter
is currently being investigated by the
Commission. Finally, Alitalia has benefited from public
service compensation, as provided for in the call for
tenders and in Regulation (EEC) No 2408/92 (25), only
for the Rome- and Milan-Crotone routes; both of these
routes have however been given up by Alitalia and will
cease operating on 30 April 2005.

(88) With regard to the financing of redundancies, Italy main-
tains that the extension of the social schemes to the avia-
tion sector is a general measure of economic and social
policy which makes use of instruments already used in
other sectors such as the metal and mechanical industry.
The Italian authorities have explained that the recourse
to the Cassa Integrazione for the aviation sector is in
compliance with the procedures used in the past for
other sectors of the economy and did not benefit from
any particular advantages. The extension of the applica-
tion of the Cassa Integrazione to industrial workers, on
the basis of a law of 5 November 1968, or to the
cleaning sector, on the basis of a decree law of 19 July
1994, followed similar procedures and had immediate
effect, or a retrospective effect in the latter case. In the
aviation sector, other Italian airlines (Meridiana, Volare
and Azzurra Air) and foreign airlines (Swiss and British
Airways) have lodged or are about to lodge requests for
compensation for their personnel.

(25) See footnote 6.

(89) Moreover,

Italy has asked for the rectification of a
number of what
it considers to be inaccuracies and
material errors contained in the text of the decision to
initiate the procedure (26).

V. RESULTS OF THE INDEPENDENT EXPERT'S OPINION

REQUESTED BY THE COMMISSION

(90) As already announced in its decision to initiate the
procedure, the Commission decided to appoint an expert
to examine a number of matters raised therein. The
purpose of initiating the procedure was to obtain an
independent assessment of the AZ Servizi recapitalisa-
tion plan and, in particular, of the profitability expected
by Fintecna from taking part in the operation (27). Also,
following the comments already made by the interested
parties before the initiation of the procedure and in line
with its duty to monitor authorised aid, the Commission
had announced its intention to verify, possibly with the
assistance of an expert, that Italy was honouring the
business commitments it had made on routes and prices
at the time of the decision to approve rescue aid and
that the loan guaranteed by this aid was being used in
accordance with the rescue aid decision (28).

(91) On 4 February 2005 the Commission entrusted the task
of carrying out these checks to Ernst & Young Italia, the
expert consultants it had already used in a number of
cases involving restructuring aid given to Alitalia and
who were therefore well acquainted with the dossier.
The Commission did not avail itself of the option open
to it under the decision to initiate the procedure (29)
whereby it could, if it saw fit, make use of an expert
appointed jointly with the Italian authorities. Ernst &
Young Italia (hereinafter
referred to as ‘the expert’)
performed its tasks under the sole supervision of the
Commission. The expert submitted its final report to the
Commission on 13 April 2005; the main findings are
set out in points 93 to 148 below. It should be borne in
mind that the report does not constitute a certification
of Alitalia's or AZ Servizi's accounts or forecasts, in the
sense of a full audit, but represents what is generally
called a ‘fairness opinion’ on the information which
follows provided by Alitalia, Fintecna and their respec-
tive consultants, Mediobanca and Citigroup.

(92) On 20 April 2005, following the adoption on 14 April
2005 of the plan as revised by Alitalia,
including the
part concerning AZ Servizi, the Commission asked the
expert to verify whether its earlier findings remained
valid in the light of the revised plan. The expert's report
thereon was submitted on 22 April 2005.

(26) Italy's comments have been included as far as necessary in the

present text.

(27) Point 61 of the decision to initiate the procedure.
(28) Points 49 and 65 of the decision to initiate the procedure.
(29) Point 72 of the decision to initiate the procedure.

8.3.2006

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Official Journal of the European Union

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(93)

(94)

V.1. Findings regarding the notified AZ Servizi

operation

These findings relate to that part of the decision to
initiate the procedure which concerns the planned take-
over of AZ Servizi by Fintecna, the expected profitability
of this operation for Fintecna and the nature of future
business relations between AZ Fly and AZ Servizi. The
Commission would state that the other part of the initi-
ating decision (the recapitalisation of AZ Fly) was not
covered by the expert study. It should be mentioned that
unless otherwise specified all the figures quoted below
have been taken from the revised version of 14 April
2005 of AZ Servizi's industrial restructuring plan for
2005-2008 and from the analyses carried out by Medio-
banca and Citigroup for
this purpose, which were
reviewed in the expert's report of 22 April 2005. Addi-
tional information was supplied on 25 May 2005.

when it invested in AZ Servizi. The expert found these
methods to be in line with established theory and profes-
sional practice. The expert also analysed the work done
by Citigroup, the adviser chosen by Fintecna, and carried
out its own sensitivity analyses, concluding that ‘we have
not found any indication that the methodology used
when determining an IRR of 25,3 % for Fintecna's
investment in AZ Servizi is not correct.’

(96)

The expert re-examined in greater detail the new invest-
ment flows envisaged by Fintecna, totalling €216 million,
described in point 37 of the decision to initiate the
procedure, and their breakdown into preference and
ordinary shares, as well as the calculation carried out by
Mediobanca and described in point 38 of the decision.

V.1.1. Comments

regarding the discrepancies between the
initial plan of October 2004 and the revised plan of
2005

(97)

Fintecna's investments will now be made as follows:

The expert detailed the main points of difference
between the initial plan as presented in October and its
April 2005 update. The main purpose of the revised
plan is to realign the 2005 figures with the budget
presented after the initial plan, so the activity forecast
for 2005 has been revised, the €/$ exchange rate has
been adapted to the present situation, and the rate of
implementation of
the economic measures has been
readjusted in line with what has been achieved. AZ
Servizi's scope of operations has been slightly changed,
for example removing groundhandling at Cairo airport,
which cannot for legal reasons be transferred to a third
party that is not an air carrier. Although there are quite
substantial differences between the two plans from one
activity to another or costs may be offset against and
revenue, ultimately the general effect is slight, except for
2005 when, with slightly higher activity and lower costs,
the effect is of a reduction in losses, as EBIT (30), from
€[…] to €[…] million. In 2008, the year used for the
€[…] million,
EBIT
evaluation,
from €[…]
if EBIT and
to €[…] million. However,
EBITDA (31) are rising, which should push up the final
their distribution by activity and increasing
figure,
investments, which has an impact on cash flow available
to shareholders, can have the opposite effect.

are

up

by

a) in 2005, a total contribution of €130 million
comprising: €98 million by subscription to ordinary
shares with which Fintecna will acquire 51 % of the
share capital of AZ Servizi and €32 million in prefer-
ence shares (33). Fintecna will therefore hold 58 % of
the total share capital and Alitalia 42 %;

b) in 2006, a capital increase of €64 million by way of

preference shares;

c) in 2007, a final contribution of €22 million by
subscription to preference shares with which Fintecna
will ultimately have acquired 69,7 % of AZ Servizi's
share capital and will continue to hold 51 % of the
ordinary capital.

Ultimately, Fintecna's contribution will be €216 million
and AZ Servizi's total share capital €310 million.

V.1.2. Findings regarding the calculation of profitability for

Fintecna

(95)

In this connection, the expert checked the methodology
used by Mediobanca, Alitalia's financial adviser, when
calculating the IRR (32) of 25,3 % expected by Fintecna

(30) Earnings before interests and taxes.
(31) Earnings before interests, taxes, depreciation and amortisation.
(32) See footnote 19.

(98)

The estimated return from the operation as calculated by
Mediobanca is based on year 2008 flows: forecast free
cash flow, less any foreseeable maintenance investments,
exceptional operations (especially restructuring costs),

(33) Preference shares, provided for under Article 2348 of the Italian
Civil Code, are a type of share which accords only limited voting
rights in extraordinary general meetings and in meetings to decide
on the distribution of annual dividends but gives the holder priority
over holders of ordinary shares as regards reimbursement in the
event of winding up, and as regards the distribution of dividends.

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and fiscal adjustments — that is the residual cash flow
available to the shareholder — is estimated at around
€35,6 million. After updating,
is
calculated as €442,7 million. How this amount is shared
between the two shareholders, Fintecna and AZ Fly, is
largely determined by the capital structure:

the final value (34)

a) in 2008 the preference shares, held only by Fintecna,
will represent 38 % of the total share capital, but
benefit from a preferred dividend equal to 5 % of the
total share capital, or €15,5 million in 2008. It was
made clear that the possibility of a preferred dividend
had existed from the outset but can only be achieved
from 2008 since there has not been a sufficient net
result beforehand. The updated value of this dividend
is €151,8 million;

b) the

of

the

final

remainder

value,
or €442,7 — €151,8 = €290,9 million, will be
shared out in accordance with the total stock held by
the
to say 69,7 %
(€202,7 million)
for Fintecna, and the balance of
30,3 % (€88,2 million) will go to AZ Fly;

two shareholders,

that

is

c) the final value estimated for Fintecna is therefore
€151,8 + €202,7 = €354,5 million; in relation to its
investment
(€130 million
€216 million
in 2005, €64 million in 2006 and €22 million
in 2007) and considering the amount of cash
liquidity available (€29 million) at the end of the
period, the IRR for Fintecna is 25,3 %.

of

(99)

The expert confirmed that the calculation method used,
that is perpetual capitalisation of normalised flows,
is
one of the methods adopted for the matter in hand. It
also stated that the rate of cost of equity (Ke) taken into
consideration, that is to say 10,2 %, is based on a no-
risk rate taken from 4,25 % government bonds, a market
premium of 4,50 %, a risk index (beta levered)
of 0,88 derived from comparable quoted firms (35) and,
finally, a premium of 2 % indicating the risk attached to
the fact that AZ Servizi is not a quoted company.

(100) The expert

then checked the calculations made by
Citigroup for the same purpose. It concluded that they
rely on the same basic data but use one of the other
standard methods for assessing the final value based not
on the perpetual cash flow growth of the company as a
whole but on the application of market multiples calcu-
lated on the basis of the EBITDA in respect of each of

(34) The final value was calculated on the basis of the estimated finan-
cial flow for 2008 for the company in question; the value was
updated applying a constant growth rate of 2 % p.a. — in line with
the expected medium-term inflation rate — which is regarded as
consistent with the possibilities of improvement of efficiency by
Fintecna and of a cost of equity of 10,2 % p.a., judged to be in line
with the market average.

(35) These are firms operating in the maintenance field, like BBA Group
plc, Goodrich Corp, Singapore Technologies Engineering, Hong
in groundhandling services, such as
Kong Aircraft Engineering;
Fraport AG; and in information technology and shared services,
such as Electronic Data Systems Corp, Computer Sciences Corp,
Cap Gemini SA, Indras Sistemas SA, Atos Origin, TietoEnator OYJ.

AZ Servizi's activities
(maintenance, groundhandling,
shared services and information technology); these multi-
ples are drawn from comparable firms operating in the
same markets, at times with a 30 % reduction in view of
the monopsony enjoyed by the relevant AZ activities.
Citigroup took account of
successful-outcome
scenarios based on the AZ Servizi plan, ranging from
full achievement of objectives as regards savings made
and new turnover from third parties to only 60 %
achievement of savings objectives and 85 % achievement
of turnover objectives.

four

(101) On the basis of the first scenario considered by Medio-
banca, the IRR for Fintecna according to the market
multiples applied is between 29 % and 38,3 %, that is
higher than that of Mediobanca (36). On the basis of
unofficial scenarios and therefore subject
to further
caveats, the average of the four scenarios would give an
IRR of 18,7 % to 27,1 %, a range which includes the
value calculated by Mediobanca. Only the most unfa-
vourable scenario would result in an appreciably lower
IRR of between 9,1 % and 17,1 %, which would in any
event be equivalent to or higher than the cost of capital.
The expert notes that in its calculations Citigroup failed
to take account of the final cash liquidity of €29 million
available to Fintecna, which ought
to be included
according to generally accepted practice and which
would improve these figures. The expert concludes that
the Citigroup study confirms Mediobanca's results.

(102) Apart from validating the studies carried out by Medio-
banca and Citigroup, the expert made its own analyses,
in particular, first, a study of the sensitivity of the IRR in
relation to the final value of AZ Servizi and in relation
to the cost of capital and the inflation rate, and, second,
a fresh calculation of the final value of AZ Servizi.

in

value

Fintecna's

(non-available)

(103) So far as concerns the capital increase by Fintecna of
€216 million provided for in the revised plan, giving a
final
favour
of €354,5 million with an IRR of 25,3 %, the expert
concluded that a final value of
than 10 %
(€320 million), attributable for example to results
below 10 % ascribable to Fintecna (37), would give an
IRR of 20,7 %. A final value 20 % lower than the plan
(€284 million) would give an IRR of 15,8 %, while a
final value 20 % higher than the plan (€426 million)
would produce an IRR of 33,8 %.

less

(36) It should be noted that the final values, almost always higher than
those calculated by Mediobanca, are not directly comparable
because the model used by Citigroup includes growing increases in
capital: thus, if the same IRR is to be obtained, the final value has
to be higher.

(37) In relation to the estimated annual flow of €35,6 million, a standar-
dised flow of €32,6 million in 2008, for example, would generate a
final value for Fintecna of €329 million.

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(104) Various risk scenarios, generating a different beta risk index and a different cost of capital (Ke), were
postulated; these scenarios are summarised in the following table, which shows the final value
resulting for Fintecna (excluding €29 million available cash), the internal rate of return (IRR) and the
net present value (NPV) of the flows updated to the same cost of capital of each scenario. It is to be
borne in mind that the NPV updates the various disbursement flows, corresponding to the capital
increases underwritten by Fintecna, and revenue flows, corresponding in this case to the estimated
final value and to the portion available at the end of the period; a positive NPV indicates value
created for the investor.

Scenario

Beta levered

Liquidity risk
premium

Cost of
capital Ke

Final value
for Fintecna

IRR

NPV

Base

Equity beta

Ke + 2 %

Equilibrium NPV

Ke - 2 %

0,88

1

1,32

1,56

0,88

2 %

2 %

2 %

2 %

0 %

10,20 %

354,5 M€

25,3 %

+81 M€

10,75 %

333 M€

22 %

+52 M€

12,20 %

287 M€

16,20 %

+19 M€

13,27 %

260 M€

13,27 %

0 M€

8,20 %

465 M€

38,10 %

+182 M€

The base scenario is that taken into consideration by
Alitalia, Fintecna and their consultants.

The ‘equity beta’ scenario takes account of the fact that
AZ Servizi's low forecast indebtedness leads mathemati-
cally to an undervaluation of the beta coefficient; an
equity beta of 1 corresponds to the beta coefficient of
firms operating in the same market, without applying
the reduction linked to AZ Servizi's indebtedness; this
generates about half a percentage point increase in the
cost of capital.

The ‘Ke + 2 %’ scenario corresponds to a beta coefficient
fixed at 1,32, that is the average of the highest equity
beta coefficients of the sample considered, in every case
disregarding the reduction associated with AZ Servizi's
low level of indebtedness; this generates an increase in
the cost of capital by 2 percentage points.

The ‘equilibrium NPV’ scenario sets the NPV at zero, in
other words the threshold of profitability of the opera-
tion; it corresponds to a cost of capital of 13,27 %, that
is a beta of 1,56.

In contrast, the ‘Ke — 2 %’ scenario corresponds to a 2
percentage point reduction in the cost of capital, due to
the disappearance of the liquidity risk premium or a
significant drop in the beta coefficient, or a combination
of the two.

(105) Finally, the expert carried out a full re-evaluation of AZ
Servizi using a method similar
to that applied by
Citigroup whereby the value of the firm is regarded as
the sum of the values of all its activities. These values
were calculated on the basis of a market multiple of the
EBITDA for groundhandling and staff and call centre,
and of the EBITDA less investments for information

technology; the same 30 % reductions were taken into
consideration for the latter two activities. The expert
explained that this method of market multiples becomes
more reliable as the financial markets evolve and that
both academic writers and international practice attach
growing importance to it. As regards maintenance, the
particular structure of the activity, with the majority of
services continuing to be provided by branches of airline
companies and with contracts under negotiation being
of limited duration, led the expert to adopt an assets-
based approach, based on assets for 2008, also described
by the expert as one of the methods generally used for
company valuations (38). Accordingly, and taking into
account the financial position in 2008, the global final
value
for Fintecna would be between €408 and
€430 million, that is giving an IRR of around 28,2 % to
30,9 %, thus confirming Mediobanca's and Citigroup's
calculations.

(106) The expert concluded that the favourable discrepancy in
IRR compared with the same calculations
terms of
carried out
the first plan of October 2004 is
primarily due to the deferral of part of Fintecna's invest-
ment to 2006 instead of 2005.

for

V.1.3. Findings regarding the assumptions made in the letters

of intent signed by Alitalia and Fintecna

(107)

In its decision to initiate the procedure the Commission
claimed (39) that three points, which according to the
letter of intent signed on 13 October 2004 between
Alitalia and Fintecna still remained to be negotiated,
could have a significant influence on the profitability of
the operation. The Commission therefore asked for them
to be specifically examined by the expert.

(38) NB: The Commission notes that

the
activity of maintenance on the basis of fixed assets for 2008 entails
its being considered equal to 3,8 times the EBITDA for 2008; this
value is lower than the multiples applied by Citigroup for that
activity (from 4,5 to 5,5).

the expert's valuation of

(39) Points 35 and 59 of the decision to initiate the procedure.

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V.1.3.1. T r e a t me nt of r e st r u c tu r i ng cost s

(108) The expert confirmed that the letter of intent provides
that the restructuring costs calculated by Alitalia would
continue to be borne by Alitalia if they were to exceed
the provision created and transferred to AZ Servizi. That
provision amounted to €88,8 million in the initial plan
and according to the detailed checks made, tallied fully
with the estimated share of those costs that have to be
covered in addition to the staff costs already considered
in the annual liabilities for 2005. In the revised plan for
April 2005, this provision was reduced to €75 million
at
the end of 2004 due to the costs of around
€15 million already entered in the accounts for 2004.
The expert confirmed that Alitalia's undertaking means
that there is unlikely to be any impact on Fintecna's IRR.

V.1.3.2. T r e a t me nt of

t h e ob je cti ve s of

t h e

r e st r u c tu r i ng p la n

(109) The expert was able to confirm that the costs included
in AZ Servizi's plan used for calculating the IRR were in
line with the efficiency objectives laid down therein; the
plan provides for a maximum annual percentage of […]%
of the invoiced amounts to be repaid to AZ Fly if the
objectives are attained;
to about
this
corresponds
in the period 2005-
€[…] million per year or,
2008, €[…] million in the revised plan. The expert
stated that, according to Alitalia's management, such an
estimate can be considered to be confirmed by the
involved in drawing up the plan,
various players
including the consultants, who included it in their calcu-
lations.

V.1.3.3. T r e a t me nt of t h e c a p i t a l g a i ns fr om t h e

tr a nsfe r of asse ts or ar e a s of a c ti v i ty

(110) The expert confirmed that the treatment of any such
capital gains, still subject to negotiation at the time of
the expert's study, would have no impact on profitability
for Fintecna if their partial retrocession to AZ Fly took
place only after all transfers planned up to 31 December
2008, and if it concerned only that part of the IRR
greater than the 25,3 % calculated by Mediobanca as
Fintecna's estimated profitability. The parties confirmed
that was the approach they
that
to the consultant
wished to adopt for negotiating the clause.

(115)

priority payment of a dividend, as in the present case,
no longer imposes any particular restrictions as regards
associated voting rights. The only restriction which does
apply lies in the fact that shares with a limited or condi-
tional voting right, as in the case of preference shares,
cannot account
the share
capital (40).

for more than half of

(112) The expert put forward three examples of private quoted
companies (Fiat SpA, Unipol Assicurazioni SpA and Isti-
tuto Finanziario Industriale SpA) which issue preference
shares according, amongst other things, a priority in the
distribution of profits that is associated with a fixed
amount per share or corresponds to a percentage of the
nominal value.

(113) The expert confirmed that it had found nothing to indi-
cate that the granting of preference shares to a single
shareholder, whether public or private, was contrary to
Italian law. The only advantage observed is precisely the
priority interest-bearing access to the profit dividend.

V.1.5. Findings

regarding

services
advance
provided by AZ Servizi to AZ Fly at market condi-
tions

billing

for

(114) The expert dedicated a large part of

its report to a
presentation of the detailed work carried out on this,
describing the billing practices applied in AZ Servizi's
plan; the plan had been drawn up by Alitalia with the
assistance of McKinsey, which supplied it with the
analysis elements direct. The work focused on each of
the
groundhandling
services,
information technology and shared services
(staff and call centre)) and its findings are set out below.
The expert concluded generally that it had found no
indications that the methodology used for setting prices
reflecting market conditions in AZ Servizi's plan might
be flawed.

(maintenance,

activities

firm's

It should be noted that Fintecna consultant Citigroup's
report says that AZ Servizi's total
turnover
of €[…] million for 2008 breaks down by activity as
follows: maintenance €[…] million; groundhandling
technology
services
€[…] million;
call
and
shared
centre) €[…] million (41).

€[…] million;

information

forecast

services

(staff

V.1.4. Findings regarding use of
Fintecna's benefit

the preference shares for

(111) The expert first pointed out the many different types of
shares existing under Italian law; in particular, since the
company law reform of 1 January 2004, the right to

(40) As already indicated in point 38 of the decision to initiate the
procedure, preference shares in the present case will represent at
most 38 % of the share capital in 2008. Preference shares carry
voting rights only in extraordinary general meetings and in
ordinary general meetings concerning the distribution of dividends.
the turnover
excludes the internal services of AZ Servizi, that is €[…] and €[…]
million respectively, which ought nonetheless to be taken into
account in the case of transfer to a third party.

(41) For information technology and shared services,

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V.1.5.1. A dva nc e
se r v i c e s

b i lli ng

for ma i nte na nc e

(116) The price construction method is essentially based on
sector price comparisons taken from the independent
study carried out by Aero Strategy (42). The expert
described in detail the calculation method adopted for
some aspects (for example ‘heavy’ maintenance and
components of the A320 family, CFM56-5B jet engine
maintenance) to verify the bases (frequency, hourly cost,
number of hours, parts, etc).
It also detailed the
following two assumptions made for the purposes of
this price construction:

a) application of a margin conforming to that currently

used by Alitalia for services to third parties,

this rate,

reduced from […]

b) application of a volume discount rate lower than that
normally obtained by AZ Fly from its maintenance
suppliers;
to […]%,
reflects Alitalia's acceptance of higher prices and the
absence of any commitments on volume. As regards
the latter point, the expert was able to ascertain by
tests that a contract with one supplier (Avio), which
offered a maximum discount of 7,5 %, did in fact
contain a minimum volume guaranteed by Alitalia.
The annual effect of the discount rate reduction is
to additional EBITDA for AZ Servizi,
equivalent
which
million
from
in 2005 to €[…] million in 2008.

would

€[…]

rise

V.1.5.2. A dva nc e
se r v i c e s

bi lli ng

for

g r ou ndh a ndli ng

(117) The prices shown in the plan were estimated on the
basis of the price which Alitalia pays at comparable
airports (43), or of offers which the company has received
at those airports where AZ Servizi will be operating (44).
A margin of […]% negotiated with Fintecna was added
to these prices. The annual effect of such a margin is
equivalent to additional EBITDA for AZ Servizi, which
would rise from €[…] million in 2005 to €[…] million
in 2008.

V.1.5.3. A dva nc e b i lli ng for i nfor ma ti on te c h -

nolog y a nd sh a r e d se r v i c e s

(118)

In the absence of any other information, Alitalia esti-
mated the prices on the basis of offers from companies
interested in acquiring such companies, and reduced in
the same measure the discount rate being offered by
those companies. The expert was able to confirm that

(42) MRO Market Forecast initiative — Component Maintenance Fore-

cast 2003-2013 of 16 December 2003.

(43) For example at Bologna for Palermo, Catania and Cagliari; at
Malpensa for Fiumicino; at Geneva for London; at Düsseldorf for
Brussels, Frankfurt and Athens.

(44) For example at Naples.

this rate corresponded to the maximum being offered
for shared services and to the minimum for information
technology. Since these secondary activities each have
similar turnover estimates (€62 million in 2005 in
respect of the first and €64 million in respect of the
second — excluding internal services — out of a total of
€935 million), using the average of the two cases would
not lead to very different results.

V.2. Findings regarding compliance with the condi-

tions for rescue aid

(119) These findings are drawn from the additional checks
required by the Commission in connection with alleged
failure by Italy to honour the undertakings it gave when
rescue aid was authorised on 20 July 2004. These under-
from new investment,
takings
ensuring that new routes being opened will be profitable
and abstaining from predatory pricing; the use of loans
secured by rescue aid was also investigated.

refraining

involve

V.2.1. Findings regarding refraining from new investment

(120) The expert examined the structure of the fleet as at
31 December 2003 and 31 December 2004 and exam-
ined its trends. It concluded that only one aircraft, an
Embraer 170,
joined the fleet operating after 1 July
2004, in other words after the Commission had decided
to grant rescue aid. Alitalia's Board of Directors had
made the decision to acquire this aircraft on 19 June
2002, that is before 31 December 2002.

V.2.2. Findings regarding analysis of the profitability of the
new routes being opened from summer 2004

(121) The expert concluded on the whole that, on the basis of
the work carried out and taking into account the few
exceptions found (described below), the situation as a
that Alitalia had failed in its
whole did not suggest
undertaking to operate the new routes with positive
operating margins.

(122) Since the profitability criterion used was the ‘gross
margin’, the expert checked whether the factors taken
into account might give cause for comment. The gross
margin (or
the
(passenger or other) revenue generated by a given route,
less commercial costs (commissions, etc.), distribution
costs (CRSs and costs related to the sales structure and
initiatives charged proportionally against
promotional

‘flight contribution’)

is defined as

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the revenue from that route) and variable operating
costs (for fuel, airport charges,
in-flight service, flight
crew allowances, etc.). The margin was evaluated from
two different aspects: the direct margin generated by the
passengers on the flight itself, and the margin generated
by the ‘feeder value’ added to it, that is to say the margin
created by passengers on that
flight who are taking
connecting flights with the same airline.

(123) The expert points out that, for a constant installed capa-
city (number of aircraft) arising from investments
decided before 31 December 2002, the operating logic
is one of decreasing marginal profitability, so that the
extra resources freed up by better fleet utilisation (in par-
ticular for the period commencing winter 2004,
in
respect of which the expert refers to the data set out in
point 47 of the decision to initiate the procedure) are
necessarily earmarked for routes less profitable than
those already opened.

for

The

2005.

(124) For routes opened in the summer of 2004, the expert
checked profitability at end September 2004, the profit-
ability forecast for end December 2004 and the profit-
ability forecast in the 2005 budget. For routes opened as
from winter 2004, reference was made to the latest fore-
casts
of
the 25 maximum cases examined, all the actual profit-
ability shown at end September 2004 (12 routes opened
in summer 2004) or forecast in the 2005 budget for the
25 routes are already positive or, exceptionally, zero
(two cases at
end
December 2004, one forecast for 2005); only three routes
opened in summer 2004 show a negative direct gross
margin at end December 2004. These cases are detailed
below.

end September 2004, one at

conclusion

that,

is

(125) The three routes with negative direct economic perfor-
mance at end December 2004 are to Scandinavia:,
Malpensa — Copenhagen (€[…] million at
end
December 2004 compared to €[…] million at end
September 2004), Malpensa — Stockholm (€[…] million
at end December 2004 compared to €[…] million at
end September 2004) and Fiumicino — Stockholm
(€[…] million at end December 2004 compared to
€[…] million at end September 2004). All three are
entered with positive margins in the 2005 forecast
(€[…], €[…] and €[…] million respectively for the year).
The expert related Alitalia management's comments on
this, to the effect that these routes are exposed to heavy
competition,
and
subject to high variable costs due to the length of the
journey. Finally, as indicated generally, these routes were
especially penalised by Alitalia's poor performance in
autumn 2004 in terms of RATK (revenue per available
in
ton-kilometre),

including from low-cost airlines,

which

14,2

fell

by

%

October 2004 compared to the previous months. The
company's precarious financial situation, which led to a
degree of loss of customer confidence, was thus found to
be particularly significant on these new northern Euro-
pean routes, which required a greater effort to attract
customer loyalty. However, the expert also points out
that the information supplied by Alitalia indicates posi-
tive ‘feeder values’ for these three routes, the feeder value
being the extra margin contributed in incremental
revenue by passengers on these routes
to Alitalia
connecting flights to other destinations, in line with the
company's hub strategy. For 2004 these feeder values
are €[…], €[…] and €[…]million respectively (45); thus,
in general terms, the operation of Alitalia's new Scandi-
navian network should remain profitable.

2004 is

Fiumicino — Zurich

(126) The route with a zero direct margin forecast at end
December
(with
€[…]million at end September 2004 and €[…]million
forecast
is characterised by
powerful competitive pressure from Swiss, which oper-
ates four daily connections as opposed to only one oper-
ated by Alitalia. The route does, nevertheless, generate a
positive feeder value (+ €[…] million) in 2004.

in the 2005 budget).

It

(127) By the same token, the route with a zero direct margin
forecast for 2005 (Malpensa — Birmingham) generates a
positive feeder value of €[…]million, with a net positive
impact on the company's results.

V.2.3. Findings regarding pricing practices on the new routes

being opened from summer 2004

(128) The expert carried out a number of analyses and checks
on the new routes opened since the summer of 2004. It
described the complex fares situation in the aviation
industry, arising from the plethora of promotional
offers, usually of one month, tied to various minimum
and/or maximum stay rules,
journey dates and times
being changeable and tickets refundable, and the impact
it noted that the most attractive
of reservation dates;
promotional rates are applied to a limited number of
seats on each flight. Finally, the expert concluded, from
the small number of exceptions found in terms of price
leadership, that on the whole there was no evidence to
suggest that Alitalia had reneged on its undertaking not
to apply predatory prices on the new routes.

(129) The examinations relied on two sources: the documents
supplied by Alitalia and checked by the expert, and the
tests carried out on the expert's initiative on the Galileo
computer reservation system (CRS) and on Alitalia's
Internet site.

(45) This value of €[…] million was calculated disregarding Alitalia's

claim of possible improved performances in winter 2004.

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V.2.3.1. Tests carried out on Alitalia's data

(130) It was possible to test each of the routes opened from the summer of 2004 onwards, either at the
time of opening of the route or in March 2005; the tests involved return flight prices departing
both from Italy and from the foreign city concerned. The prices indicated by Alitalia and its compe-
titors were corrected to take account of the surcharge cost (SC) intended to cover the extra aviation
fuel or insurance cost, which could vary greatly from one company to another, the purpose being
to show the final price paid by the customer. The prices may be summarised as follows:

Alitalia data (€)

AZ

Compet-
itor

Delta (€)

SC

Delta
final (€)

Prices at opening of summer 2004 routes

Zurich — Fiumicino

77

112

– 35

10

– 25

Prices at opening of winter 2004-2005 routes

Timisoara — Malpensa

Shangai — Malpensa

Salonicco — Fiumicino

Prices in March 2005 of winter 2004-2005 routes

Malpensa — Zagabria

Timisoara — Malpensa

Shangai — Malpensa

Note: SC: surcharge cost

250

513

130

169

129

461

390

533

170

199

149

533

– 140

– 20

– 40

– 30

– 20

– 72

12

19

19

22

12

19

– 128

– 1

– 21

– 8

– 8

– 53

(131) Only one of

the 12 routes opened in the summer
of 2004, entailing 24 tests, only one (Zurich-Fiumicino)
showed an Alitalia fare (SC included) at the time of
opening of the route €25 lower than that of the compe-
titor, Swiss. In this connection, Alitalia argued that the
difference in the price was justified by the difference in
flight
the type of product, having a much lower
frequency than its competitor of one to four.

or

Gothenburg, Geneva, Helsinki
Luxembourg
(€249 instead of Alitalia's €250 to Malpensa). The
expert also put forward Alitalia management's expla-
nation that Carpatair, a Romanian airline not
in
Galileo, offers Timisoara — Orio al Serio (Milan-
Bergamo airport) one-way for €70, so that a return
ticket would cost €140, more than €100 below Alita-
lia's fare;

(132) By March 2005, of the 12 routes opened in summer
2004 (24 tests), none was any longer found to have
Alitalia fares (SC included)
its
cheapest rival. In the case of Zurich — Fiumicino the
final price currently paid by Alitalia customers is higher
than Swiss's fares.

lower than those of

(133) Of the 11 routes opened in winter 2004 (22 tests), there
are three routes with Italian destinations (Timisoara and
Shanghai — Malpensa, Saloniki — Fiumicino) offering
an Alitalia fare (SC included)
lower than competitors'
prices at the time of opening of the route:

a) for Timisoara — Malpensa the price difference
is €128.
compared with Austrian Airlines
However, Austrian Airlines' price of €390 seemed
high compared with the fare charged by that airline
for departures from the same city to Amsterdam,

(OS)

b) for Shanghai — Malpensa the difference is negligible

(€1 for a fare of more than €500);

c) for Saloniki — Fiumicino it is €21, comparing Alita-
lia's price (SC included) with that of Olympic Airlines,
which offers €85 one-way, or €170 return. This
observation applies only to departures from Greece,
since the Alitalia flight from Italy is more expensive
due to the SC which adds an additional €5 to the
Alitalia flight.

(134) Two of the 11 routes opened in winter 2004 (22 tests),
which fly to Italy (Timisoara and Shanghai — Malpensa),
as well as the Malpensa-Zagreb link, show an Alitalia
in
rate
March 2005. According to the expert, Alitalia manage-
ment ascribes the difference to limited-duration promo-
tional fares linked with increased frequency:

than its competitor's

(SC included)

lower

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a) for Timisoara — Malpensa the difference compared
with competitors is reduced to €8. However,
the
competitors (Alitalia, Tarom, Malev) have had to cut
their prices by some €130-150 (net of SC) due to the
abovementioned presence of Carpatair, which is
offering Orio al Serio at €140;

b) for Shanghai — Malpensa the divergence is increased
to €53 due to Alitalia's price reductions compared
with Lufthansa and KLM; flights to this destination
are now five times a week instead of three;

c) for Malpensa — Zagreb Alitalia offers a price (SC
included) €8 below that of its competitor, Croatian.

(135) As regards the two routes opened in summer 2005
(Malpensa — Kraków and Sarajevo),
in all four tests
Alitalia's fares are higher than or equal to those charged
by its competitors.

V.2.3.2. T e sts ca r r i e d ou t on th e e x p e r t's i ni t i a -

ti ve

(136) The expert carried out some 110 additional tests directly
via Galileo on these new routes at different periods;
generally
supplied
confirmed
previously by Alitalia, but the expert considers that three
cases examined under different criteria could have gener-
ated a tariff advantage.

tests

data

the

the

(137) The first case concerns Saint Petersburg — Malpensa, for
in November 2004 and January 2005, Alitalia
which,
enjoyed a tariff advantage of €13 over CSA, not
including Air France among its competitors because of
their joint-venture agreements; in previous data, Alitalia
had regarded Air France as its chief competitor. In any
event, the expert observes that this price difference no
longer exists.

(138) The second case concerns the Timisoara — Malpensa
link, for which the difference compared with Austrian
Airlines at the time of opening was €128. The expert
notes that from 15 October to 30 November 2004,
Alitalia was offering a fare of €149, that is a difference
of €229 (SC included) compared with Austrian Airlines.
He
since
September 2004 (and confirmed in February 2005) of a
return fare equivalent to €140 offered by Carpatair on
the Timisoara — Orio al Serio route.

however,

existence

points

out,

the

(139) The last case concerns the Valencia — Fiumicino link for
which, in November 2004, Alitalia had offered a promo-
tional rate of €69, taken into account by the expert
when carrying out its examination, while Alitalia had
made its comparisons on the basis of a fare of €101;
Alitalia thus enjoyed a tariff advantage of €22 (SC

included) in the month in question; as mentioned above,
this difference no longer exists.

(140) Finally, at

the

was

prices

Alitalia

the beginning of April 2005 the expert
carried out, at the Commission's request, a comparison
between
offering
between 17 and 22 March in Galileo (the basis of the
previous tests) and those it was offering directly on its
Internet site. Only two cases (Rome — Boston and Milan
— Washington) showed a €10 difference, while the
other prices had been confirmed. Since Alitalia manage-
ment had given its assurance that it was not company
policy to operate price differences according to sales
channel and since the differences found were only slight,
the expert concluded that they were due to the differ-
ence in time between the two checks.

V.2.4. Findings regarding the use of loans secured by rescue

aid

(141) With the help of Alitalia the expert analysed the situa-
tion as regards the loan guaranteed by rescue aid, its use
in 2004, its use in the first quarter of 2005 and the cash
flow forecast for end 2005.

V.2.4.1. G e ne r a l r e ma r ks on th e br i dg i ng loa n

and th e cash asse ts

(142) As mentioned in the rescue aid decision,

the expert
pointed out that the cash flow forecasts used for rescue
aid were to a large extent derived from the fourth
quarter 2003 and first quarter 2004 data. When the
decision was adopted, the company was in an impasse
after the 2004-2006 industrial restructuring plan foun-
dered in the face of
trade union opposition to the
measures proposed in it. This had led to the resignation
of the managing director in February 2004, to his repla-
cement and to the implementation of a new plan in
September-October 2004.

(143) The expert also mentioned that the €400 million loan
agreement signed with Dresdner Bank AG on 11 October
2004 was in pursuance of the guarantee decree of the
Ministry of Finance of 8 October 2004. The expert
recalled that the company's board of auditors had made
activation of the loan conditional on calling a meeting of
the shareholders to discuss the recapitalisation of the
company. This meeting, which decided on a maximum
capital
place
€1,2
on 15 December 2004. Alitalia was not therefore in a
position to make use of the bridging loan before that
date. Dresdner Bank, on the other hand,
reminded
Alitalia by letter of 14 January 2005 that the loan had
to be taken up by 31 March 2005.

increase

billion,

took

of

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(144) Furthermore, the expert compared the cash flow situa-
tion presented for the purposes of this procedure with
that published by the company monthly as required by
Consob (46). The expert showed that
the situation as
presented here reflects funds actually available in Alitalia
group bank accounts on the value date. Conversely,
Consob's monthly cash flow report is calculated on the
accounting date and comprises
short-term financial
credits, including appropriations to Italian firms either in
liquidation (like Sisam) or not covered by cash manage-
ment (like Aviofin) and the unusable assets in the hands
of an insurance broker, Alinsurance, in US travel agen-
cies not covered by cash management and in companies
located in countries (such as Libya, Iran, Nigeria, etc.)
which have systems for controlling financial transfers to
foreign countries. Altogether these items amount to a
total of €22-25 million, which increases, without consti-
tuting available assets, the available assets and short-term
financial credits submitted as required by Consob.

(146)

V.2.4.2. Use of th e b r i dg i ng loa n i n 2004

V.2.4.3. Use of

t h e b r i dg i n g loa n i n t h e fi r st

qua r ter of 2005

some €60 million of

In the first quarter of 2005, from an initial figure of
€66 million at 31 December 2004 the cash flow in July
2004 was -€70 million instead of the -€195 million
forecast;
this €125 million
improvement stems from the continued improvement in
the forecast used for
operational management over
calculating the aid; the figure also takes into account the
favourable effects of a lower-than-forecast fall
in unit
yield and an improved load factor. Another €60 million
is derived from the continued fall in investment costs:
this includes the effect of another two of the five MD-
11 sale and lease-back transactions planned and the sale
of three Pipers for €30 million, the transfer of shares for
€10 million and a €20 million reduction in the invest-
the
ment programme. The total
financial need for
quarter
to about €105 million,
including the repayment of €35 million of due debts;
the bridging loan was nevertheless activated for the
remaining €300 million (€55 million in February
and €245 million in March), generating €262 million in
available funds at 31 March 2005.

therefore

comes

(145)

‘cash flow’),

In the fourth quarter of 2004, the cash flow net of varia-
tion in demand for working capital and net of invest-
ments (operational and investment cash flow, hereinafter
reached -€54 million
referred to as
compared with the -€187 million forecast in July 2004;
€80 million (47) of this €133 million improvement stems
from the improvement
in operational management
compared to financial year 2003, used for calculating
the aid, and from €20 million in revenue from tax
credits 1993-1994 from the State, from €20 million in
payments due but not made,
suppliers
following legal action and,
from €4 million
received as a contribution (48) by the Atitech subsidiary
for the construction of a hangar at Naples airport. The
lower negative balance (€53 million thereof (49)) is also
due mainly to the reduced need for investment;
for
example, in addition to unrealised planned investments,
in November 2004 Alitalia carried out one of the five
planned sale
and lease-back transactions of MD-
for €17 million. After repayment of due
11 aircraft
debts amounting to €49 million,
the cash needs of
€103 million for the quarter were met by means of a
withdrawal of €100 million from the bridging loan
after 15 December 2004.

to airport

finally,

V.2.4.4. Ca sh flow for e c a st u p t o e nd 2005

(147)

In the short term, the expert's Alitalia forecasts show
only a slight fall in cash flow to €212 million at 31 May
2005; management
improvements and lower invest-
ment, together with a fourth MD-11 sale and lease-back
transaction will continue to bring benefits. Nevertheless,
by the end of 2005 forecast cash flow, net of the impact
of the possible recapitalisation, is expected to halve to
€[…] million.

(46) The Commissione Nazionale per le Società e la Borsa, the Italian securi-

ties market regulatory authority.

(47) Cash flow of -€60 million compared to the -€140 million forecast.
(48) Source: Law No 488/1992, approved by the Commission as a
regional State aid scheme on 2 August 2000 under number N
715/99. This scheme, which expires on 31 December 2006,
excludes the transport sector, but Atitech, a subsidiary of Alitalia, is
a company whose object is aeronautical maintenance; the company
requested State aid in December 2000 and approved in 2001; the
work was completed in December 2003 and payment of the aid
was requested, on this basis, in September 2004.

(49) Cash flow of +€6 million compared to the -€47 million forecast.

(148) The expert refers to one of the justifications given by
Alitalia in connection with using the loan in its entirety
at 31 March 2005, that is to say that, as mentioned by
Dresdner Bank AG, it would not be possible to resort to
it after 31 March 2005. The expert also emphasises one
of the scenarios adopted for the purposes of these fore-
casts, that of October 2004 where the €/$ exchange rate
is 1,27 and the price of a barrel of Brent is 41 USD.

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Official Journal of the European Union

8.3.2006

of

the

This scenario is unrealistic set against the current Brent
crude price of $55-57/bl. The forecasts provided by the
expert and three market players (BP RiskManager, Shell
Trading and Macquarie Energy) indicate a figure ranging
between $54 and $58 by end 2005. It has been calcu-
lated that, with a barrel price of $55 and a €/$ rate
holding at 1,27,
the negative impact on Alitalia's
accounts would be of the order of €[…] million by the
end
other words,
about €[…] million for the April-June quarter. This
shows that Alitalia's current cash flow forecast is highly
exposed to this volatility, all the more so since, when
these forecasts were being put together in autumn 2004,
Alitalia was prevented by its financial situation from
taking any steps to cover exchange rate and oil price
risk, so that any deterioration would therefore be fully
reflected in its accounts. At present, the coverage opera-
tion merely seeks to stabilise the price at $55 and thus
put a definite value on the loss.

year, (50)

or,

in

VI. THE COMMISSION'S COMMENTS ON THE ALLEGED

MISUSE OF THE RESCUE AID

its

(149) The Commission would point out that,

decision

in accordance
with
in
procedure
January 2005, the purpose of the present decision is to
assess whether or not the AZ Fly and AZ Servizi recapi-
talisation measures notified by Italy should be regarded
as State aid.

initiate

the

to

in view of

However, even if the decision to initiate the procedure is
silent on this matter,
the observations
received from interested parties the Commission wanted
to give them the opportunity to make comments on
compliance with the undertakings given by Italy with
regard to the rescue aid and the procedures for using it.
On the basis of these elements and with a concern for
transparency, it sets out in this section its preliminary
analysis of this question. In any event, as long as the
bridging loan has not been repaid, or the State guarantee
granted in this connection has not been withdrawn,
Alitalia remains subject
to the same conditions and
undertakings; this part does not therefore prejudge the
Commission's final assessment on this matter, in particu-
lar its option either to refer the matter directly to the
Court of Justice under Article 88(2) of the EC Treaty or
to initiate a procedure for misuse of rescue aid if it
subsequently considers that there are grounds for consid-
ering that there has been such misuse.

The Commission would point out that one of the prin-
cipal conditions of accepting rescue aid is that it should

not have serious detrimental spillover effects on other
Member States. To this end, as indicated in the rescue
aid decision, the Italian authorities had given undertak-
ings concerning the development of the company's capa-
city and the absence of predatory pricing on the new
routes. These two questions are examined in points 150
to 172.

VI.1. Comments concerning the lack of new invest-

ment and capacity

(150) The Commission takes note of the conclusion of the
expert appointed by it that, at the time of the expert's
report
in April 2005, Alitalia's fleet had not been
increased by any new aircraft the acquisition of which
had not been decided upon by the company before
31 December 2002. In particular, in reply to comments
by the interested parties, it would point out the decision
of Alitalia's Board of Directors of 16 February 2004, as
mentioned in the decision to initiate the procedure (51)
only concerned the arrangements for financing aircraft
the acquisition of which had been decided upon before
31 December 2002. The Commission notes that the
fleet referred to is that of the entire Alitalia Group,
including Alitalia Express.

(151) The Commission therefore considers at this stage that it
has not encountered elements prompting it to think that
this specific undertaking contained in the rescue aid
decision has not been complied with.

(152) Quite apart

the

the decision
from the actual content of
authorising the rescue aid in terms of capacity which it
was recently confirmed has been properly complied
with, the Commission also takes note of the clarifica-
tions provided by Italy concerning more general
concepts concerning capacity; so far as concerns the
fleet, it finds that, apart from the lack of new investment,
the fleet should in fact be reduced by four units in 2005.
tonne-kilometres offered
Accordingly,
(TKO) leading to the increase in frequencies and seats
between summer 2004 and summer 2005 noted by the
competitors is simply the result of increased productivity
resulting from a much greater daily use of the existing
fleet. Accordingly, the increase of nearly 15 % reported
by the Italian authorities corresponds to the order of
magnitude noted by its competitors. The ability to
implement
itself
improved as a result of the significant increase in the
aircraft utilisation rate.

this capacity in practical

terms is

available

(50) With an annual fuel cost rising from €469 million to €711 million.

(51) Point 48 of the rescue aid decision.

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(153) However, the Commission considers that the rescue aid
decision already took account of the opening of new
routes (52) and approved them precisely because they
were implemented on the basis of constant capacity and
on routes which to a large extent were not operated or
were operated on a monopoly basis. It was a question of
allowing the company to use the new resources made
available by means of a better rotation of the existing
fleet and the constant number of seats available, which
explains, as indicated above, the increases noted in terms
of tonne-kilometres and seat-kilometres offered (TKO/
SKO).

(154) The Commission therefore considers that, in the light of
the information available to it at this juncture, the devel-
opments noted in terms of
frequencies and routes
opened are not contrary to its rescue aid decision of July
2004.

(158)

VI.2. Comments concerning the analysis of the prof-
the new routes opened from

itability of

summer 2004

that

(155) On the basis of the data provided by its expert, the
the
Commission has obtained confirmation that all
routes opened since summer 2004 were profitable,
in
most cases in terms of their individual financial contri-
bution alone and in all cases where the feeder value is
included,
is to say the additional gross margin
generated by these routes on the rest of the company's
network. The Commission considers that
taking the
feeder value into account is justified, especially for a
company pursuing a hub strategy, since this additional
contribution would not have existed if the routes in
question had not been opened. Accordingly, all
the
routes, including the new Scandinavian network, seem
to be making a positive contribution, which is in accord-
ance with the rescue aid decision.

of

the

case

concerning

(156) The Commission also notes that the interested parties'
the
allegations
Saint Petersburg-Milan route, which the competitors
considered to be operating at a loss, would seem to be
invalidated by the figures supplied. This line, which was
opened in winter 2004-2005, is forecast to have a posi-
tive direct gross margin for 2005 of € […] million,
without even taking into account the feeder value, that
is to say […]% of the income, placing it among the most
profitable of the lines opened.

thus generating a loss. This question, which was exam-
ined in paragraphs 155 and 156, requires a complex
and thorough analysis of the company's accounts, which
the interested parties were not in a position to make.
That is why, as indicated in its decision to initiate the
procedure, the Commission had taken the view that a
simpler comparison of
the fares charges by Alitalia
compared with the other companies (the existence of
price leadership) could, initially, provide an indication as
to the existence of situations could lead to predatory
pricing.

In this connection, the Commission has concluded, on
the basis of the tests carried out, that, while situations of
price leadership did in fact exist in a very small number
of cases, for brief periods and with limited price differ-
ences, the fares charged on the routes in question would
not seem to be predatory. As already indicated, the new
routes are economic and most of the routes in question
are among the most profitable according to the forecasts
for 2005: that is the case with Saint Petersburg-Malpensa,
which has already been mentioned, Malpensa-Zagreb,
with a high gross margin of […]%, and Thessaloni-
ki-Rome with almost […]%. Slightly less positive results
were recorded for Rome-Zurich and Timisoara-Mal-
pensa, with a […]% margin each, and Rome-Valencia
with […]%.

(159) The Commission therefore considers that at this stage
the very limited number, scale and duration of cases of
price leadership established in the many tests carried out
do not reflect a deliberate policy in this respect but are
instead inherent in the very structure of air fares, their
number and their constant updating. Furthermore, as the
analysis of the margin obtained on the new routes has
indicated, this situation has not affected the Alitalia's
profitability; quite the contrary since the marginal vari-
able income from the new routes for the company is
higher than their marginal variable cost, which of itself
confirms the lack of predatory pricing.

(160) The Commission therefore considers that, in the light of
the elements in its possession at this juncture, the devel-
opment noted with regard to the profitability of the new
routes opened and the fares charged on them would not
appear to be contrary to its rescue aid decision of
July 2004.

VI.3. Comments concerning the analysis of pricing
on the new routes opened from summer 2004

VI.4. Comments relating to the use of the loan guar-

anteed by the rescue aid

(157) The Commission would point out that the existence of
predatory pricing is primarily characterised by a situa-
tion in which the marginal variable income does not
make it possible to cover the marginal variable cost,

(52) Point 37 of the rescue aid decision.

(161) On the basis of the comments by the interested parties
and Italy, and in particular the conclusions of its expert
and the data available at present, the Commission notes
that Alitalia is at present in a more favourable cash-flow
situation than that expected when the rescue aid was
adopted.

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(162) This situation arises essentially from better control of
operating costs and successful efforts to find alternative
financing arrangements such as the abovementioned
sales and lease-back operations. It also reflects the contri-
bution to the results of the company of the new routes
which, as indicated above, produce a profit margin. The
Commission would point out, in reply to the interested
parties, that the purchase of kerosene and the settlement
of wages form part of the normal charges of an airline,
influencing its cash flow or operating flow used when
determining the aid.

(163) As to the principle, the Commission cannot but find it
positive that a company faced with the necessity to
redress its financial situation should seek to reduce its
financial needs for the general benefit of its operation
and credibility vis-à-vis new investors and find alterna-
tive financing arrangements. The Commission notes,
moreover, that the dual effect of the reduction in invest-
ments and the efforts to find alternative long-term finan-
cing arrangements dispel any criticism relating to the
financing of the fleet by means of the rescue aid and
hence its use for an objective not in accordance with the
decision authorising it.

(164)

In this connection, the Commission notes that the late
utilisation of the rescue aid, as from 15 December 2004
was in fact a condition imposed by the Audit Board at
the start of the recapitalisation procedure in order to
ensure that the company was not indebted without any
prospect; by the same token, the gradual use of the aid
would rather seem to be a sign of sound management.
The delay in the use of the loan also indicates that since
the development of the new routes took place on the
basis of constant installed capacity and with a profit
margin as indicated above, did not have a detrimental
effect on the company's cash-flow situation compared
forecasts but, on the contrary, helped to
with its
improve it. Similarly, the coverage of the future costs of
the restructuring operations, essentially in terms of
job-shedding, was budgeted for until 30 June 2005 and
only gradually has an impact on the cash-flow situation
as and when staff leave and sums due are paid.

the annual

plan presented in accordance with the guidelines. The
Commission would point out that this level of liquid
assets of €262 million represents at most less than 6 %
turnover, and is therefore very much
of
lower
than the figures previously presented by the
company, of the order of €500 million at the end of
2003, and less than the average of 17 % for the main
European companies as at that same date, which would
represent €700 million for Alitalia. Alitalia's liquid assets
therefore remain very stretched, whether in terms of
gross figures or when compared with those of its main
competitors. The Commission also notes that, all other
things being equal, that is to say taking into account the
financial efforts made in recent months by Alitalia but
without
the company would, as at
31 March be in deficit to the extent of €262-400 million
or approximately €140 million, rising to €190 million
the end of May. The Commission must therefore
at
conclude that, but for the aid, the company would have
had negative liquid assets and would therefore have been
insolvent at the end of December 2004 (54). According
to the Commission, there is nothing in the conduct of
the company with regard to the utilisation of the brid-
ging loan to show that the rescue aid was misused.

the rescue aid,

(166) The Commission would also point out that the assess-
ment of the need for the aid had to be made at the time
when the decision was taken and according to the infor-
mation available at that time, which is what it did in
July 2004. The Commission notes that much of what
was known to the management of Alitalia at that date
aroused deep concern about the state of the liquid assets
from summer 2004. The Commission would point to
the early cancellation by the Royal Bank of Scotland of a
guarantee contract at the beginning of 2004 reported by
the expert for €34 million; it would also refer to third-
party documents provided by Italy which show that the
company's major suppliers in terms of leasing, fuel and
credit card sales operators required the provision of
additional cash reserves and, where appropriate, guaran-
tees in order to continue their commercial relations with
Alitalia. This clearly shows the market's negative percep-
tion of Alitalia at that time and the assessment made by
its management. The Commission had in fact accepted
in the rescue aid decision that €40 million should be
included to cover contingencies in this connection (55).

(165) Consequently, the liquid assets of the Alitalia group as at
31 March 2005 amount to €262 million, or approxi-
mately €200 million above the figure as at 30 September
2004, that is to say €60 million (53). The Commission
notes, as indicated by the expert (see paragraph 147),
that
this figure should be reduced by approximately
€50 million by 31 May, the most favourable date for the
closure of the procedure concerning the restructuring

(53) Situation presented to the Consob on 29 October 2004, or
€83 million minus the €22-25 million of unavailable funds identi-
fied by the expert.

(167) The Commission also notes that

these contingencies
have not disappeared. Thus, the economic forecasts for
Spring 2005 (56) published by the Commission on 4 April
2005 were based on the assumption of an oil price of

(54) The situation presented to Consob on 31 January 2005 concerning
31 December 2004 indicated short-term financial loan availabilities
of €91 million, i.e. after deducting around €25 million of unavail-
able funds and as presented by the expert (see paragraph 144), and
a cash flow of €66 million after utilisation of a first tranche of
€100 million of the bridging loan; otherwise the liquid assets
would have been negative.

(55) Point 16 of the decision of 20 July 2004.
(56) http://europa.eu.int/comm/economy_finance/publications/europea-

n_economy/2005/ee205en.pdf

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$50,9 per barrel and an €/$ exchange rate of 1,31 in
2005; on this basis, the recalculated annual charge for
2005 for fuel
is approximately €625 million, repre-
senting an annual additional cost of approximately
€156 million and €40 million for a single quarter.

as already indicated, for virtually all the present debt.
The Commission will obviously continue to monitor the
proper implementation of the rescue aid as part of its
general State aid monitoring duties.

(168) Thus, even taking into account what is known about
present and future circumstances,
the Commission,
noting the negative liquid assets in the absence of the
loan, since 31 December 2004, and the contingencies
relating in particular to the price of oil, still considers
the amount granted as being reasonable in the light of
the uncertainties at the time. The Commission could
therefore legitimately consider, at the time and without
having its judgment affected by subsequent events, that
the amount of €400 million was appropriate.

(169) As a result of this analysis, the Commission considers,
first, that the rescue aid decision was fully justified and,
secondly, that there was not at that stage misuse of the
rescue aid. On the contrary, the rescue aid was necessary
to maintain the company's business during the limited
period covered by the authorisation and enable it to
implement an industrial, economic and financial plan
which was largely acceptable to its social partners,
designed to ensure the long-term viability of
the
company.

Italy must

(170) The Commission would point out to Italy, however, that
the undertakings which it gave continue to apply for as
long as the rescue aid remains;
therefore
continue to comply strictly with the Commission's
authorisation of this aid and in particular ensure that
Alitalia refrains from charging predatory prices on all
the new routes opened since the 2004 summer season.
In particular, Italy remains responsible for providing the
Commission with the regular reports provided for in the
rescue aid decision to enable it to assess compliance
with the undertakings given. As for the repayment of
the loan guaranteed by the rescue aid, the Commission
Italy's abovementioned undertakings to
takes note of
intervene within eight working days following imple-
mentation of the recapitalisation of AZ Fly and, in any
event, before 31 December 2005. The Commission takes
the view that the date of implementation corresponds to
the transfer of the corresponding funds to the company.
It will be the responsibility of Alitalia as the aid benefi-
ciary, and of AZ Fly for matters concerning air transport,
as Alitalia's successor in this respect and thus still liable,

(171) Moreover,

the Commission takes the view that

the
undertaking give by the Italian authorities that the State
participation in Alitalia should become a minority
holding in fact applies only to AZ Fly. This company
will retain the legal personality of Alitalia, will assume
virtually all the debt and in particular the bonded debt
secured on aircraft and the loan guaranteed by the
rescue aid; the undertaking given in the context of the
latter to ensure minority public participation within one
year is therefore linked to this. The Commission notes
that the operations notified are also intended to ensure
compliance with this undertaking.

(172) Lastly, the Commission takes the view that recapitalisa-
tion of the airline AZ Fly and the further analysis of the
investors
company's financial prospects that potential
will
inevitably carry out should, together, prompt the
company scrupulously to respect the industrial plan thus
presented;
in this
connection that the plan makes provision for a recovery
phase in 2005-2006 entailing guaranteed continued
operation and a rapid return to balance from 2006,
rather than expansion which would run counter to these
objectives by, for example, resulting in a price war.

the Commission would point out

VII. ASSESSMENT OF THE EXISTENCE OF AID WITHIN
THE MEANING OF ARTICLE 87(1) OF THE TREATY

(173) The Commission would point out that this final decision
concerns the two recapitalisations notified by Italy in
respect of which it
investigation
procedure on 19 January 2005, namely the State's parti-
cipation in the recapitalisation of AZ Fly for a maximum
total of €1,2 billion, and the increase in the capital of
AZ Servizi envisaged by the State holding company
Fintecna of €216 million.

initiated the formal

(174) Moreover,

that

the Commission notes

the support
measures referred to in paragraphs 18 and 19 of the
decision initiating the procedure and referred to as ‘cassa
integrazione’ and ‘trattamento di mobilità’ are instances
of pre-existing measures in Italian law being applied to
the air transport sector which should, if necessary, be
assessed as such for all the sectors of activity concerned.

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Neither the notification nor the decision to initiate the
procedure itself, in particular paragraphs 51 to 66 and
72 thereof, related to those instruments. This decision
therefore does not prejudge the Commission's position
with regard to the assessment of those measures in the
light of State aid law. The Commission also notes that
those measures fall within the framework of the obliga-
tions incumbent on the State as a public authority and
the national social
with regard to the operation of
security system. Since they are completely different in
nature from the capital contributions analysed in this
decision they should not be included in the assessment
of these contributions.

(175) Pursuant to Article 87(1) of the Treaty and Article 61(1)
of the EEA Agreement, any aid granted by a Member
State or through State resources in any form whatsoever
which distorts or threatens to distort competition by
favouring certain undertakings or the production of
certain goods is,
insofar as it affects trade between
Member States, incompatible with the Treaty and with
the EEA Agreement.

VII.1. State resources

(176) The Commission would refer to its analysis in point 63
of the decision to initiate the procedure with regard to
the transfer of State resources to Alitalia. This analysis
has not been called into question by the interested
parties or by Italy. In particular, the Commission would
observe that the details provided by Italy concerning the
background to the relations between IRI and the State as
well as their impact on Fintecna are simply intended as
clarification and are in no way intended to dispute the
designation of the funds to be provided by Fintecna as
State resources or the fact that the operations in ques-
tion are attributable to the State.

VII.2. Effect on intra-Community trade and competi-

tion

(177) The interested parties and Italy have not disputed the
Commission's assessment in point 64 of the decision to
initiate the procedure with regard to the effect on trade
between Member States and the effect on competition,
an assessment which the Commission maintains. The
Commission would point out that
the supply of air
transport services is a sector in which there is keen
competition in Europe since the entry into force of the
third air transport liberalisation package (‘third package’)
on 1 January 1993 (57).

(178) As regards the complaints made by Italy concerning the
time it took to adopt the final decision, the Commission

the

accurate

investigation of

would specify that, while it is perfectly aware of what is
involved for Alitalia, the situation of keen competition
on the air transport market requires it to make a particu-
situation. The
larly
Commission does not consider that Italy has demon-
strated that the continued operation of the airline would
have been put at risk if its decision had not been taken
before the end of May 2005. Lastly, the Commission
notes, by way of example, that the revised plan for
2005-2008 adopted by the airline's Board of Directors
on 14 April 2005 was not forwarded to it until 22 April
which did nothing to expedite the investigation.

VII.3. Specificity

(179) Pursuant to Article 87(1) of the Treaty, in order to be
regarded as State aid, a measure has to favour ‘certain
undertakings or the production of certain goods’. In the
present case, the Commission finds that the measures in
question, namely the State holding in the recapitalisation
of AZ Fly or AZ Servizi by the State holding company
Fintecna are intended only for those two undertakings.

VII.4. Existence of an advantage for the beneficiary

undertaking

(180) As indicated in the decision to initiate the procedure, the
two separate operations
assessment
to the
described above, which concern two separate companies
which operate on different markets.

relates

(181)

In this respect, the Commission finds that the separation
between the air transport activities, AZ Fly, and the
ground activities, AZ Servizi, of Alitalia is not specific to
that particular undertaking (58). In the present case, Alita-
lia's consultant bank, Mediobanca, has in fact noted that
in the case of AZ Fly this demerger could make it
possible to focus on investors interested in the aviation
sector on account of its current economic problems and
growth potential;
it will also make it possible for the
undertaking, as already indicated in the decision to
initiate the procedure, to vary part of its operating costs,
which had hitherto been fixed, by concluding contracts
for maintenance, handling, etc., a possibility which is
particularly attractive in an economic downturn. Simi-
larly, in the case of AZ Servizi, demerger should make it
possible, according to Mediobanca, to create new busi-
ness and growth opportunities which will be difficult to
achieve by a company wholly owned by an air carrier. It
should also be of interest to industrial or financial opera-
tors in a given activity which wish to continue to
develop that activity but do not wish to find themselves
exposed outside their reference area of activity.

(57) Council Regulation (EEC) No 2407/92 of 23 July 1992 on licensing
of air carriers (OJ L 240, 24.8.1992, p. 1), Regulation (EEC)
No 2408/92 (see footnote 6) and Regulation (EEC) No 2409/92 of
the Council of 23 July 1992 on fares and rates for air services (OJ
L 240, 24.8.1992, p. 15).

(58) For example, in recent years, BMI British Midland has transferred
its groundhandling activities to Go-Ahead to create Aviance, TAP
has transferred its activities to Globalia, and Lufthansa has trans-
ferred its Globeground subsidiary to Penauille Polyservices.

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(182) The Commission would also point out that this separa-
tion of activities and the accounting and financial impli-
cations are transparent. Accordingly, the business plan
submitted to the investors concerns both aspects of the
plan which specifies that Alitalia's debt,
including the
repayment of the loan which is the subject of the rescue
aid, should be taken over virtually entirely by AZ Fly,
and sets out the separation of the activities of AZ Servizi,
the initial contribution of AZ Fly
the evaluation of
recently presented on Alitalia's website,
Fintecna's
proposed participation in the capital and the procedures
for this, including recourse in part to preference shares.
The Commission therefore considers that investors were
able to make an informed opinion about the activities in
which they are likely to invest, the foreseeable profit-
ability of each of them and their future relations.

level of

the usual

(183) Lastly, the Commission would point out, as indicated in
its decision to initiate the procedure, that applying the
principle of a private investor in a market economy is
the only way to assess the absence of advantage derived
from the two recapitalisation operations. It notes that
this is a matter separate from the assessment of the
rescue aid. The latter was intended exclusively, through a
very short-term cash loan of a very limited amount (in
particular in relation to the undertaking's short-term due
dates,
liquid assets of comparable
airlines, and the undertaking's balance sheet total) and
moreover comprising a bank loan provided by Dresdner
Bank and simply backed by a State guarantee, to over-
come a short-term cash crisis which could,
in itself,
cause the undertaking to become insolvent. Conversely,
the judgment of the investors (and of the banks guaran-
teeing the operation) during recapitalisations operations,
which generate permanent resources for the undertak-
ings concerned, is based on an economic assessment of
the medium and long-term viability and intrinsic profit-
ability of the company's activity; their objective is the
future viability of the undertaking, through the results
achieved, which depends on the credibility of its busi-
ness plan, the industrial and commercial activities for
which it provides and the management
thereof. The
Commission also notes that the undertaking given by
the Italian authorities that Alitalia should repay the
rescue aid immediately following recapitalisation will
entail
from the undertaking's
assets of the €400 million liquid assets in question.

the early disbursement

VII.4.1. Assessment of the recapitalisation of AZ Fly

(184) First and foremost, there is no doubt that the injection
of capital which the recapitalisation operation, including
the State's participation in conjunction with private
investors, amounts to does in fact constitute a State

resource within the meaning of the Treaty since the
funds concerned derive from the Italian Treasury. Simi-
larly, the decision to participate in the recapitalisation
and to undertake to exercise, at least in part, its preferen-
tial subscription right has been taken up by the Italian
Ministry for Economic and Financial Affairs.

VII.4.1.1. G e ne r a l

(185) The Treaty enshrines the principle of neutrality with
regard to the system of property ownership in the
Member States (Article 295 of the Treaty and 125 of the
EEA Agreement) and the principle of equality between
public and private undertakings. Pursuant to those prin-
ciples, action by the Commission must be neither preju-
dicial nor advantageous to States or public establish-
ments which provide capital
for undertakings. The
therefore investigate these capital
Commission must
contributions to undertakings in order to ensure that the
Member States do not infringe the Treaty's rules on State
aid.

(186)

In order to determine whether State aid is involved, the
Commission is authorised by the Court to base its judg-
ment on the principle of an investor in a market
economy, as confirmed in recent case-law (59). According
to the case-law, in order to examine whether a capital
injection constitutes State aid, account should be taken
of the genuine possibilities for a beneficiary undertaking
to obtain equivalent
resources by having
financial
recourse to the normal capital market. State aid is not
involved where it is a question of new capital being
contributed in conditions which would be acceptable for
a private investor operating under the normal conditions
of a market economy (60).

(187) The conduct of the public investor should therefore be
compared with the hypothetical conduct of a private
investor, such as a private holding company or a private
group of undertakings pursuing a structural, global or
sectoral policy and attracted by prospects of longer-term
profitability (61). A capital contribution necessary in
order to ensure the survival of an undertaking experien-
cing temporary difficulties but which, where appropriate,
following the implementation of the necessary measures
would be in a position to return to profitability does not
necessarily constitute aid if a private investor would
have made the same analysis.

(59) Cf. Case C-482/99 France v Commission (Stardust) [2002] ECR I-
4397. See also the Opinion of Advocate-General Geelhoed in
Joined Cases C-328/99 and C-399/00 Italian Republic and Sim 2
Multimedia SpA v Commission [2003] ECR I-4035.

(60) Commission communication on the application of Article 92 and
93 of the Treaty to public shareholdings, Bulletin of the European
Communities No 9-1984; Court of
the European
Communities, Joined Cases 296 and 318/82, Netherlands and Leeu-
warder Papierwarenfabriek Bv v Commission [1985] ECR 809, para-
graph 17; application of Articles 92 and 93 of the EC Treaty and
Article 61 of the EEA Agreement to State aid in the aviation sector,
op. cit. points 25 and 26.

Justice of

(61) Judgment of the Court of Justice in Case C-305/89 Italy v Commis-

sion (‘Alfa Romeo’) [1991] ECR I-1603, paragraph 20.

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(188) Consequently, the Commission takes the view that a
capital contribution from public funds does not consti-
tute State aid where private shareholders take part in the
in proportion to their
least
operation first of all at
shares, secondly in conditions identical to those of a
public investor and finally if the proportion subscribed
by private investors is of real economic significance.
This approach, based on the principle that contributions
should be, has been consistently applied by the Court of
Justice and the Court of First Instance (62).

VII.4.1.2. Ap p li c a ti on i n th e p r e se nt ca se

(189) The Commission takes the view, first of all, that contrary
to other cases that it has criticised, it is not a question
here, in the case of the separation of AZ Fly and AZ
Servizi, of a dismemberment aimed at leaving the accu-
mulated debt in a public cocoon, while the economic
activity itself is transferred to the private sector. On the
contrary, and in accordance with the legal and economic
situation of the undertaking, virtually all the debt, that is
to say the bonded debt and the loans secured by aircraft,
as well as the loan which is the subject of the rescue aid,
will remain within Alitalia, renamed AZ Fly, which will
continue the vast majority of the current activities of the
company. The Commission notes, in this respect, Italy's
undertaking with regard to the advance repayment of
this loan within eight working days following the recapi-
talisation of AZ Fly, that is to say the transfer of the
corresponding funds to the undertaking, and in any
event before 31 December 2005.

(190) With regard to the recapitalisation of AZ Fly notified by
Italy, the Commission finds that private shareholders are
participating in it in fact more than proportionally to
the number of shares currently held by those share-
holders (38 %) and under the same conditions as the
State as shareholder. The implementation of the under-
taking by the Italian State to reduce its participation to
49,9 % of the company capital has resulted in Deutsche
Bank agreeing, possibly in collaboration with another
institution, to underwrite private investors to
financial
the extent of a maximum of €650 million, or approxi-
mately 54 % of the maximum proposed recapitalisation.
Their shareholding in the capital increase will therefore
be a majority one, in order to reduce the public partici-
pation to below 50 %. It is also specified in the letter of
intent from Italy that the State will purchase the shares
at the same value, to be determined jointly by AZ Fly
and Deutsche Bank, and under the same market condi-
tions as the private investors.

(62) See the judgment of the Court of First Instance in Case T-296/97

Alitalia v Commission [2000] ECR II-3871, paragraph 81.

(191) The successful completion of the operation is therefore
guaranteed by Deutsche Bank, a technically competent
professional operator, which has assessed the risk
inherent in the partial non-subscription of the shares. In
this connection, the Commission has received a copy of
the letter of intent dated 19 April 2005 sent to Alitalia
by Deutsche Bank accepts to conclude a contract to
underwrite or have underwritten the success of the reca-
pitalisation operation. This practice is in accordance
with what the Commission had agreed to in 2002 on
the occasion of the previous market recapitalisation of
Alitalia. The final guarantee contract will be signed once
the conditions set out in paragraphs 195 and 196 have
been verified and will constitute the final concrete
undertaking by Deutsche Bank to supply the financial
resources for the operation and to subscribe the shares
issued or have them subscribed. The Commission takes
note in this connection of the details given by the Italian
authorities indicating that this preliminary contract is
legally fully valid in this respect for the parties subject to
compliance with the suspensive conditions.

(192)

In the abovementioned letter it is proposed that the final
guarantee contract will be concluded close to the begin-
ning of the offer period and will contain the standard
provisions and undertakings in force in this type of
contract and in accordance with best national and inter-
national practices. Deutsche Bank and another bank will
also take responsibility for involving other financial insti-
tutions in the guarantee,
thus making it possible to
establish a genuine guarantee consortium. The involve-
ment of the banks is decisive for the success of the
operation as a result of Alitalia's shareholding structure.
The capital held by private shareholders is very frag-
mented; as a result, at present there is no private institu-
tional shareholder in the company that could carry out
an economic analysis of the operation and give its prior
undertaking to participate, as the State has done.

(193) The Commission acknowledges that,

in the case of
companies with a very fragmented shareholding struc-
ture, recourse to one or more banks responsible for
guaranteeing the operation is necessary so as to ensure
the successful completion of a capital increase operation
on the capital market. Only qualified financial intermedi-
aries are in a position, on the basis of their detailed
knowledge of
the financial markets and the type of
investments sought and in the light of a detailed study
that they have carried out of the operation in question,
to commit themselves in respect of the investment vis-à-
vis private investors where newly issued shares are
concerned, to the extent that they consider the operation
reasonable and attractive for certain providers of funds.
Alitalia clearly has a fragmented shareholding structure
since no private shareholder holds 3 % of the shares; the
only remotely significant participation is that of Air
France with nearly 2 % of the capital.

(194)

In order to present its offer, Deutsche Bank carried out
an assessment of the company's strategy and profitability
In addition, before concluding the final
prospects.
contract, it proposes to carry out a due diligence opera-
tion which any investor should carry out before initi-
ating the operation. In this way the bank surrounds itself

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the guarantees and securities enabling it

with all
to
adjust its offer to the risks taken. It should be noted that
this bank has neither a management link nor a share-
holding link with the Italian economic sector, and that it
is not controlled, directly or indirectly, by the Member
State concerned.

(195) The conditions to which the conclusion of the final
guarantee contract are subject may be grouped together
in two blocks,
the first concerns relatively standard
elements with no direct influence on the Commission's
assessment but only on its actual implementation. They
include:

a) the absence of extraordinary events which could be
the

to the successful completion of

detrimental
operation,

b) the transmission to the bank of complete information
on the economic and financial situation and on the
management of Alitalia, including the audited 2004
accounts and the updating of the 2005-2008 indus-
trial plan,

c) the involvement of

the bank in determining the

procedures for the operation,

d) the demerger of AZ Servizi thanks to duly authorised

capital injections by one or more undertakings.

(196) On the other hand, a second series of conditions set out
in Deutsche Bank's letter of intent are liable to affect the
assessment of the operation by the Commission; they
should be analysed in detail. It is a question of:

a) the difference in the share issue price relative to the

stock market quotation,

b) the commissions to be charged by the bank for the

operation,

c) the exercise by the Italian Ministry for Economic and
Financial Affairs of its preferential subscription right
so as to enable it to reduce its participation in the
capital to 49,9 %. The letter of intent specifies that
this guarantee will obviously not cover the propor-
tion of
the
Ministry for Economic and Financial Affairs' preferen-
tial option right which must be subscribed by it so as
to enable it to reduce its share of the capital of AZ Fly
to 49,9 %.

the shares which are the subject of

(197) So far as concerns, first, the subscription price for the
new shares, Deutsche Bank and AZ Fly have agreed
that the price or price range for the issue of the new
shares will be defined jointly in accordance with market
practices in the light of the stock market conditions
prevailing at the time of the launch of the operation.
The difference between this price and the theoretical
price taking account of the subscription right will be at
least […]%. The Italian authorities have provided refer-
ence material drawn up by the bank enabling the
Commission to ascertain that this difference is in accord-
ance with market practices since 2003 for various Euro-
pean companies (in particular those undergoing restruc-
turing) which have carried out recapitalisation in respect
of a significant proportion of their share capital or of
their value in terms of the daily stock market volume
traded. The Commission therefore takes the view that
this particular aspect does not present any particular
difficulties. This of course is true only provided that all
the shares issued are in fact subscribed at the same price
by the various investors,
is to say the State,
Deutsche Bank or other potential investors. Italy has in
fact confirmed to the Commission that a single price
will be charged for all the subscribers involved and that
no specific discount will be granted to the guarantor.

that

the proportion of

(198) So far as concerns, secondly, the remuneration of the
banks through commissions, the latter are based on
the operation to be
the value of
subscribed by the market, and amount to […]% for the
commitment commission and […]% for the manage-
ment and guarantee commissions, or [of the order of
5 %] of the total amount guaranteed. The Commission
has been able to ascertain that this remuneration is in
accordance with market principles on the main Euro-
pean stock markets so as to guarantee the successful
completion of a comparable share placement operation.
It notes that it is higher than the recapitalisation in
2002, although consistent with the normal
level of
remuneration, but acknowledges that this is attributable
to the different nature of
the operation, since only
shares were involved in 2004 whereas both shares and
bonds, presenting a lower risk, were involved in 2002,
and to the fact that the proportion to be guaranteed is a
majority one whereas in 2002 it represented 38 % of the
operation. The Commission concludes from this that the
transaction between Alitalia and Deutsche Bank is in
accordance with market conditions for this type of
operation and that it does not amount to a discount on
the price paid by the bank for the shares that it will be
called upon to subscribe. Consequently, the commissions
paid to the banks do not have the effect of enabling
them to participate in the operation on more favourable
conditions than the State or the other shareholders.

(199) So far as concerns, thirdly, the State participation, the
Commission would point out that the formal under-
taking by the Italian authorities not to subscribe their
increase until Deutsche Bank
share in Alitalia's capital
and any other participating banks have
formally
committed themselves is an essential decisive element

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8.3.2006

increase only if

guaranteeing the existence of a concomitant participa-
tion of public and private shareholders. The State will
participate in the capital
there is a
formal commitment by a private investor to make a
capital contribution of real economic significance (63).
This operation enables the private market to subscribe
to a significant extent and even represent a majority
holding (54 %) in respect of the shares newly issued by
Alitalia under the same conditions as the public share-
holders given that the share prices will be identical and
the rights attaching to each share will be the same for all
shareholders.
the Commission
considers that it goes without saying that there cannot
be collateral or implicit agreement whereby the Italian
State would exonerate the banks from their obligation if
the recapitalisation offer was insufficiently subscribed.

connection,

In this

the operating loss

and the load factor already showed a 0,2 % increase. The
turnover for the quarter shows an increase of 9 %, or
€77 million compared with 2004, with an increase in
costs of only €36 million, or 5 %; even operating costs
have fallen if fuel costs, which have risen by €45 million,
are excluded;
therefore only
€120 million compared with €190 million in 2004. The
operating loss estimated for the whole of 2005 is
€100 million, that is to say that a profit is expected over
the next nine months. The average staffing levels for the
quarter (19 075 members of staff) have fallen by 1 617,
two-thirds being ground staff, thus implementing the
restructuring measures negotiated with the trade unions.

is

(200) The Commission also notes the undertaking given by
the Italian authorities to transmit the final contracts with
the banks (containing these formal and unconditional
subscription obligations) to the Commission immediately
the new
after conclusion and before subscription of
capital
increase by the public authorities. A second
undertaking given by the Italian authorities is to submit
a report containing the actual subscription levels for this
capital increase once the operation has been carried out.
The Commission will pay the utmost attention to strict
compliance with these undertakings by Italy so as to
ascertain that the terms of the present decision will be
properly adhered to.

(201)

In this context, the Commission would stress the impor-
tance of Alitalia's
industrial plan for 2005-2008
(including the revised version of April 2005) presented
to the investors, which bases the future of the company
‘recovery’ phase in 2005-2006 prior to
on an initial
further development. Deutsche Bank has undertaken to
guarantee the participation of a majority of private
investors in the recapitalisation provided for in the plan
on the basis of an analysis of this plan.

(202) The Commission would refer in this connection to the
information already presented in the decision to initiate
a procedure regarding this plan. The measures provided
for in AZ Fly's restructuring plan should result, from
2005, in an increase of […]% of TKO (tonne-kilometres
offered) together with an increase of […] percentage
points in the load factor and […]% in the yield. In fact,
over the first quarter of 2005, the accounts for which
were submitted on 12 May, the TKO increased by 13,9 %

(63) See footnote 59.

(203) More generally,

for an annual
the plan provides
improvement of around €1 billion by 2008, including
€200 million as a result of the load factor and some
€770 million from other aspects of the plan; among the
most significant improvements brought about by the
latter are arise from savings on purchases, commercial
expenses and staff expenses (€~ […] million per annum
in each case).

(204)

In terms of the outturn account, the data for 2004 and
the following years are not comparable because of the
spinning-off of AZ Servizi; nevertheless, after a small
loss in 2005 in terms of pre-tax results and financial and
exceptional factors (‘operating result’), a margin of […]%
is expected for 2008. (In 2004, for the same sectors, the
margin announced on 26 May 2005 represents a loss of
10,1 %).

(205) The Commission would point out that, where a particu-
larly qualified private investor is involved alongside the
State, there is no call for the Commission to take a view
as to the profitability of an operation. In the light of the
undertaking given by the Italian authorities, it therefore
concludes that the exercise by the shareholders of their
preferential subscription right,
together with the fact
that the operation is underwritten by Deutsche Bank, is
in accordance with banking practice in cases of recapita-
lisation in the Community, and can be treated as an
operation by a private investor operating in a market
economy, which moreover shows that the recapitalisa-
tion offers genuine market prospects. Given all these
conditions, the Commission has decided that the invest-
ment notified by the State of a maximum amount of
around 46 % of €1,2 billion is tantamount
to the
conduct of an investor operating in a market economy
and does not therefore constitute aid.

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(206) The Commission must nevertheless lay down the condi-
tions attached to this decision, that is to say first of all
the signature of an unconditional formal commitment
institutions
by Deutsche Bank and any other financial
with the exception of the usual conditions concerning
cases of force majeure, acts of war, terrorism and other
similar cases,
following due diligence checks and an
agreement on the price. The State must also undertake
to subscribe the shares on the basis of the same rights
and under the same conditions, at the same price and at
the same rate as priority investors, without prejudice to
the implementation timetable proposed by Deutsche
the
Bank and any other guarantor banks. Moreover,
operation must not be accompanied by any collateral
agreement or implicit agreement whereby the Italian
State would exonerate the banks from their obligation if
the recapitalisation offer was insufficiently subscribed or
granted the banks any specific discount on the issue
price.

VII.4.2. Assessment of the recapitalisation of AZ Servizi

(207) So far as concerns the participation envisaged by the
State holding company Fintecna of €216 million
between 2005 and 2007 in AZ Servizi, the Commission
would observe, first of all, that Fintecna is governed by
ordinary law and that the State does not provide any
specific or general guarantees in respect of
it. The
Commission also notes that Fintecna's liquid assets situa-
tion, which is favourable, as already noted in point 33
of the decision to initiate the procedure, is unconnected
with any specific favourable treatment by the Treasury
since, on the contrary, the loan of €788 million made
by the former IRI to the State in 2000 and confirmed by
Fintecna in 2003 still has to be paid back to that
company in the next few months. These operations are
in fact presented transparently in Fintecna's annual
accounts.

(208) The Commission has

reviewed the various

reports
presented by the parties involved in the operation, that
is to say Mediobanca for Alitalia and Citigroup for
Fintecna, and in particular its own experts, Ernst &
Young. It notes that it did not have any reason to doubt
the methodology of the evaluation carried out by Medio-
banca which, on the basis of the investment of €216
million by Fintecna in the manner envisaged, leads to a
final value, excluding cash flow, of €355 million in
2008, which produces an IRR of 25,3 %. Calculated

otherwise, the net present value (NPV) of the investment
to be made by Fintecna between 2005 and 2007, taking
into account the same final value for 2008, and brought
in line with the capital cost, that is to say 10,2 %, would
be positive to the tune of €81 million; the operation
therefore to a large extent creates value for Fintecna.

(209) Since such returns are highly dependent on use (€118
million of the €261 million capital brought in) of prefer-
ential shares held by Fintecna, the Commission observes,
on the basis of the expert's findings, that recourse to this
instrument would be subject to the limits set by Italian
law. It would point out that the existence of a preferen-
tial right with regard to profitability offsets the limited
voting rights at general meetings. Accordingly, with
69.7 % of the shares, Fintecna will have only 51 % of
the ordinary voting rights. The Commission also notes
the information provided both by the expert with regard
to private Italian groups and by Italy in the case of other
European companies to show that the use of shares of
this type is widespread, including for significant parts of
the capital of these companies, and does not give rise to
any specific objections. Lastly, the Commission observes
that only one investor,
the State holding company
Fintecna, will participate in AZ Servizi's capital increase
so that the question of concomitance does not arise.

(210) The Commission also notes

the

that

expert has
compared the method and the results of the current
valuations conducted by Mediobanca and Citigroup.
These two bodies have used different approaches: Medio-
banca has followed a global approach based on the capi-
talisation of the 2008 cash flow while Citigroup has
approached valuation by sector of activity and the
market multiples of EBITDA 2008, applying reducing
coefficients where necessary; this also makes it possible
to have a complementary validation of the value of the
undertaking. The potential result normally expected by
Citigroup, the investor's advisor, using this method has
proved to be higher than that anticipated by Alitalia's
Board used for this study (64).

(64) In addition,

achievement of

the plan's objectives

the Commission notes that Fintecna's consultant,
Citigroup, has analysed various scenarios corresponding to lesser
degrees of
involving,
depending on the method used, an upward adjustment in Fintecna's
investment beyond the amount notified, and measuring the impact
of this on profitability for Fintecna; the median value of these four
scenarios, three of which are more unfavourable than the base
scenario, still generates an IRR between 18,7 % and 27,1 %
depending on the EBITDA multiple, notwithstanding the larger
amount of capital invested. Account should be taken only of the
worst case scenario, which forecasts the attainment of only 60 % of
the efficiency targets and 85 % of the targets for increasing turn-
over from third-party customers, and associated with the lowest
EBITDA multiples in the range for each activity, resulting in profit-
ability of 9,1 % corresponding more or less to AZ Servizi's capital
cost, Fintecna's being estimated at around one percentage point
lower. Furthermore, the Commission's expert noted that, logically,
Citigroup should have included the end-of-period liquid assets in its
calculations, thereby improving the outturn.

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(211)

In its own verification of the valuation which, on the
basis of the methods generally used in this connection,
combines the activity-based approach and Citigroup's
EBITDA multiples and an asset evaluation on the basis
of fixed assets only for maintenance, the expert arrives,
for the investment value notified, at a minimum value of
28,2 % above that calculated by Mediobanca.

(212) The expert also carried out a sensitivity analysis which
shows that the key factor is the capital cost, regarded as
correct in the cases considered. The Commission found
that
the abovementioned 10,2 % capital cost corre-
sponds to a beta levered of 0,88 %, which is comparable
to that of the reference quoted companies. AZ Servizi's
debt, forecast at only 16 % of its financial needs, the
balance being covered by its own funds, is on the low
side;
the Commission therefore wished to verify the
impact of a beta of 1, which corresponds to that of the
reference companies themselves, without reduction to
take account of AZ Servizi's low level of indebtness; the
capital cost would then be 10,75 % and the NPV for
Fintecna still clearly positive at €52 million.

(213)

If the higher beta applied to comparable companies, that
is to say 1,32,
is taken, without reducing it to take
account of AZ Servizi's low debt, the capital cost would
be 12,2 % and the final value for Fintecna, discounted to
the capital cost itself, would still generate an increase in
NPV of €19 million for Fintecna.

(214) Finally, on the most rigorous assumption, the capital
cost would need to be 13,27 % to achieve the equili-
brium NPV (stress test), that is to say the point where
the forecast outgoing and incoming payments cancel
each other out, or in other words the limit of profit-
ability of the investment. This cost corresponds to an
equity beta of 1,56 and a beta levered of 1,73 used for
such valuations taking account of AZ Servizi's low rate
of debt. This beta is well above those of all the competi-
tors in the analysis carried out by the Commission's
expert. It therefore considers that the threshold at which
Fintecna's investment would become unprofitable is at a
level such that it renders this risk highly improbable.

would not reduce the return on Fintecna's investment in
AZ Servizi, excluding liquid assets, to below an internal
rate of return (IRR) of 25 %. In this connection, the
Commission takes note of the distribution that has now
been agreed between the parties whereby a return for
Fintecna in excess of the 25 % IRR envisaged in the busi-
ness plan would be transferred to the extent of […]% of
the part
figure. The Commission
considers that, since this distribution only concerns the
part of the return exceeding the target which is the
subject of this decision, it will not affect its analysis. It
considers that, in its capacity as a risk capital investor,
Fintecna's objective of making a profit therefore falls
within a well established range:

exceeding

this

a) where the return for 2008 turns out to be lower than
expected, the presence of preference dividend shares
gives Fintecna a guaranteed minimum return; thus,
the first €15,5 million of the net annual result will be
assigned to it;

b) if, on the contrary, this return is very high, with an
IRR in excess of 25 %, it will in any event exceed the
target which Fintecna has set itself as investor and
the partial redistribution is unlikely to reduce its
return to below that figure.

(217) Fintecna's conduct

is in this case indeed that of an
informed risk capital
investor seeking to limit its risk
and having a precise profitability target informing its
investment decision.

(218) At

contractual

the request of
the Commission,
the expert also
relations
future
checked whether
the
between AZ Fly, as client, and AZ Servizi, as supplier,
affect the future valuation of the latter. The Commission
would refer to the extensive description of the analyses
that it has carried out which conclude that, on the basis
of the verifications carried out, there is no reason to
doubt that such relationships will henceforth be based
on market prices.

(215) The Commission notes, with regard to the matters still
to be negotiated between Alitalia and Fintecna in respect
of which it specifically asked its expert to carry out an
impact assessment, that the coverage of any additional
costs of the restructuring of AZ Servizi by AZ Fly, and
the possibility of a premium for AZ Fly if the plan is
fully successful with regard to AZ Servizi, are properly
taken into account for the purposes of the valuation and
are not such as to generate a reduction in IRR for
Fintecna.

(216) The same applies to the possible payment of added value
generated by the transfers by AZ Servizi to AZ Fly,
this only concerns added value which
provided that

(219) However, the Commission wishes to clarify its analysis
in respect of the findings of its expert on a number of
points: the market references used in the plan to esti-
mate the invoicing of maintenance and groundhandling
activities have been corrected by a discount limited to
[…]% instead of […]% for the former, and an additional
margin of […]% for the latter. In certain cases, these
corrections are attributable to special circumstances,
such as the absence of a long-term volume commitment.
However, given the close link which exists and will
continue to exist between the two undertakings, this
explanation might not be sufficient. For 2008 these
in terms of
differences in margin generate a gain,
EBITDA, of […] and […] € million, that is a total of
some €[…] million, which amounts to a significant gain
for AZ Servizi.

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(220) However, the Commission also notes the findings of the
expert and Italy in this connection that this additional
margin is cancelled out, de facto, and is even negative in
terms of owing to AZ Servizi's results owing to the
provision relating to the premium to be paid to AZ Fly
if the plan's objectives are achieved in full. This provi-
sion amounts to €[…] million of which €[…] million is
chargeable in 2008, the year used for the valuation.

If, on the other hand,

(221) The logic underlying this two-fold hypothesis is as
follows: if AZ Servizi achieves 100 % of its efficiency
targets, as set in the plan, the valuation carried out by
Fintecna will be correct and there will no longer be any
need for the additional margin from 2005 to 2008,
which will have to be reassigned to AZ Fly; this is the
assumption made and reflected in financial terms in the
plan.
the improvement and
economy measures which have been to a large extent
defined and negotiated and which the current manage-
ment, that is to say Alitalia's management, has begun to
implement, and to a certain extent ‘sold’ as such to
Fintecna, are not entirely successful, Fintecna will then
incur an additional charge in AZ Servizi's accounts
which it will have the option of offsetting by reducing
the discount or the margin by […]%. As far as the
Commission is concerned, this arrangement, which does
not artificially distort the valuation of AZ Servizi, is a
normal arrangement between a former shareholder and
a new shareholder called upon to co-participate in the
capital of a company and also to manage a client-sup-
plier relationship; it should give rise to a win-win situa-
tion on the part of the two stakeholders and should
therefore be considered favourably.

(222) The Commission would specify in this connection that
the analysis made of the business plan and the conclu-
sion to which it has come on the basis of this analysis
are based on strict compliance with the calculation and
assumptions presented; accordingly, the rates, duration
and procedures for, first, the efficiency premium to be
paid to AZ Fly in the event of successful completion of
the plan and in particular the maximum rate of […]% of
incomings, and the reduction in the discount from […]%
to […]% for maintenance and, secondly, the additional
margin of […]% for handling must not affect the results
of AZ Servizi's business plan and must therefore be kept
in line with one another until 2008 or the complete
withdrawal of Fintecna from the capital of AZ Servizi,
whichever is the earlier.

will not be very high immediate returns, nonetheless
means that,
following a reduction in the EBITDA in
2005, the figure will once again be positive in 2006 and
a clearly positive net result will not be achieved until
2008.

serious,

(224) The Commission therefore considers that the industrial
plan as presented is
albeit described as
demanding by the two parties, particularly by their advi-
sors Mediobanca and Citigroup; it entails the continua-
tion of the activity of AZ Fly, its main client, the success
of the measures to make savings on purchase and staff
costs, as negotiated with the trade union organisations,
and which amount to €600 million over the lifetime of
the plan and form the basis for the premium due to
AZ Fly in the event of success.

(225)

the Commission's analysis leads it

In conclusion,
to
consider that the plan is sound and has been carefully
examined by the parties, their consultants and its own
expert. The €216 million investment by Fintecna in
AZ Servizi is therefore tantamount to the action of an
informed investor operating in a market economy and
the
so does not constitute State aid. Nevertheless,
Commission will lay down the conditions to which this
decision shall be subject.

(226) These conditions entail compliance with the following
calculation parameters: the contractually agreed added
value to be reassigned to AZ Fly shall not be transmitted
unless all the proposed transfers have taken place, or on
31 December 2008 and according to the valuation
carried out, and in either case only in respect of the part
exceeding the forecast internal rate of return on Fintec-
na's investment, that is to say 25 %.

(227) The Commission would also point out that the proposed
conditions for Fintecna's investment are acceptable for
an informed investor in AZ Fly since the commitment
by Deutsche Bank to underwrite the successful comple-
tion of the recapitalisation of AZ Fly has been entered
into in full knowledge of the general business plan of
the two undertakings, AZ Fly and AZ Servizi, and in
particular Fintecna's abovementioned investment condi-
tions.

VIII. CONCLUSIONS

(223) The Commission would also refer to point 36 of the
decision to initiate the procedure which describes
AZ Servizi's plan for 2005-2008 on which this valuation
is based. This did not entail a particularly large increase
in sales, which would only rise from €956 million in
2004 to €1 076 million in 2008, that is to say a 12,5 %
increase in five years which, while suggesting that there

(228) The Commission finds that the proposed recapitalisation
of AZ Fly, the new designation of Alitalia and Fintecna's
proposed investment in AZ Servizi in accordance with
the precise procedures notified by the Italian authorities
and analysed in this decision do not constitute State aid.
The Commission can therefore authorise the procedures
for the recapitalisation subject to the conditions set out
below,

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HAS ADOPTED THIS DECISION:

Article 1

1.
The share of the recapitalisation of Alitalia (AZ Fly) noti-
fied by the Italian State and amounting to a maximum of
approximately 46 % of €1,2 billion, that is to say approxi-
mately €550 million, does not constitute State aid.

2.
In accordance with the principle of a private investor
operating in a market economy, the operation described in
paragraph 1 must take place in compliance with the following
conditions:

a) recapitalisation will not take place until a formal uncondi-
tional commitment to underwrite the successful outcome of
the operation has been signed by Deutsche Bank and any
other financial institutions with the exception of the usual
conditions concerning cases of force majeure, acts of war,
terrorism and other similar cases;

b) the State's participation is authorised subject to the condi-
tion that it subscribes the new shares issued on the basis of
the same rights and under the same conditions, at the same
price and at the same rate as private investors, without
prejudice to the proposed timetable for the underwriting by
Deutsche Bank and any other guarantor banks of
the
successful completion;

c) the operation must not be accompanied by any collateral
agreement or implicit agreement whereby the Italian State
would exonerate the banks from their obligation if the reca-
pitalisation offer was insufficiently subscribed or granted the
banks any special discount on the issue price.

2.
The contractually agreed added value which will have to
be returned to AZ Fly may be transferred to that company only
for the part exceeding the forecast internal rate of return on
Fintecna's investment, that is to say 25 %:

a) once all the proposed transfers have been made, or,

b) in any event on 31 December 2008 and in accordance with

the valuation of the rate of return.

Article 3

Italy shall provide the Commission with any reports and docu-
ments enabling it to verify:

a) compliance with the conditions referred to in Article 1 and
2, concerning both the participation of the Italian State and
of Fintecna and third parties and particularly the final
contracts with the banks and the reports justifying the
subscriptions carried out in the context of these capital
increases;

b) compliance with the commitment to repay the bridging
loan within eight days of the recapitalisation of AZ Fly, and
in any event by 31 December 2005.

Article 4

inform the Commission within two
The Italian State shall
months of the date of notification of this Decision of the
measures taken to comply with it.

Article 5

Article 2

This Decision is addressed to the Italian Republic.

1.
The investment of €216 million by the public company
Fintecna in the company AZ Servizi notified by the Italian
State does not constitute State aid.

In accordance with the principle of a private investor operating
in a market economy, based on the analysis of the viability of
the business plan submitted to the Commission, the investment
can be made only if the conditions referred to in paragraph 2
are complied with.

Done at Brussels, 7 June 2005

For the Commission

Jacques BARROT

Vice-President