Italy's economy minister overseeing Alitalia's sale said the near-bankrupt carrier's only alternative to an existing deal with Air France-KLM would be to put it under emergency administration by the government.
The two airlines agreed to the takeover more than two weeks ago to keep Italy's national carrier flying, but the deal risks falling apart due to opposition from unions, Milan's airport operator and prime ministerial candidate Silvio Berlusconi.
As unions began last-ditch talks with the two carriers, Air France-KLM CEO Jean-Cyril Spinetta offered to revise slightly plans for Alitalia's fleet, cargo and maintenance units to win union backing by a Wednesday deadline, sources said.
The unions met the two carriers on Wednesday -- the deadline for winning support -- for make or break talks.
Economy minister Tommaso Padoa-Schioppa ruled out a bid for the airline by private Italian businessmen -- as suggested by Berlusconi -- calling it "impossible" and not a solution for an airline in need of deep restructuring.
"If the Air France-KLM offer falls apart, we would be left without the only takeover offer," Padoa-Schioppa told a parliamentary hearing on Alitalia, which has exploded into a major issue ahead of Italy's April 13-14 general election.
"It would be bitter destiny if the company, dragged down for years because of a perverse relationship with politics, got its mortal blow from exploitation for election purposes or from the lack of a deal with unions."
At the Wednesday meeting with unions, Air France-KLM offered to reconsider next year its decision to shut Alitalia's cargo unit -- a key union concern, sources at the meeting said.
It also offered to speed up plans for new planes for Alitalia's fleet if the airline manages to break even next year and offered to let its Atitech unit continue providing heavy maintenance work beyond 2010, the sources said.
Air France-KLM says it will ditch the deal without union support.
Padoa-Schioppa, whose ministry approved the sale of the Italian state's 49.9 percent Alitalia stake to Air France-KLM, has long said the carrier was a drain on resources that the state could no longer afford and favors the French solution.
But he has yet to convince rivals like Berlusconi, who on Wednesday said selling Alitalia to the French meant tourists would only head to Paris.
"Never in the history of the state's privatisations have so many and such difficult elements come together," Padoa-Schioppa said.
He also warned the government could not grant a EUR300 million euro bridge loan Alitalia needs to survive in the coming months unless the Air France-KLM deal is sealed. The European Union has banned further state aid to Alitalia.
Under the special administration option for big companies in severe financial trouble, the state appoints an administrator who is given a limited amount of time to decide whether the company can be restored or should cease operations.
The proceeding allows a firm's industrial divisions to keep working under protection from creditors. The option was used for food and dairy giant Parmalat, which has since restructured and re-listed on the Milan Bourse.
But Padoa-Schioppa warned Alitalia may not be so lucky. "Alitalia is not a Parmalat," he said. "While that was an industrially healthy company in very serious financial crisis, Alitalia has debt that is completely normal but financial accounts that are chronically in the red."
