Alitalia agreed to sell a 25 percent stake to Air France-KLM for EUR323 million euros (USD$429 million), giving the Franco-Dutch airline wider access to Europe's fourth biggest travel market after years of courtship.
After a week of frenetic talks among politicians hoping for a last-minute coup for rival Lufthansa, Alitalia Chairman Roberto Colaninno announced Air France-KLM had beaten the German carrier to clinch the deal on Monday.
He forecast synergies with Air France-KLM worth EUR720 million for Alitalia over the next three years.
Air France-KLM and Lufthansa had been locked in a battle for more than three months over the stake, which offered a quick route into Italy's busy aviation market, which meshes business routes in the north with heavy Rome tourist traffic.
Alitalia chief executive Rocco Sabelli said the French airline was the natural choice, starting with its deep knowledge of the Italian airline due to their longtime partnership.
"Air France-KLM... showed determination and conviction that the others did not have," Sabelli told reporters.
Alitalia, which filed for bankruptcy in August last year, will be formally relaunched on Tuesday as a smaller, regional carrier with fewer staff and a revamped network, under the ownership of the CAI group of investors that Colaninno heads.
Alitalia will also be integrating recently acquired domestic rival Air One, allowing it to cut the average age of its fleet.
Some Alitalia employees held a mock "funeral" procession at Rome's Fiumicino airport for the carrier, which began flying in 1947 and became a symbol of Italy's postwar economic prowess before falling on hard times due to union strife and high costs.
Workers protesting job cuts at the carrier due to the restructuring carried a black coffin with a grey tombstone bearing Alitalia's logo and the dates: "5.5.1947 - 12.1.2009."
The Air France-KLM deal will not prevent Alitalia from managing its affairs autonomously, Colaninno said, adding that a lock-up arrangement would prevent Italian investors owning Alitalia from selling their stake to the French for four years.
The Air France-KLM alliance comes less than a year after the French carrier's takeover of the then state-controlled Italian carrier fell apart due to union opposition and criticism from Silvio Berlusconi, who was then campaigning to be prime minister.
For Alitalia, the French alliance gives the newly restructured airline much needed backing on an international stage and a more prominent role within the Skyteam alliance.
Alitalia's dominance in the Italian domestic market will drive traffic to Air France-KLM's intercontinental network.
However the deal is against a backdrop of falling passenger and cargo traffic that has triggered an industry crisis.
Air France-KLM said it would participate in a reserved Alitalia capital increase worth EUR323 million to purchase its 25 percent stake and said it would benefit from EUR90 million of synergies annually from the second or third year.
The deal will boost Air France-KLM earnings from year two and generate a return on investment of 15 percent from the third year, Air France-KLM said in a statement.
It will control 3 out of 19 Alitalia board seats.
Alitalia could decide to go public in an IPO after three years. The deal with Air France KLM also includes a clause that allows the Italian carrier to end the agreement if at least 50 percent of the expected synergies are not achieved.
Alitalia faces growing competition on its home turf from a new high-speed train service in Italy and the reshaped carrier has yet to prove it will not be stymied by the political and union problems that have beset it until now.
Augusto Fantozzi, the bankruptcy administrator who ran Alitalia until Italian consortium CAI took it over, said he was handing over an airline in better health than most assumed.
"In four months we have been able to effect a turnaround despite strikes, union negotiations, demands by creditors, threats by suppliers, EU restrictions," he told a newspaper.
