Illegal State Aid? EU Questions Italy's Loan for Moribund Alitalia

The Italian government plans to hand the country's ailing national airline Alitalia an emergency loan to keep it afloat. The European Union, however, is questioning the legality of the bailout.

Rome's bailout of national airline Alitalia could fall foul of European Union rules on state aid to struggling companies.

Rome's bailout of national airline Alitalia could fall foul of European Union rules on state aid to struggling companies.

Italy's national airline Alitalia is in big trouble: It is losing about €1 million ($1.6 million) a day. To keep the cash-strapped airline from going under, Italy's government has promised to hand Alitalia a €300 million ($478 million) emergency loan until a buyer can be found. But Rome could be forced to abandon the bailout after the European Union expressed doubts over the legality of the loan.

A spokesman for the EU, Michele Cercone, said Thursday an initial review had "raised doubts about the nature" of the €300 million bailout, AP reported. According to the news agency, EU officials suggested privately that the Italian government should heed the EU's message and hold off granting the aid.

Under EU law, state aid to companies is allowed only under strict conditions -- to ensure struggling companies are not handed a competitive edge without reforming their businesses. Governments are only allowed to hand out loans if the loans made under commercial market conditions, and then only if they will be repaid.

A spokesman for the EU's transport commissioner Jacques Barrot said Thursday that Rome would need to supply more information to clear up the EU's doubts, Reuters reported. "We want to understand if this is a commercial operation as the Italian authorities claim," he said.

The emergency bailout has also drawn sharp criticism from rival European airlines, which denounced the loan as illegal. The Irish budget carrier Ryanair called on the EU to stop the loan. "The latest bailout makes a mockery of EU state aid rules," the airline's head of legal affairs, Jim Callaghan, said according to Reuters. "Propping up an inefficient national airline, which would have gone bankrupt long ago, is simply illegal." Scandinavian airline SAS said it was considering taking action, while British Airways said it was watching the situation carefully.

Italy's government came to the rescue of its cash-strapped national airline after rivals Air France KLM pulled out of a takeover deal on Monday. Italian officials said the €300 million bailout was a "bridge loan" -- aimed at keeping the airline functional and out of bankruptcy protection until a new buyer can be found.

According to Italy's incoming prime minister Silvio Berlusconi, an Italian consortium, backed by banks and airlines, is likely to make a bid for the airline within a month. Berlusconi defended the loan on Thursday -- a measure initiated by his predecessor, Romano Prodi -- saying it was the right thing to do. "We have no fear of being hindered in something that is right, necessary and correct," he said.

Alitalia, which is losing about €1 million ($1.6 million) a day, has been lurching towards bankruptcy protection. The airline has struggled on several fronts: It faces increasing competition from low-cost rivals, operates an outdated fleet of aircraft and has been hurt by labor protests.



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