Business Update: Aeroflot - Alitalia (Looking more confusing)

The situation surrounding the auctioning of a 49.9% stake in Alitalia by the Italian government is becoming more and more puzzling. The auction process, for which Russia's state-owned airline Aeroflot is a leading contender, may not even happen after all.

Out of several contenders for the stake in the Italian carrier, only two remained at the end of May, after a US-based consortium including private equity giant TPG left the bidding sying it was "too complex". The remaining two bidders, Aeroflot (supported by Italian bank Unicredit) and AirOne (Italy's second biggest airline) began complaining in the past week about the unsatisfactory conditions of the auction.

Aeroflot's management stated that it would not buy the stake in Alitalia "at any price" due to unsuitable conditions set by the Italian government. AirOne complained that it was being denied crucial financial information of Alitalia necessary to establish a proper bidding strategy.

So while originally Aeroflot was cited by many as being an outsider to the bidding process, due to the Italian government's requirements to keep an "Italian image" for the airline under a new owner, the Italian government may now have to pursue any chance it has to get the ailing airline off its hands. Selling it to Russian Aeroflot may not be that bad of an idea anymore.

Alitalia has been having very serious trouble, and has been forced to drop its government ownership due to EU regulations limiting the amount of cash a government can infuse into its own companies. Alitalia has reported losses for six of the past seven years, has been aggressively turning around management, and has suffered from very strict labor unions.

Why would Aeroflot want the sickly airline? For one, it would give the Russian airline a sizable stake in the EU airline industry, and for the Russian government it would give a bigger market for which to sell its newer regional jets. Russia's other airline AirUnion has already purchased Hungarian airline Malev earlier this year.

The Italian government is now facing a situation where it can simply create a monopoly if it sells its stake to AirOne in an auction where only one bidder is present (if Aeroflot withdraws from the bidding, which Alitalia has denied). It may have to restart the auctioning process from scratch, or convince the remaining bidders, which today have been joined by Matlin Patterson Global Advisors LLC (part of the TPG-led consortium which dropped out in May), that it may be more flexible in the sell-off. The bidders have until July 2 to decide on their course of action.