Etihad still open to Alitalia talks, but won't budge on demands

MILAN (Reuters) - Etihad Airways has signaled that it is ready to continue talks on a potential investment in Italy's troubled Alitalia but it refuses to budge on tough conditions on debt restructuring and job cuts, a source close to the talks said on Wednesday.

Loss-making Alitalia was kept afloat by a government-engineered 500 million euro ($691 million) rescue package last year, but it needs to find a cash-rich partner quickly to revamp its flight network or risk having to ground its planes.

Sources have said that Abu Dhabi-based Etihad could invest 500 million euros in return for a 49 percent stake, but talks reached a stalemate this month when the Italian carrier raised concerns over the Gulf airline's conditions.

In a letter sent on Tuesday, Etihad reiterated that it wants banks to convert half of Alitalia's debt of more than 800 million euros into shares and the other half to be written off, the source said. It also wants up to cut 3,000 jobs from Alitalia's 14,000-strong workforce.

"The letter suggests Etihad is willing to negotiate, but the room for maneuver is slim," the source said.

One Italian paper said that Etihad, as an alternative, asked for the airline's creditor banks, including Italy's two biggest lenders Intesa Sanpaolo and UniCredit , to provide additional financing of at least 300 million euros.

"Etihad continues to lead the negotiations," said Andrea Giuricin, a transport analyst at Milan's Bicocca University. "If they want a deal, Alitalia will have to agree."

Etihad declined to comment on the letter or the status of the talks. Alitalia could not immediately be reached for comment.

DWINDLING CASH

Any large job cuts are likely to stir opposition from Italy's notoriously powerful unions, although labor officials have already signaled a willingness to negotiate, given that Alitalia has few options outside an Etihad deal.

Six years after Alitalia was rescued from bankruptcy, the airline is fast running out of cash after an ambitious plan to become a strong regional player failed in the face of aggressive competition from low-cost carriers and high-speed trains.

A tie-up with Etihad could give Alitalia the money to invest in a new strategy focused on more lucrative long-haul routes.

Analysts estimate that Alitalia has less than a 100 million euros of cash left. Even with a profitable summer booking period, it will need fresh capital by mid-August at the latest.

The banks - which are also big shareholders in the airline - are willing to consider converting parts of the debt into shares, another source said on Tuesday, but even they want clear guarantees that the company can be turned around.

Disagreements over debt restructuring already scuppered Alitalia's efforts last year to secure more capital from former top shareholder Air France-KLM .

The Franco-Dutch group eventually allowed its 25 percent stake to be diluted to around 7 percent, but CEO Alexandre de Juniac said on Wednesday that he has not ruled out reinvesting in Alitalia if a deal with Etihad can be reached. ($1 = 0.7237 Euros)

(Reporting by Agnieszka Flak and Paola Arosio in Milan, Praveen Menon in Dubai and Cyril Altmeyer in Paris; Editing by David Goodman)