Italian cabinet rewrites rules to rescue Alitalia

The beleaguered airline industry was rocked by more crises yesterday as the Italian government was forced to change the law to save its national carrier and Aer Lingus reported losses for the first half and predicted worse to come.

At an emergency cabinet meeting yesterday, Silvio Berlusconi reshaped bankruptcy and anti-competition rules to save Alitalia from almost certain collapse. A group of 17 investors propose splitting the airline in two – with the troubled portion put into liquidation and the rest thrown a $1.5bn (£800m) lifeline. Up to 7,000 job losses are expected.

The new chief executive will be Roberto Colaninno, the maverick businessman who already heads Piaggio, the iconic motorcycle manufacturer, and whose Immsi holding company is putting as much as €150m (£121m) into the resurrected airline.

Alitalia's existing board will meet today to go through the group's first-half accounts. "The board is likely to request administration under the new rules at this meeting," a source said.

The company created by Mr Colannino's consortium – called Compagnia Aerea Italiana – will present the rescue plan as soon as an administrator is appointed, which could be today. If accepted, all will be completed in the next two months and the shareholders will be locked in for five years.

The new carrier will incorporate Alitalia's fleet and Air One, another Italian airline, which forced a rewriting of competition law to allow such domination of lucrative internal routes.

Alitalia has been in dire straits for some time, hit by strikes, inefficiency and competition from low-cost rivals. The government tried to sell its 49.9 per cent stake three times in two years – it has not made a profit since 1999 – and the shares were suspended in June.

Before yesterday's agreement, one industry expert warned: "If it doesn't happen, Alitalia will be dead in a couple of weeks." But the scale of the rescue is not trivial. "The government is essentially creating Chapter 11 law from scratch."

The next challenge is to find a strategic partner. Air France-KLM and Lufthansa are understood to be front runners, although "nothing has been decided yet," the source said.

Such upheavals put Aer Lingus's problems into context. The Irish low-cost carrier plunged to a loss of €22.3m (£17.9m) in the first half of the year, as rocketing oil prices almost doubled its fuel bill to €56.5m.

It maintained revenue-per-passenger levels and increased its capacity by nearly a quarter. But the expectation for the second half is to break even at best, and there will be an overall loss for the full year and worse to come in 2009, Aer Lingus warned. "There are tough times ahead," Sean Coyle, its finance director, said. "Next year will see fuel prices up by probably a further 15-17 per cent, which would increase the loss to close to a sum in the three-figure millions."

At the end of September, Aer Lingus will publish clear plans for how to keep the business afloat during the coming tricky years. Every aspect of the company will be under the microscope, including staff numbers, supplier and airport costs, and the potential for commercial partnerships. "At best in the next couple of years we will be seeking to minimise our losses," Mr Coyle said.

The group saw overall revenue growth of 10.2 per cent to €633m in the first half, and passenger numbers were up by 10.5 per cent. But consumer demand is sliding, and only fares cuts of around 6 per cent this autumn will keep demand up, said Mr Coyle.