Air France: Climbing

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Flying isn't so smooth at Alitalia, the wobbly Italian flagship carrier now being sold by the state that could fit nicely into Air France--KLM. Although several other companies have made bids for Alitalia, a stake in the airline would give Air France a dominant position in the lucrative Italian market and more heft and coverage of its international network. Air France scarcely hides its interest in the strategic allure of linking up with Alitalia, but last month it refused to make a bid for a 49.9% stake the Italian government put on the market, which by law would later become a full buyout.

To make the deal viable, considerable changes would be inevitable. Indeed, most observers feel Alitalia will require a massive overhaul, including significant job eliminations. Although the left-leaning Spinetta is no fan of job cuts (and avoided them in turning Air France around), he's not likely to propose any deal until politicians in Rome clearly signal they'll let a new owner do what's necessary to halt Alitalia's descent. "Air France has already had to battle politicians and unions to survive once. It's not going to get itself into the same situation again," says Derocles.

While Alitalia represents a final chapter in the consolidation of European flag carriers, Spinetta insists that the next big development in the sector--transatlantic deregulation--will send shock waves around the globe. The U.S. and E.U. recently agreed on a long-sought open-skies accord. "And things change considerably from there. That won't just lead to reinforced partnerships between airlines but will also encourage other open-skies treaties between the U.S. and Asia, and Asia and the E.U." In other words, the real battle of the world's skies is only starting--just as Air France can feel confident knowing its people are fighting the competition rather than the company. AIR FRANCE--KLM GROUP (FY 2006) Once beset by labor trouble and red ink, the company has soared into profitability. Sales $28.2 billion Profits $1.2 billion Employees 103, 127 Passenger planes AF 254 KLM 190 Destinations 225 in 109 countries Stock Ownership French state: 18.6% Employees: 14.1%