Alitalia future up in the air

(CNN) -- The future of Alitalia looked increasingly shaky this week after Air France-KLM withdrew its takeover offer. In a statement, the French-Dutch carrier said its struggling Italian counterpart had failed to fulfill the "legal situation" after talks over a negotiation were broken off earlier this month.

The airline, reportedly losing $1.6 million (1 million euros) a day and staggering towards bankruptcy protection, was warned by Italian aviation authorities that its flight license could be revoked if it fails to raise funds to meet obligations, including safety.

As the Alitalia buyout flounders, and as the Northwest Airlines - Delta Air Lines merger falters in the U.S., analysts are questioning how successful consolidation will be in solving the global airline industry's woes.

The outgoing Italian government has been trying to find a buyer for its 49.9 percent share of the airline for months. Air France-KLM's offer was the last remaining on the table. Announced on March 14, it valued Alitalia at $220 million (139 million euros) and called for the layoffs of 2,120 Alitalia employees.

Pierre Henri Gourgeon, Air France-KLM's deputy CEO told CNN at the end of March that the reason for their interest in Alitalia came down to the airline's importance to Italy and Italy's customers. "Integrating Alitalia and keeping Alitalia with its colors and its flagship, we will attract those customers also in this network. And we will help Alitalia to recover rapidly," he added.

Three weeks ago, days following this interview, negotiations collapsed when the French-Dutch carrier refused to bow to Italian union demands.

Italian Premier-elect Silvio Berlusconi promised on his campaign trail to save Alitalia for Italians during April and called for Italian investors to come forward. No such group has yet emerged.

Berlusconi has since softened his stance. But, as Lloyd Brown aviation analyst at Ernst & Young says, the incoming president is likely to accept Air France's demands. "There is a lot of Italian pride to swallow so soon after being elected," he says.

It is also doubtful that Air France-KLM will weaken its demands. "Air France had no option but to walk away earlier this month," says Chris Avery, airline analyst for JP Morgan.

Another potential suitor is Air One, a smaller domestic airline, that has been looking for international investors for funds to restructure the airline.

But rumors of a merger with Aeroflot has been classed as "hot air" by analysts, due to the two airlines' poor strategic fit.

A last-minute proposal from Lufthansa is also improbable. "Frankly, if Air France don't believe they can make it work, then I am not sure why Lufthansa would think they can," says Brown.

The end of Alitalia would be "very serious news for Italy", says Avery, and a serious dent for national pride.

That said, he adds "it is perfectly possible that something may arise from the ashes."

With Open Skies opening greater competition for carriers crossing the Atlantic and oil prices continuing to soar, many in the industry believe consolidation is the final solution, particularly for U.S. airlines.

By coming together, airlines gain greater clout in their markets and form back-office synergies to cut further costs.

It worked for Air France and KLM, says Brown, because the two brands remained intact with changes occurring behind the scenes.

As he says, consolidation doesn't have to result in fare increases or reduction of flights.

The market could even withstand some reduction in volume of seats, he adds. "There is still over capacity, which is why you can never get pricing increases in the U.S."

But consolidation is not the panacea many expect, says Chris Tarry, an aviation industry analyst at consultancy, CTAIRA. "You have to ask yourself what the benefits are, how much these are going to cost to realize, and how long it will take for them to emerge?"

The success of a Delta-Northwest merger remains to be seen, as airlines deal with federal regulators and unions over seniority rights for pilots.

If this and the Alitalia deal fails, experts predict that merger talks between British Airways and Iberia, United Airlines and Continental, or United and US Airways could stumble.

As Avery says, dealing with the issue of over-capacity in the industry isn't just a matter of consolidation. As far as he is concerned, it's a case of the leaving the strongest to survive, mopping up the passengers that failing airlines leave behind. E-mail to a friend