Aeroflot reinvents itself with Italian bid

Jason Corcoran

16 April 2007

Letter from Moscow

Russian airline Aeroflot’s surprise bid for Italy’s Alitalia is not the flight of fancy many commentators would have you believe. State-controlled Aeroflot has teamed up with Italian bank UniCredit to bid for a stake in the troubled airline in a transaction worth up to €700m ($933m).

Analysts have dismissed the deal, arguing the carriers make an unwieldy pair, given their varied aircraft fleets, bad reputations and issues posed by air-travel regulations governing non-EU countries.

However, the former Soviet carrier, previously known as Aeroflop because of its safety record and outrageous delays, is reinventing itself.

It recently introduced internet booking, increased net profits 32% last year and had a 17% rise in passenger traffic.

Its European and Asian services are being expanded and investment of $500m has been found for Moscow’s new Sheremetyevo-3 terminal.

Aeroflot’s new fleet is among the youngest in Europe, its business class is considered first rate and its flight attendants have been back to school to learn how to smile.

The Aeroflot-UniCredit consortium is among three in the field and may succeed, if only because of greater political cooperation between Russia and Italy.

Italian energy utilities group Eni and Enel this month scooped up the remains of oil company Yukos. They cast the winning bid at a bankruptcy auction and announced plans to pass on the bulk of the assets to Russian gas monopoly Gazprom.

Russian President Vladimir Putin and Italian Prime Minister Romano Prodi are reported to have spoken by phone the day before the auction.

Italy is Russia’s third largest trading partner – after Germany and China – and its participation in the auction comes against a backdrop of several deals involving the two countries. And their leaders signed economic accords – on the building of a jet, nuclear power projects, banking and construction – at a meeting in Bari last month.

The co-operation includes Russian conglomerate Sistema’s attempt to buy a minority stake in Telecom Italia from the Pirelli group. UniCredit bought Russian brokerage Aton Capital for $424m in December, which will allow it to offer underwriting and merger advice, in addition to corporate lending through its International Moscow Bank unit.

German investment banks Dresdner Kleinwort and Deutsche Bank have profited in the past from close links to the Kremlin. But following a cooling of relations between Germany and Russia, since Angela Merkel replaced Gerhard Schröder as Chancellor, Italian financiers may find Moscow more receptive.

Experts say Aeroflot has a slim chance of winning a stake in an Italian airline saddled with debt, losses and a truculent trade union. But Russian coup could be sweetened, should Aeroflot find a European partner, and the Italian press has cited Air France-KLM.

Aeroflot’s rivals are Italian airline Air One and a consortium comprising US investment fund MatlinPatterson, private equity firm TPG Capital and Italy’s Mediobanca.

Candidates have until today – April 16 – to file non-binding offers and business plans. For the Italians, surrendering an airline on the brink of bankruptcy may not be a steep price for gaining access to Russian mineral resources and power-generating facilities.

But, regardless of the outcome, both airlines can be expected to increase the number of well-tailored suits using their Rome-Moscow routes.

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