Alitalia agrees short-term funding deal to keep airline going

(Updates with details, background, quotes from sources)

By Alberto Sisto

ROME, Dec 22 (Reuters) - Italy's Alitalia has approved a short-term financing deal and a new industrial plan that will include job cuts, it said on Thursday, as the loss-making flagship carrier steps up efforts to sustain its business.

Alitalia and its creditors, including Italy's two biggest banks UniCredit and Intesa Sanpaolo, have been in talks for weeks over the future of the carrier.

It is looking to revamp its operations in a market facing increasing pressure from low-cost airlines, more competition from high-speed trains and lower passenger numbers due to terror attacks.

In a statement on Thursday, Alitalia said short-term funding had been agreed to allow its management team to begin negotiations in the next 60 days with key stakeholders.

"The next two months will be crucial for Alitalia," Chief Executive Cramer Ball said, adding without "a subsequent and significant financing package from shareholders Alitalia will have no future".

Sources have previously said various financing options were being discussed, including fresh credit lines, a cash call and a bond conversion into semi-equity financial instruments without voting rights.

The conversion would allow controlling shareholder Etihad Airways to invest more without breaching the ownership limit required for Alitalia's European status.

Abu Dhabi-based Etihad invested 560 million euros ($585 million) in Alitalia in 2014 as part of a wider 1.76 billion euro rescue deal and pledged to return it to profit by 2017 by slashing costs, turning Rome into an intercontinental hub and adding more lucrative long-haul connections.

But two years later, Alitalia is losing at least half a million euros a day and may remain unprofitable for another two to three years, sources have said.

In its statement on Thursday, Alitalia said it needed to overhaul its business model by developing its long-haul network, reshaping its short- and medium-range business, cutting costs and jobs and agreeing commercial agreements and partnerships.

Etihad, Alitalia's biggest single shareholder with a 49 percent stake, is now pushing to turn the business around. Proposals include cutting up to 2,000 jobs and some unprofitable routes and grounding at least 20 planes, sources have said.

But there is scepticism whether the proposed revamp will be sufficient. Alitalia is also heavily unionised and there will likely be a significant backlash to the proposed cuts.

Italy's government has often come to Alitalia's rescue in past years, but Rome is currently dealing with a banking crisis and has very limited room for manoeuvre because of EU rules.

With Abu Dhabi unwilling to give any more money to Alitalia, Etihad may choose to lend the carrier some of the cash it raised in a recent $1.5 billion sukuk issue, another source said. ($1 = 0.9568 euros) (Additional reporting by Stanley Carvalho in Abu Dhabi, Paola Arosio in Milan and Cyril Altmeyer in Paris; Writing by Agnieszka Flak and Stephen Jewkes; Editing by Steve Scherer/Ruth Pitchford)