Etihad examines Alitalia's books, mulls investment - sources

* Alitalia needs strong partner to survive long-term

* Etihad to decide on possible investment by Xmas -source

* Alitalia, Etihad decline to comment

By Stephen Jewkes and Stanley Carvalho

MILAN/ABU DHABI, Dec 11 (Reuters) - Abu Dhabi's Etihad Airways is examining Alitalia's books and is expected to decide by Christmas whether to take a stake in the troubled Italian airline, two sources familiar with the matter said on Wednesday.

Alitalia offers access to Europe's fourth-largest travel market and flies 25 million passengers a year. But the airline, which loses 700,000 euros a day and has net debt of more than 800 million euros, needs to find a partner willing to invest in its fleet and make it profitable in the longer term.

"Etihad has been in (Alitalia's) data room as of some ten days and will complete the process by the end of this week," one source said. Etihad is expected to decide on whether to buy a stake in Alitalia "just before Christmas", the source added.

Etihad and Alitalia declined to comment.

Alitalia has just raised 300 million euros ($413 million) which analysts said would keep the carrier flying for the next six months while it searches for an investor.

Not being a European carrier, Etihad can only take a stake of up to 49 percent in Rome-based Alitalia. Analysts said Etihad would likely be interested in a shareholding of at least 25 percent to have enough management and strategic influence.

The two airlines had been linked in media reports earlier this year but Etihad said at the time there were no talks beyond those on code sharing. Speculation of a tie-up began again in recent weeks.

"An Etihad-led team is looking at numbers of Alitalia and this is not the first time it has done so," a second source close to Etihad said, adding the two airlines already had strong commercial links by jointly operating flights between Abu Dhabi and the Italian cities of Rome and Milan.

Etihad, whose annual net profit tripled in 2012, already holds stakes in Virgin Australia, Air Berlin (Berlin: AB1.BE - news) , Aer Lingus and India's Jet Airways among others.

The UAE carrier has been aggressively growing its international network over the past 10 years through minority stake purchases and codeshare agreements, as it competes with regional rivals Emirates Airline and Qatar Airways.

"Etihad recently bought a third of Switzerland's Darwin airline and a good portion of their fleet serves destinations in Northern Italy," said Stefano Sala, a partner at aviation investment advisory firm Avinomics. "It will be interesting to see what can be done between Alitalia and Darwin.

CASH-RICH PARTNER

Alitalia is much leaner today than the group that was rescued and privatised in 2008 and in a revised industrial plan presented last month its management promised severe cost cuts of up to 300 million euros to make the carrier more profitable.

A previous focus on domestic and regional routes backfired in the face of tough competition from budget carriers and high-speed trains on the key Milan-Rome route.

Alitalia needs to invest in the more lucrative long-haul routes but lacks cash to buy larger planes.

"Alitalia's unit costs are not bad when compared to other European network carriers," said Sala. "If the Etihad deal could help them move deeper in the long-haul, this could be a huge win."

Over the years other major airlines including Lufthansa , British Airways and Air France-KLM (Other OTC: AFLYY - news) have flirted with partnering Alitalia, but in the end decided the airline was too much of a gamble.

Alitalia's top investor has so far been Air France-KLM, but the Franco-Dutch group has let its 25 percent stake be diluted to just around 7 percent after it snubbed the recent cash call, asking for tougher restructuring of Alitalia's debt.

The chances of Air France-KLM increasing its stake should not be dismissed however, the head of Intesa Sanpaolo (Berlin: IES.BE - news) , one of Alitalia's main shareholders, said on Wednesday.

Other Alitalia shareholders include a disparate group of Italian investors with little know-how of the airline market.

Etihad is being advised by Booz & Company, lawyers Dla Piper and PricewaterhouseCoopers, the first source said. Booz and Dla declined to comment.