Russian airline Aeroflot pulled out of the bidding for Alitalia on Wednesday, leaving Rome's auction of the unprofitable airline in danger of collapse with just two players left.
Alitalia shares fell nearly 2 percent after Aeroflot's announcement and were then suspended. When the shares resumed trading they were down nearly 6 percent, but pared these losses to be down 3 percent in afternoon trade. The airline has a market value of around 1.2 billion euros ($1.6 billion).
Aeroflot cited a lack of access to critical information on Alitalia's business and restrictive conditions on the sale that would have hampered its ability to turnaround the carrier for its decision.
"Aeroflot believes that acquiring Alitalia under the current conditions would not be the right decision for it to take," it said in a statement.
The Russian carrier's departure from the auction leaves smaller Italian airline Air One and U.S. private equity fund MatlinPatterson as the only potential bidders ahead of a July 12 deadline to submit binding offers.
Aeroflot was bidding with one of Italy's biggest banks, UniCredit, while Air One has the backing of the country's largest retail lender Intesa Sanpaolo, whose chairman is a long-time friend of Prime Minister Romano Prodi.
Analysts had considered Air One and Aeroflot as the only serious contenders to buy Alitalia, and Italian media have speculated that MatlinPatterson could soon pull out as well or team up with the smaller Italian carrier's consortium.
Either of those two scenarios could leave the Italian government with the prospect of handing its national carrier to Air One, a much smaller airline whose annual revenues barely match the annual losses of its larger rival.
Alitalia's shareholders are meeting on Wednesday to discuss the airline's precarious financial situation.
Chairman Berardino Libonati has asked them to approve using 150 million euros of reserves after the airline wrote down its fleet last month, pushing its 2006 net loss to more than a third of its market value. The write down triggered the need for a capital increase under Italian law.
Aeroflot's withdrawal is another problem for Italian Prime Minister Romano Prodi's centre-left government, whose talks with unions over pension reform broke down on Wednesday over proposals to raise the retirement age to 57.
The government, which launched the auction in December and has actively courted Russian political and business leaders in recent months, could find it needs to get unions on board to deal with Alitalia.
Analysts have warned selling an airline beset by strikes, losses and frequent government interference would not be easy, and that any buyer would have to slash jobs and overhaul operations to turn it around.
Rome put its 49.9 percent stake in Alitalia up for sale after repeated restructuring efforts had failed to return it to profitability. It attracted 11 bidders initially, before the list was shortened to three allowed to submit binding offers.
One of the three, U.S. private equity fund TPG, pulled out soon after. MatlinPatterson was a partner in that group and returned to the fray earlier this month.