VOLARE in trouble?

[White Kite]

MILAN
Volare Group, an Italian low-cost airline that has not flown since suspending flights late last week, declared insolvency on Tuesday, opening the way for government intervention.

Prime Minister Silvio Berlusconi's cabinet is expected to name an extraordinary commissioner for Volare when it meets on Thursday or Friday. The commissioner can be named only after a decree changes legislation introduced less than a year ago to sort out the chaos left by the bankruptcy of the dairy and food giant Parmalat. That legislation, which governs appointments of extraordinary commissioners, currently applies only to companies with more than €1 billion, or $1.31 billion, in debt, far more than Volare is estimated to have.

By declaring insolvency, Volare is protecting itself from creditors' claims while it tries to sort out its finances.

As with Parmalat, the demise of Volare may lead to the courtroom.

Prosecutors have already begun investigating the airline's financial records on suspicion of false accounting and fraudulent bankruptcy, according to the Italian newspaper La Repubblica. Volare had a "hole" of €270 million in its accounts, according to an audit done by KPMG, Repubblica said. A Volare spokesman could not be reached for comment.

The collapse of Volare, which means "to fly" in Italian, could be a precursor to financial problems at other European low-cost airlines, and it shows that not just the traditional large airlines are running into financial problems that have been aggravated by the surge in the price of oil. Ray Webster, chief executive of EasyJet, said Tuesday that the number of low-cost airlines in Europe was not sustainable, and Michael O'Leary, chief of Ryanair, recently warned of a "bloodbath" in the sector.

"Ryanair has been very good at the low-cost business, but others in the industry will have problems in the future because the margins are very low and you can only cut costs so much," said Massimiliano Romano of Opus Consulting in Milan. "Competition is getting tougher all the time, and the price of oil keeps going higher."

The insolvency of Volare comes on the heels of financial problems at Alitalia, Italy's flagship carrier.

Alitalia teetered on the edge of bankruptcy for a year before securing a €400-million government-guaranteed loan that has given the flag carrier breathing room to begin implementing a restructuring plan.

After seven years in the air, Volare's problems came to a head Friday when the company could not cover the costs of leasing some of its airplanes, and insurance companies then pulled their coverage of the flights. Almost 1,400 employees risk losing their jobs, though Italy's welfare minister, Roberto Maroni, told La Repubblica that Rome would use "every means" to safeguard their position.

Volare is owned by the Argentine investor Eduardo Eurnekian; the airline's founder, Gino Zoccai; a Milan-based merchant bank; and an investment fund.

The company also runs a charter airline called Air Europe.

By Eric Sylvers International Herald Tribune