Italy: How not to rescue an airline ONLY the most gullible or optimistic Italians ever believed that the Phoenix Project launched with great fanfare five years ago would allow Alitalia, Italy's bankrupt flag-carrier, to soar to profitability. Half-year results approved on September 26th showed a net loss of €294m ($386m), taking total losses since the end of 2008 to well over €1 billion. Its share capital eroded, bleeding cash, with only €128m left, including unused credit lines, Alitalia has run into near-terminal turbulence. Poor strategy has played a part but much of the blame for Alitalia's misfortunes lies with Silvio Berlusconi, the former prime minister, who exploited the airline's difficulties in his election campaign in 2008. He blocked its sale to Air France-KLM, a Franco-Dutch airline, a decision that cost Italian taxpayers an estimated €3 billion. Mr Berlusconi's wheeze was to encourage a group of "patriotic" businessmen, headed by Intesa Sanpaolo, the country's biggest bank, to take over the assets of the airline, which had been put into administration in August 2008. The patriotic group, including Pirelli, a tyremaker, and Benetton, a fashion group, were joined by Air France-KLM, which took a 25% stake in the venture. Project Phoenix got under way in difficult economic conditions and faced increasingly tough competition from low-cost airlines and high-speed trains on Alitalia's most profitable domestic route between Rome and Milan. It has now gone down in flames, taking with it an investment of around €1 billion. The latest crisis came to a head on October 11th when Alitalia's board approved a €500m salvage package, of which €300m is to come from fresh capital and €200m from new credit lines. Despite evident competition concerns, Italy's state railways had been talked of as a white knight. Instead, the government is planning to involve the state-owned postal service in a rescue. Poste Italiane is expected to invest €75m in the airline. Not surprisingly, some of Alitalia's competitors are crying foul at what is de facto a helping hand from the state. International Airlines Group, which owns Iberia and British Airways, declared that it "expects the EU Commission to take interim measures to suspend this manifestly illegal aid." Alitalia's mayday came as the left-right coalition headed by Enrico Letta was putting the final touches to budget measures for 2014 that are intended to demonstrate to the European authorities and the markets that it is serious about putting its public-sector finances in order. As the euro zone's weakest large economy - GDP is expected to contract by about 1.5% this year and the debt-to-GDP ratio hovers around 130% - Italy is under close observation. On October 15th the government approved a €11.6 billion package, which aims to reduce Italy's fiscal gap next year to 2.5% of GDP, from a target of 3% this year. With little room for manoeuvre, it makes small cuts in the tax taken from lower-paid workers and in social-security contributions paid by firms. Local administrations will enjoy a slight easing of restrictions on their spending. The government will cover these changes with €3 billion of extra borrowing as well as freezing public-sector contracts and reducing overtime pay to public-sector employees, by selling assets and through increasing stamp duties. Set against the budget's figures, the €75m that Poste Italiane is planning to pump into Alitalia sounds like small change. Even so, this highly political manoeuvring suggests some bad old habits are deeply ingrained despite the new reforming government - and that the airline's problems are far from over.