Private equity buyers are struggling to put together a bid for Alitalia, leaving the way clear for a rival airline to snap up just under half of the Italian flag carrier.

Texas Pacific Group, the US private equity group, has finally thrown in the towel on almost a year’s worth of negotiations after failing to put together a consortium with a majority of Italian investors.

TPG has informed advisors to the Italian government that at present it is unable to finalise an Italian-led consortium but has said that it will continue to follow the evolution of the auction, in case a new opportuntiy arises.

Aeroflot, Air France-KLM, Lufthansa, AP Holding, which owns theItalian airline Air One, and a group of local investors led by lawyer Antonio Baldassarre have also expressed interest in Alitalia.

The Italian government, which has a 49.9 per cent stake in Alitalia, has been trying to privatise the loss-making airline but has set stringent conditions around the sale which have deterred buyers and already derailed the auction once this year.

Alitalia is encouraging foreign and Italian investors to form alliances that will keep the airline in Italian hands to avoid losing routes obtained through bilateral agreements.

In a statement, Alitalia said: " TPG has informed the financial Advisor Citi that, at the moment, they are unable to finalize an Italian-led consortium, but will continue to follow the evolution of the Alitalia dossier with interest, should an opportunity and/or new elements arise."

TPG's withdrawal from the auction leaves Air France, which has a cross-shareholding with Alitalia and a commercial alliance, as the front-runner to win the auction.

Lufthansa, which has been put on a list of preferred bidders by the Italian government, this week indicated that the airline needed radical restructuring before the German flag carrier was prepared to buy the stake.

Alitalia has sparked protests in Italy by pledging to cut its workforce of 18,000 by about 1,000 and to close operations at one of Milans two airports. But Lufthansa’s chief financial officer has indicated that the restructuring needs to go further still.

Air One owner, AP Holding, which rejoined the race for Alitalia in September is also thought to have finally dropped out of the running to buy the airline.

Alitalia is hoping to conclude the sale by Christmas, but it is thought that could be an optimistic timetable.

A previous government auction collapsed in July because potential buyers did not want to meet conditions stipulated in advance by Rome. Now buyers have the chance to state their terms and it will be the government, as the company's largest shareholder, that will decide whether it can abide by them.

Meanwhile, TPG is understood to be pressing ahead with its bid for Spanish airline Iberia. Sources said TPG and its partner British Airways were in the advanced stages of putting a bid together but that there was still some confirmatory due diligence to be completed. In addition, TPG is still in negotiations with banks about financing the transaction. It is understood the consortium will need about 3 billion euros, although it has yet to raise all the money given the tough conditions in the debt markets. One source, however, said TPG was confident it would secure the financing package soon.

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