Italy’s last-ditch attempt to save its failing national airline carrier Alitalia was illegal because it gave massive state loans, in another blow that came even as the European Commission has approved a privitisation plan under new management. The Commission said a 300 million Euro loan was “illegal state aid” and will have to be paid back to the government. The EU’s Transport Commissioner, Antonio Tajani, who is close to Italian Prime Minister Silvio Berlusconi, delivered the bad news to his country and said the privitisation plan would be allowed, but only as long as its asset sale is done at market prices.

The loan will have to be paid back by the existing company, not a consortium of private investors who have stepped in to take over Alitalia, the Commission said. “The commission considers that if the sale of assets is done at market prices, it will not involve state aid,” Tajani said. He said the commission would set up an independent trustee charged with ensuring that the sale follows EU rules. The bad news kept mounting for Alitalia as the decision came as it was trying to deal with a wildcat strike by its employees, long disgruntled over the government’s attempts to patch together deals to keep the airline flying.

Alitalia’s bankruptcy commissioner, Augusto Fantozzi, said the strike had caused damage to the schedule and to that of its clients at airports Fiumicino in Rome and Linate in Milan. By noon on November 12, Alitalia had been forced to cancel 13 flights at Fiumicino, 17 at Linate and four at Milan’s Malpensa hub, the airline said. There was no immediate reaction from Alitalia to the European Commission demand that Alitalia will have to pay back the 300 million Euro loan.

The so-called “bridge loan” was granted by the previous government of Prime Minister Romano Prodi on April 22 as a means to ensure its short-term survival amid falling passenger numbers and soaring debts. The company, which is partly owned by the state, is currently being sold to a consortium of private investors called Compagnia Aerea Italiana (CAI.)The repayment was expected to place the burden of the repayment on Italian taxpayers, since CAI made its bid to purchase the airline contingent on not having to shoulder the “old” Alitalia’s debt.

“There is discontinuity between the old Alitalia and the new CAI,” said Tajani, noting that the new, leaner carrier had agreed to employ 12,500 people, compared to today’s 17,000. Pilots, flight attendants and ground staff staged their strike to protest what they say is CAI’s breach of employment terms it had agreed to when negotiating its privatisation bid with the main labour unions. Most of the unions however, did not support the stoppage, which Berlusconi’s government declared illegal. Alitalia, which is facing debts of more then 1.2 billion Euro, saw bookings decline by 30 per cent in September compared to the same period in 2007, according to Milan daily Corriere della Sera.