Alitalia has rarely made a profit

Italy's aviation authority wants rivals to stop undercutting state-run Alitalia on flights from domestic airports.

Germany's Lufthansa, Europe's largest airline, said it is in talks with Italy about how to resolve the situation.

A Commission official told the Reuters news agency the demands are "clearly a problem for the internal market".

"But today, we are not sure if we have a strong enough basis to make the case against Italy," the unidentified official added.

Difficult times

Alitalia is currently struggling for survival.

Last month, it had an emergency state-backed 400m euro (�267m; $490m) loan approved by the European Union.

However, when it approved the loan, the EU stipulated that it had to be repaid within a year.

Alitalia has made a loss in all but one of the past 12 years, and its finances have come under greater pressures in recent years.

Earnings have been hit by the impact of terrorism fears and the Sars virus on the airline sector, and fierce price competition and surging fuel prices have added to the tough environment.

As part of its plans to turn the business around, the company has appointed a new chief executive and is also holding talks over the summer with trade unions about cost-cutting measures.

The Italian government, meanwhile, plans to cut its holding in the company to 49% from 62% during the next 12 months.

Arguments remain

A spokesman for the British government's transport ministry said it had been in contact with its Italian opposite numbers over the issue.

"We are more than happy for airlines to be free to set their fares as they wish in line with EU policy on competition, but this right must be available to all airlines," said the spokesman.

Yet Italian aviation agency Enac said it was fully within its right to prevent foreign companies from undercutting Alitalia prices on certain routes.

It said that the request was made to a number of airlines, but that only BA refused to comply.

"The Enac authority ordered them to raise their tariffs, and this step was taken in agreement with the EU," agency chairman Vito Riggio said.