ABU DHABI/MILAN (Reuters) - Alitalia could cut up to 2,000 jobs as controlling shareholder Etihad Airways pushes for sweeping changes to turn the loss-making airline around, according to sources close to the matter.

The Italian carrier may also ground at least 20 planes to cut certain unprofitable routes on domestic and regional services where it is struggling to compete with low-cost rivals and high-speed trains, the sources told Reuters.

It is likely to remain loss-making for the next two to three years even if it carries out the job cuts of around a sixth of its workforce and the plane groundings, said one of the sources.

But a failure to slow the airline’s decline and ultimately reverse its fortunes would not only see Abu Dhabi state-owned Etihad take further financial hits on its investment, but deal a significant setback to its European expansion ambitions.

It would also represent a defeat for the Italian government, which regards Alitalia as a strategic asset and a matter of national pride, denting its industrial strategy aimed at attracting foreign investment.

Yet Rome is in a tough position, as news of possible job cuts at Italy’s flag carrier come at a sensitive time - days from a Dec. 4 referendum on constitutional reforms that Prime Minister Matteo Renzi has staked his political future on.

Alitalia said the next phase of its industrial plan would be presented to its board of directors and its staff soon and that it would not comment on any speculation until then.

Etihad, which owns 49 percent of the carrier, declined to comment.

Slideshow ( 4 images )

FRUSTRATION

Etihad invested 560 million euros ($591 million) in Alitalia in 2014 as part of a wider 1.76 billion euro rescue deal, seeking to expand its global reach with access to Europe’s fourth-largest travel market, and pledged to return the airline to profitability by 2017.

Rome helped engineer the rescue, hailing it an example of Italy’s attractiveness for foreign investors.

But two years after the deal was signed, Alitalia is losing half a million euros a day.

Alitalia management is now studying several options to boost revenues and create an operator that can finally yield a profit. No final decision has yet been taken, sources say.

The options include cutting between 700 and 2,000 jobs of the airline’s 12,700 workers, according to three sources. This could put Etihad and Alitalia management on a collision course with unions - which have gone on strike over cost cuts in the past - as the busy Christmas travel season nears.

Alitalia is also considering grounding at least 20 planes, mostly Airbus 320 aircraft, said two of the sources.

The airline is also trying to renegotiate the terms of an alliance with Air France-KLM AIRF.PA and U.S. carrier Delta Air Lines DAL.N to boost traffic on higher-margin transatlantic routes.

When Etihad took its 49 percent stake in the carrier, it promised to slash costs, turn Rome’s Fiumicino airport into an intercontinental hub, improve the airline’s cargo business and add new long-haul connections from Rome and Milan, keen to expand in Europe’s fourth-largest travel market.

Slideshow ( 4 images )

But the turnaround hit problems after low-cost airlines such as Ryanair RYA.I expanded more aggressively in Italy, putting more pressure on Alitalia's domestic and regional services, and after militants attacks across Europe dented passenger numbers.

Last month Etihad CEO James Hogan used an interview with Italy’s daily Corriere della Sera to vent his frustration about unions who hamper his efforts by taking to the streets over cost cuts and accused Rome of failing to support his turnaround plan.

The government responded by saying it had fulfilled all its commitments towards Alitalia.

EUROPEAN STRUGGLE

Alitalia needs money to invest in its long-haul business, but its existing Italian shareholders are unwilling to pour in any more cash.

The group of Italian shareholders, which control a combined 51 percent stake and include Italy's two biggest banks UniCredit CRDI.MI and Intesa Sanpaolo ISP.MI, have long ceased to take an active interest in the airline.

One option discussed is the conversion of a bond into semi-equity financial instruments without voting rights, allowing Etihad to invest more without breaching the ownership limit that ensures Alitalia retains its European status, according to two sources.

However, whether Etihad is prepared to invest more is uncertain.

“In the low oil price environment, it will be a big challenge for Etihad to convince Abu Dhabi for more cash,” said one of the sources. “They’ve already pumped in a lot in Alitalia and others. It is time to get some money back.”

Etihad’s first major investment in Europe – Air Berlin – has also proven a struggle to turn around. Etihad is now in talks to buy some of its tourism operations and combine those into a new joint venture as part of a drastic restructuring that will see Air Berlin’s fleet halve in size.

Ultimately the options for Alitalia remain few and far between, unless another cash-rich investor can be found or it can be folded under a bigger and financially stronger European player, industry sources and analysts have said.

Italian media suggested that German airline Lufthansa LHAG.DE could buy into Alitalia, but both airlines denied those rumors.

“The low-cost carriers are getting stronger, Alitalia is weak in Italy and Europe, is a tiny player in intercontinental traffic and has little money to invest,” said Andrea Giuricin, a transport analyst at Milan’s Bicocca university.

“Either Etihad finds a European solution to Alitalia or lets it close up shop, although I doubt Rome would allow that.”