wittmann is right, the Italians can’t participate in the German attack so they are bystanders. By rule the German transport should endure one round of combat, then it can retreat if still alive (unless you are playing a friendly game and allow the German player to rethink his move based on the new info).
Question for Krieghund [or anyone else that knows for sure]
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If you are attacking a lone enemy transport with a plane in let’s say SZ 1, are any of your own naval units allowed to move through SZ 1 during Combat Movement?
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yes, you can ignore unescorted trns in combat movement. battles occur after combat movement.
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JimmyHat is correct.
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so in the same scenario, with a sub as defender, instead of the transporter (attacking with a destroyer) would the attacker still be allowed to sail through with other ships (combat move)?
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Yes, as the sea zone is still not hostile.