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Alitalia Hits Turbulence Over Etihad management

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Alitalia Hits Turbulence Over Etihad management

Alitalia Hits Turbulence Over Etihad management
January 16
10:20 2017

LONDON — Less than three years after it was pulled back from the brink of bankruptcy by Etihad Airways, Alitalia is once again in financial straits.

An indication of the seriousness of the situation came after a board meeting immediately before Christmas. Alitalia CEO Cramer Ball said that partners, suppliers and the trade unions had to accept the “radical changes” that would be needed to persuade Alitalia’s shareholders to provide a new tranche of funding.

He added that considerable improvements had been made over the past two years but that Alitalia now operated in a “brutally unforgiving” market. Low-cost carriers such as Ryanair, EasyJet and Wizz Air are continuing to eat into its domestic and short-haul markets. Ireland-based Ryanair now actually has more capacity in the Italian market than Alitalia.

Essential changes to its business model would include developing the long-haul business; “reworking” the narrowbody business; cutting costs and raising productivity; and reducing manpower numbers once again.

Ball went so far as to say: “The next two months are critical for Alitalia.”

Will the Italian flag-carrier’s problems lead to a change in Etihad’s strategy of taking large stakes in struggling airlines, with the aim of turning them round and linking them into a constellation of companies mutually supporting each other via codeshares and traffic flows?

And could the continuing problems at Alitalia and Germany’s airberlin – another airline in which Etihad has a major stake and that remains stubbornly in the red – put Hogan’s position in jeopardy?

According to Saj Ahmad, chief analyst at UK-based StrategicAero Research and who has good contacts in Middle East carriers, “Hogan’s strategy will not be his undoing. However, it will become harder to justify new investment elsewhere until some of [Etihad’s] existing partners buck up their ideas and performance.

“Hogan has done wonders for Etihad, so I can’t see that he’d be at risk there yet. But Etihad may well curtail future investment and instead focus on its own organic expansion first.”

The August 2014 announcement that Abu Dhabi-based Etihad was taking a 49% stake in perennially loss-making Alitalia for €387.5 million ($407.8 million), looked like the Italian carrier’s last, best hope of an economic rebirth.  Etihad, in fact, went further than that headline figure, later sinking a further €112.5 million for a 75% stake in Alitalia’s passenger loyalty scheme and another €60 million for five pairs of slots at London Heathrow airport.

And, as part of the deal, the Italian government wrote off the airline’s historic debt mountain, giving it much more freedom to maneuver.

At the time, Alitalia was hemorrhaging an estimated €1 million a day and Hogan warned that, while he had great faith in the strength of the Alitalia brand, the carrier had to re-make itself and become profitable.

The plan for Alitalia was that a three-year turnaround plan would lead to break-even this year. CEO Ball (a former CEO of Air Seychelles and Jet Airways, two other airlines in the Etihad constellation where he also oversaw restructuring programs) went so far as to say last spring that he was aiming for profitability in 2017.

Losses were reduced in 2015 (the last full year for which accounts are available) to €199 million. This was a significant improvement on 2014’s huge deficit of €580 million, but still a hefty loss in a year when most airlines were racking up record profits as the cost of fuel slumped.

However, reports in the Italian media say that Alitalia is still losing €500,000 a day and may need yet another financial bail-out. So, why is the Italian airline taking so long to turn around?

The answer, says Ahmad, lies in years of under-investment: “While airberlin’s issues stem mostly from its cost base, Alitalia needs restructuring more widely. And with Alitalia struggling to get unions on-side to enact job cuts and other changes, it looks destined to struggle ad infinitum.”

Despite last year’s improved figures, Ahmad says that real progress has proved elusive. “The request for some $230 million more from Etihad suggests that this airline could well be another money-soaker rather than money spinner.” And if Etihad does come up with more cash, it will have to be structured in such a way that it does not increase its shareholding – European Union laws stipulate that control of EU airlines must reside with EU-based shareholders.

Deep cuts to Alitalia’s loss-making activities – notably its European routes – will be necessary, says Ahmad.  That could involve cutting routes, onboard services or even instituting some form of co-operation with a regional carrier with lower costs.

“Whatever steps are taken, Alitalia’s footprint will have to shrink if costs are to slide – and that will mean job cuts.”

Details of what Alitalia calls the second phase of its business plan are due to be presented imminently to the workforce. The Italian government said on January 9 that it wants the airline to present it with a detailed business plan agreed with creditors, banks and shareholders within the next few weeks.

Only then will it discuss the possibility of job cuts.

What other options are open to Alitalia? There is currently no suggestion that it could be off-loaded to a competitor. EU rules on ownership mean any competitor would have to be European, which effectively narrows the choice of suitor to one of the continent’s three major consortia:  Air France/KLM; Lufthansa Group; and International Airlines Group. No suggestions have appeared that one would be prepared to take on the ailing Alitalia.

Nor would the Italian government be likely to re-nationalize it. Much as Rome wants to keep Alitalia alive as a national asset, nationalized carriers rarely have an incentive to improve if they know a government will always pick up the tab – and EU competition rules would rule out such continuing subsidies, anyway.

One possible solution that could play into Alitalia’s announced business plan is that followed some years ago by Aer Lingus.

The Irish flag-carrier converted its short-haul services into a low-cost operation – not one as hard-core as Ryanair, but still less expensive than many mainline airlines – while boosting its long-haul services, notably to the US, where it can take advantage of the large Irish diaspora.  Alitalia could, conceivably, follow a similar route, perhaps by hiving off at least some of its European services to a ‘white label’ capacity provider.

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About Author

Alan Dron

Alan Dron

Old-school scribe who now is fortunate enough to earn a fair percentage of his income by writing about aviation. Still laments the passing of Concorde and has been known to take a day trip to the Middle East to interview an airline executive.

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