Published in November 2015 issue
After countless years of uncertainty, poor financial performance, strikes, operational hiccups, and flirtations with bankruptcy, one of the world’s most iconic airlines seems to be back on its feet. Following a hefty investment by Etihad Airways (EY), 49% of Alitalia’s (AZ) ownership is now planted in the successful Middle Eastern airline’s turf. Alitalia looks to be moving toward viability. Yet, its profitability and strategic success remain in question.
By Enrique Perrella
It was the 1940s. World War II was over. Five years of constant distress and massive destruction had left Italy’s air service completely shattered. At that low point, a joint venture between Italy and Britain started up with a small fleet of Fiat G.12s from the Italian Air Force, looking to reestablish air service in the country. Though these aircraft were tailored for the military, they were ultimately converted for carrying mail and passengers.
On May 5, 1947, one of the retrofitted Fiat G.12Es, took to the air from Turin to Catania, stopping in Rome’s main airport, Ciampino (CIA), on behalf of Alitalia- Aereolinee Italiane Internazionali. It was the first flight of an airline that would set the pace for commercial aviation in Southern Europe.
Two months later, in July 1947, Alitalia made its first international flight from Rome to Oslo, carrying 38 passengers onboard a Savoia Marchetti SM.95 aircraft.
In 1950, the first Douglas DC-4 aircraft joined the fleet, offering travelers a much more comfortable cabin for lengthy routes—warm meals and full beverage service included. Alitalia was immediately recognized for offering high-quality products on every flight, a feature which would continue as part of the airline’s identity, even today.
In November 1957, Alitalia consolidated as the country’s main carrier after merging with another airline that had also launched in 1947. Linee Aeree Italiane (LAI)—which had started operations in Rome’s Urbe airport—had been a role player in the development of commercial aviation in Italy during the 1950s. It had been, in fact, the first Italian carrier to operate transatlantic flights to the US with Douglas DC-6 aircraft, and the first to include turboprop airliners in its fleet. After the merger, the combined airline had 37 aircraft managed by over 3,000 workers. Its network extended to more than 100,000km (62,000miles). Alitalia-Linee Aeree Italiane, then the world’s 12th largest airline, was born.
The unstoppable growth continued through the 1960s. When Rome hosted the 1960 Olympics, Alitalia not only became the Games’ official carrier, it also began receiving its first jet aircraft. Those jets were based at the city’s new airport, Rome-Fiumicino (FCO), which opened in August 1960 to help ease traffic congestion at CIA during the Olympics. Five months later, in January 1961, FCO opened officially, eventually largely taking over from the smaller Ciampino.
With these additions, Alitalia managed to transport over three million passengers that year. The Douglas DC-8, along with the brand-new DC-10, enabled the airline to expand its reach as far as South and North America, Australia, and Far East Asia.
In less than 10 years, Alitalia became the first airline in Europe to be an all-jet operator, as it added brand-new Boeing 747s, Airbus A300s, McDonnell Douglas MD-11s, MD-80s, and additional Boeing 747 Combis for its thriving cargo division.
A QUESTIONABLE MANAGEMENT CULTURE
Alitalia’s golden era was guided by Bruno Velani, a civil and aeronautical engineer who was commonly known as ‘Alitalia’s father’. More than that, he was the man most responsible for developing commercial aviation in Italy.
Velani personally chose the Douglas DC-8 as the backbone of Alitalia’s fleet of the early 1960s, and pointed to the Caravelles, the Viscounts, and the Boeings for the airline’s expansion. In 1963, he flew to New York with a US$300,000 check to reserve a slot for Boeing’s projected supersonic airliner, the Boeing 2707. He wanted Alitalia to become one of the first airlines in the world to offer supersonic flights. Unfortunately, Boeing’s project never saw the light of day, and all that came of the foray was a photo showing the aircraft in Alitalia’s colors. Velani remained CEO from 1964 until 1973.
After Velani, Alitalia was guided first by Umberto Nordio, and then by Roberto Schisano, who was responsible for acquiring new Boeing 767-300(ER)s and Fokker F-70s. Alitalia’s economic situation began to decline in the 1990s, as European deregulation came in and competition increased at the expense of the airline’s financial position.
Domenico Campella, the next CEO, strengthened the airline’s financials and, in 2000, promoted a merger with KLM. The Dutch carrier invested heavily in Milan-Malpensa (MXP), hoping Alitalia would shift its operations there, but the Italian airline, after some delay, decided to keep Milan-Linate (LIN) open and its main hub in FCO. KLM terminated the deal immediately. The merger never took place and both airlines ended their nine-month partnership. Four years later, Air France (AF) succeeded in what Alitalia had failed to do, taking over the Dutch carrier, thus creating today’s Air France/KLM (AF/ KL) group. Campella was responsible for posting Alitalia’s last-ever yearly profit.
The following years were tough for Alitalia. After September 11, 2001, the airline entered into a prolonged slump that was exacerbated by the growth of the Low Cost Carrier (LCC) industry and the lack of a coherent strategy to cope with increased competition and steeper fuel costs. The Italian government, owner of 50% of the airline’s shares, attempted to increase liquidity by selling assets, taking loans, and seeking new investors. The AF/KL group seemed interested in investing, though nothing ever materialized.
Between 1999 and 2008, Alitalia reported net losses of more than €3.7 billion ($4.9 billion), forcing it to file for bankruptcy in August 2008.
In January 2009, weeks before the airline would have had to halt its operations for lack of liquidity, a group of Italian investors (among which was the owner of AirOne, Carlo Toto) backed by Prime Minister Silvio Berlusconi took over the airline by purchasing the airline’s best share for €1 billion ($1.33 billion). The AF/KL group and Lufthansa remained the best candidates for the takeover; however, Berlusconi believed Italy’s national carrier had to remain Italian, saying that it was inconceivable that foreign carriers would be responsible for air transport in Italy.
The new company, Alitalia-CAI (Compagnia Aerea Italiana), replaced Alitalia-LAI. It absorbed its subsidiaries Alitalia Express, AirOne, AirOne CityLiner and Volare, and eliminated Alitalia Cargo.
The new, 100% Italian, Alitalia-CAI was born with zero debt. The Italian government absorbed the €625 million ($830 million) in arrears, so the new Alitalia could have a fresh start. Unfortunately, the early 2000s had been too damaging to the airline. It had lost a large piece of market share to increased competition both in Europe and globally.
Alitalia’s new management, led by CEO Rocco Sabelli and Chairman Roberto Colaninno, wasn’t able to turn things around. The airline continued losing millions every day as two more CEOs were appointed in less than one year.
Gabriele Del Torchio, a renowned Italian entrepreneur known for having saved from bankruptcy companies like the motorbike manufacturer Ducati, took over the reins of the again-bleeding airline and initiated talks with Abu Dhabi-based Etihad Airways (EY). The Mideast giant, on a buying spree across the continent, agreed to purchase a 49% stake for €560 million (about $700 million) and became Alitalia’s new majority owner, creating yet another new incarnation of Italy’s flag carrier: Alitalia- Società Aerea Italiana.
On June 4, 2015, the third—and perhaps last— version of an airline that had seen too much trouble, was born.
One of FCO’s maintenance hangars was turned into an ultra-modern theater, fitted with a modern set of colorful sofas, tables, and a stunning buffet filled with exquisite Italian recipes that would make any attendee rejoice. An enormous curtain behind a super-wide screen showed photo slides of Alitalia’s rich and long history, with past heads of states, actors, singers, and worldwide celebrities flying the airline and reminiscing about the essence of the true Alitalia.
As press members, employees, Etihad/Alitalia chiefs, and Italy’s Prime Minister mingled, Alitalia’s new President, Luca Cordero di Montezemolo—a renowned Italian entrepreneur known for his successful track record in Ferrari—kicked off the event, starting with a nod to Etihad’s President and CEO, James Hogan.
“Dear James, thanks for being here. This is a crucial day for all of us,” he said. “Behind these curtains, you will all see an aircraft which represents a new moment for an airline that has been in trouble, but today stands as a company that has all the ingredients for an optimistic future.”
Etihad’s boss then took the stand and welcomed the audience in a very sympathetic manner. Buongiorno, come state, (Good morning, how are you?). “I’m trying,” he noted with a smile, referring to his modest Italian. “Being here today reflects our commitment to Alitalia. You have a great brand and a proud history. And, as you know, there have been challenges in the past, but today, a fundamental change can take place.”
Hogan continued, proclaiming his passion for Italian culture and explaining Etihad’s interest in the troubled carrier. “Alitalia is Italy. We, in Abu Dhabi, love Italy,” he said. “When we started looking at Alitalia, we were very clear from Day One that the appeal of Italy is fundamental and we must build this brand and re-build its business.”
Hogan said that all the investors—not just Etihad—had made a major commitment to rebuilding the airline. “This is all about financial recapitalization. It is about rebuilding the airline’s medium and long-haul network. It’s about service. It’s about bringing the values of Alitalia alive,” he declared.
Looking at the airline’s rough past, with government involvement and poor managerial execution, Hogan said: “The game plan is that we have no legacy and are not involved with Alitalia’s past. There are no politics. Alitalia must be run commercially. Alitalia will be run on a truly commercial basis.”
As part of a master plan to return to profitability, Hogan said that the remainder of 2015 would be completely focused on debt and cost reduction as well as productivity improvements. In 2016, the management will aim at stemming losses and attaining financial break-even. In 2017, Hogan expects to see Alitalia finally return to an operating profit after more than a decade of hefty losses.
“I have said this in the past, and I say it today: Alitalia can be one of the best airlines in Europe and the world,” Hogan said. “But the focus on cost, productivity, and how we generate revenue is fundamental. We must make sure that load factors, yields, and operating efficiencies are up. Using our partnership to achieve scale and improve our mutual business is key, and that’s what we plan to do with Alitalia.”
Hogan affirmed that his commitment is for the long haul. “In business, it’s all about winning,” he said. “Together, I have no doubt that we will win.”
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THE NEW IMAGE
“Alitalia is a sexy brand,” Hogan said. “I’ve been told not to say ‘sexy’, but I think it is!”
And Alitalia’s CEO, Silvio Cassano, backed him up, noting how, besides being sexy, Alitalia is also “elegant, traditional, and historic.” He said that the new brand will evolve in ways that will ensure it remains so. “A stunning new livery, new cabin interiors, and an enhanced hard and soft product will evoke the Italian style that Alitalia has been known for,” he said.
Then came the moment everyone was waiting for. Hogan, Cassano, Montezemolo and Italian Prime Minister Matteo Renzi stood in front of a red button. The hangar’s lights dimmed. The music rose. The button was pressed, the gigantic screen split in half, and the enormous curtain dropped, unveiling the first Airbus A330-200 sporting the new image.
The shimmering airliner, glorious in a blaze of lights, was painted in what they called a ‘warm ivory’ color. Alitalia’s iconic green cheatline had been supplanted by a Eurowhite-style fuselage, paired with a refined series of white-and-ivory bands that merged toward the rear of the aircraft. The traditional ‘A’ tailfin—perhaps the most iconic part of the Alitalia brand—had been kept, slightly modified with a gradient type of green color. Alitalia’s logo had been modified to a typeface and non-Italic style.
This new livery will be applied to the entire fleet by mid-2017. New cabin interiors will see a major overhaul in all three classes: Magnifica (Business Class), Premium Economy, and Economy. A new hard product witha completely different color palette, inflight Wi-Fi, LiveTV, and the typical top-notch Etihad in-flight entertainment (IFE) will be standard throughout the long-haul fleet. Authentic Italian ingredients and wines will enhance an onboard menu that already has been named Best Airline Cuisine for several consecutive years by Global Traveler.
The Magnifica product, which Cassano compared to a First Class, will offer new flagship lounges and chauffeur services on selected flights, turndown service, premium amenity kits, and Italy’s award-winning crystal glassware from Richard Ginori. Premium Economy, similar to that of Etihad, will offer enhanced features such as ‘dine any time’ and smaller amenity kits with large pillows and blankets.
EXPANSION AND STRATEGY
Etihad’s involvement began immediately with daily flights from Abu Dhabi (AUH) to FCO and MXP. Likewise, AZ launched daily service from FCO, MXP and Venice (VCE) to Etihad’s base, and expects to introduce Bologna (BLQ) and Catania (CTA) to AUH before the year’s end.
Alitalia’s long- and short-haul network will also see a change. FCO’s long-haul service will increase from 87 to 113 flights per week by 2018, with new routes to Beijing (PEK), Seoul (ICN), Shanghai (PVG), Mexico City (MEX), Santiago (SCL), and San Francisco (SFO). Likewise, MXP will see an increase from 11 to 25 weekly long-haul flights, with new service to ICN and PVG, especially after both carriers were named the official airlines of the 2015 Expo, held in Milan from May until October. According to Hogan, MXP will also become the airline’s global cargo hub.
Alitalia’s fleet will be optimized with an increase in both wide- and narrow-body aircraft. “This will be accomplished with Etihad’s large order-book of new airliners, which will be at Alitalia’s disposal when needed,” Hogan said.
Two ex-Etihad Airbus A330-200s were brought into the fleet under a lease agreement, increasing the number of A330s to 14. Altogether, the longhaul fleet will increase to 24, including 10 Boeing 777-200(ER) aircraft. It is said that three Boeing 777-300(ER)s will soon be added for flights to Buenos Aires (EZE) and Tokyo (NRT).
With Etihad’s own airline alliance—which includes Air Berlin (AB), Air Serbia (JU), Jet Airways (9W), Air Seychelles (HM), Etihad Regional (F7), Niki (HG), and now, Alitalia— Hogan expects to use the newest member as a long-haul connector to its Asian, and North and South American destinations through FCO. In fact, regional flights within Europe have been integrated with AB’s network to Germany, Switzerland, and Austria. And a new partnership has been struck with Italy’s main rail provider, Trenitalia, offering some advantages to reach Milan for the Expo.
For the Summer 2015 schedule, AZ offered flights to 102 destinations with over 4,500 flights every week, all in sync with the other Etihad partners to maximize efficiency.
FIUMICINO WOES, ALITALIA REACTS
As AZ strains to re-launch itself into a successful venture, its immediate environment continues to struggle. FCO has been in a constant plunge since 2010, with numerous strikes, operating liabilities, poor overall service, and a general unreliability that has placed it among the worst airports in Europe.
FCO’s deterioration hit a new low with a massive fire that consumed Terminal 3 at a bar located on the airside in early May 2015. The fire destroyed a large portion of the terminal, resulting in canceled flights and crippled operations. The airport’s management’s poor response made things worse, taking over two months to partially open its most important concourse. Throughout the summer, passengers and airline were invited to wear masks, as the quality of the air remained dangerously contaminated.
In late July, yet another massive fire struck the airport’s surroundings. This time, it was a pine forest next to the main runway, forcing a halt to all operations for over two hours. Chaos again erupted inside the terminals and Alitalia CEO Silvio Cassano complained vigorously.
“Without a decent investment plan to re-launch this airport, Alitalia will leave,” said Cassano. “If Fiumicino continues prioritizing its mediocre service and Low-Cost Carriers, Alitalia will be forced to move out and grow elsewhere.”
It was a dramatic and surprising statement from the airline that practically owns more than half of the airport’s market share. According to Cassano, AZ lost over €80 million (about $100 million) because of the two fires and the botched responses. “Fiumicino doesn’t have the right infrastructure to work as a decent hub for a company with such high ambitions as Alitalia does,” Cassano said. “The current situation is no accident. These issues originated many years ago, when poor investment and planning projects—which are now part of the airport’s structure—took place.” Unfortunately, for an airline that desperately needs operational reliability, FCO is posing more a threat than a solution. Cassano said that the airline is determined to demand compensation from the airport’s management company, Aeroporti di Roma, “for the cancellation of thousands of flights and for the plethora of operational problems that have been evidenced in the fragility of the airport’s state.”
A CHALLENGING FUTURE, STILL
With Etihad’s big wallet backing up its every move, AZ’s future seems quite bright. However, an entrenched operational culture and the lack of a decent hub may end up tilting the balance to the negative side of the equation. AZ may have threatened to leave FCO, but, in reality, it has few viable alternative options. MXP could be an immediate solution—but it’s so close to Paris (CDG), Frankfurt (FRA), and Amsterdam (AMS) that it would conflict with other airlines’ mega-hubs and undermine its competitive strategy. Likewise, the proximity to one of Europe’s most precious regional hubs, Milan-Linate, would pose too big of a challenge to the hub perspective EY wants to impose. MXP’s infrastructure, although exponentially better than FCO’s, isn’t world class, and is located too far from Milan’s city center. AZ moved out of it in favor of FCO back in 2009; going back would just be too much of an operational hassle.
With this in mind, Alitalia’s future is still uncertain. Its new livery, initially expected to be as striking as that of Etihad’s, is not a fan favorite among aviation enthusiasts. Many would say that an airline’s colors aren’t profit makers, though it’s been proven that a positive change of image can enthuse workers to work for the change. And yet, whatever Etihad touches turns to gold. Let’s hope it finds gold in Italy too.