MIAMI – The plan of the umpteenth Alitalia Fenice, now called ITA, is not only clearly unsustainable in the medium term but also devoid of any public utility value and useless for the development of Italy.
In the scenario of the post-pandemic reset of the airline industry, the seriousness and urgency of any projects and decisions are now unavoidable and almost out of time.
How to Turn a Modest Proposal into an Ambitious Plan
There are only two alternatives, respectful of public money and European standards, and they are placed at the two extremes of the analysis:
1. the voluntary liquidation of the employees and the central/national management of public service obligations (PSO) (including each contribution to the low-cost carriers by the Italian airports) which is the only service that could have a concrete public utility and that would cost less than 1/20 of the amounts allocated for ITA;
2. to achieve the “business discontinuity” invoked by Brussels, not through a perimeter reduction, but rather through a project that contemplates a significant increase in activities up to 300 aircraft, of which at least 75% are new and owned by the airline.
The new Alitalia founding strategic line should be the unit costs reduction (to be duly started already in the Extraordinary Administration) to be able to compete in Europe on an equal footing with real competitors, such as the low-cost carriers.
As a natural consequence of this project, Alitalia could have a great chance to increase the long-haul passengers and cargo activities. Such an ambitious initiative will certainly preserve all Alitalia employees, goodwill, assets (including slots), brands and know-how in Alitalia under Extraordinary Administration (A.S.) as well as the ones of the former Meridiana Fly/Air Italy, thus leading to the rebirth of one of the most important industrial sectors in our Country.
Failed Attempts of the Past
The reasons that lead us to declare only two viable paths – extremely drastic and radically opposite – do not arise from emotional or rhetorical considerations but are rather based on the observation of the numerous failed attempts of the past, that everyone can analyze, from the very reading of the technical data available, on the effort to interpret the near future.
The last one is a task to which, unfortunately, the insiders sitting at the Alitalia bedside never had a great desire to dedicate themselves, not even this time vis a vis the enormity of the predictable and inevitable post-pandemic changes.
It is sad to note that after three pseudo-bankruptcies (2008, 2014, and 2017) followed by as many phases of extraordinary administration managed, unfortunately, with “substantially ordinary” methods and a pandemic that saw the decimation of passenger air transport worldwide in 2020, the Italian Government is trying to persuade the European Union to give the green light to the following:
A project that aims to transform of what remains of the old Alitalia (still in A.S.), into a new “self-sustainable” reality with a fleet of 47 aircraft, 4,500 employees (from the current 11,000), a passenger share of around 7% of the Italian market, and with the only explicitly stated goal of still flying the Italian flag.
An Amateurish Mess
This Alitalia/ITA for which the Government fights so much is a real “amateur mess”: a number of employees inconsistent, by excess, with the actual needs of the 47 aircraft envisaged.
Size of the fleet that would place the Company in the hundredth position in the world rankings. In fact, if we look at the latest pre-Covid statistics for traffic volumes of all airlines – private and public – of the IATA (international airline association), our ITA would position itself, from the start, with potential goodwill equal to 40% of the aircraft used in 2019, approximately 15 million RPKs and approximately 10-11 million passengers, like Egyptair and the regional carrier SriLankan Airlines.
Positioning inconsistent with Italy’s membership of the G7 or G20. Rather a positioning “just to take part”, in the group of flag carriers trying to survive in the hyper-competitive world air transport market thanks to public aid and by leveraging the old bilateral agreements where the States decide on the distribution of routes, flights, and prices. Pity that such a strategy is no longer applicable to the European carriers for many years!
What are the Options for Alitalia/ITA?
It is funny that the new executives of ITA repeatedly declare that they can quickly recover, within two/three years, the fiftieth IATA position by doubling the fleet. Currently, we can imagine two different options:
1) the main competitors, after having replaced Alitalia in 50% of the old 2019 connections, withdraw in good order in front of the impressive display of the Italian flag.
2) ITA, in great secrecy, has access to a hitherto unknown and very powerful competitive advantage. The arrogant intent of ITA’s Board of Directors to deliberate, in 2022 or 2023, an increase in the capacity offered and new investments, with public money, in the presence of substantial losses in the first year/two years of activity, unfortunately, unlike the extraordinary administration, will be easily frustrated once again, because they will also have to present financially sound financial statements subject to the aeronautical economic constraint of the “going concern”.
To start such a curious initiative, the Italian State would like to endow ITA and its Board of Directors with €3bn. With these premises, it almost seems that the Italian Government wanted to sit at the negotiations table on “business discontinuity” with Commissioner Vestager to confirm to the latter what Brussels has always suspected, along with the majority of Italian and European citizens, on the long-standing Alitalia crisis, which can be summed up as follow:
The Italian Government has absolutely no vision or any entrepreneurial ability to profitably manage an airline and that this is nothing more than one of the many initiatives aimed at the useless waste of public money.
Cards with which our Ministers sat at the EU table:
- a confusing strategy and an ITA company size inconsistent with the vaunted Hub & Spoke role of a network carrier; a role that in the last 20 years has been used exclusively as an alibi, by trade unions and management, in order not to proceed with a serious “revolution” of the company organization according to the evolutionary dynamics of the airline industry;
- a prevailing positioning on Rome/FCO, a market characterized by very low and decreasing per capita income (mainly tourist traffic), not compatible with the high costs of Alitalia, with the airport tariffs of ADR (the Rome airport management company), and with a huge presence of the low-cost leader Ryanair at city airport Rome/CIA;
- a financial commitment (€3bn!) equal to at least ten times the amount of the commitment that a private investor would bear (net of the outlay to take over the business complexes) for a similar entrepreneurial initiative at arm’s length;
- no serious strategy and no internal cost and process control culture for a drastic reduction in Alitalia unit production costs which at the moment are approximately double the main competing carrier present at RomeFCO and in Italy;
- an “empty box” ITA – with a Board of Directors of nine people, 40 employees, and many consultants – set up very early which, in addition to demonstrating from the outset the lack of sensitivity to cost reduction, would seem an excellent trailer for a new television series on Alitalia’s industrial crises.
IATA places a return to pre-covid global traffic volumes in 2024. At that date, according to the plan of its Board of Directors, ITA should develop a volume of activity respectively equal to approximately 1/15 and 1/10 of the potential strategic partners, Delta Air Lines (DL) or Lufthansa (LH).
In the intentions of the Business Plan, one of these companies will seek an “agreement that produces significant advantages in terms of traffic and economic margins.” Given the forces at play, the negotiation to obtain these results can only be unrealistic.
Once again, there is no memory of the strategic and management mistakes made in the past thirty years. Nor are the big names in the global consultancy missing from the chorus that, in the wake of what was elaborated in the previous in terms of Alitalia’s restructuring plans aimed at recovering, though indeed never achieved economic equilibrium, prescribe once more, even in the context of the absolute novelty of the post-pandemic ‘reset’; the same usual, wicked recipe, based on the reduction of the fleet and the number of the connections offered.
Further, there is the omission to include even a single project that aims to solve the primary problems of the “AZ_LAI_CAI_SAI_ITA”: fleet, service, productivity, costs, and certainly not alliances, networks, and advertising. The consultants know that in contemporary air transport, those with the lowest seat costs and the highest traffic volumes always come ahead and survive. Politicians and opinion leaders would better get over it before starting any discussion in Europe and before writing any more articles against Alitalia employees in the newspapers.
What is the Right Path?
But which is the path that should be taken? First of all, the definition of a realistic and convincing competitive positioning.
The new business plan, though full of colorful PowerPoint slides, makes no mention of the simple economic principle that oversees the planning and management of a civil air transport company that can be summarized in the organizational concept of the “exploitation of the physiological operating leverage through a continuous increase in production volumes and company productivity flanked by a contextual, continuous and obsessive reduction in costs.”
It is worth reminding planners that, except for those entities protected by local regulations or publicly subsidized, no company in the recent history of air transport has ever managed to improve results, reduce economic losses through a reduction of the activities.
On the contrary, all the business combinations carried out in the last 50 years in the industry have been successful not only thanks to the deregulation processes but also precisely because of an expansion of the perimeter of activity with consequent exploitation of operating leverage, economies of scale, cost reduction fixed and increased productivity. The above points are the facts.
The “old soup” of the new plan re-proposes the story already seen, in a competitive post-covid context in Italy, which will presumably maintain all the old critical issues relating to low rates of economic growth and the high incidence of extra-charges of the “Italian System”, to which the new critical issues deriving from a natural reduction in the number of business passengers by now accustomed to “virtual” relationship methods via videoconferencing will be added.
The above will have a greater impact on traditional carriers or network carriers, what it claims to be ITA. These are mainly based on business traffic compared to low-cost ones, with a tourist vocation, now well established and constantly expanding in our country.
Competitive Positioning and LCCs
Precisely speaking about competitive positioning, the new ITA company, which has 90% of the aircraft capable of flying between Europe and the Mediterranean and which insists on a country with predominantly tourist traffic, must necessarily look at what the European low-cost carriers (LCCs) do.
Over 60% of the Italian market shares are in the hands of LCCs and, in the current plan, the unit production costs of the new ITA will at best be double of those of the first carrier in Italy, called Ryanair (FR) whilst another LCC, WizzAir (W6), an efficiency champion on the FR model, is launching a sensational attack on the conquest of the Italian market.
All this is disdainfully set aside in the new plan and the doubts that Commissioner Vestager’s technicians express on the premises and analyses presented by ITA are unfortunately not lacking in foundation.
National Industrial Policy and Italian Aviation
The second matter to be addressed concerns the national industrial policy and the role of an air carrier in this area. Given the considerable public investment required, this issue is central: does Italy need Alitalia?
The issue should be at the center of the political debate which, in recent years, has instead focused on collateral and often misleading decisions such as the choices on System Charges, Alliances, and the contributions of airports to low cost and the Flag.
That is, failing to change the cultural and management paradigm of the former Alitalia, it was considered better policy to let air transport services be offered only by those who know how to manage the business and limit themselves, without great success, to defend the rights of the Italian workers at the service of a foreign low cost.
Public or Private?
Regarding the public or private nature of the Alitalia company, it is necessary to start from the awareness of the failure of all the private business initiatives of the past.
This confirms, as widely experienced all over the world, how an airline of a certain size expresses an underlying risk that is difficult to manage, at least in phases of exogenous crisis, by shareholders other than States, by major investment funds, or by the undifferentiated public of savers (listed companies).
For Alitalia, however, the same entrepreneurial initiatives, sometimes only supposedly private, caused considerable suffering for the public purse, adding insult to injury.
Being aware of the above, it is rather necessary to focus on which connections are intended to make the company useful for the country, a utility that is difficult to find in the ITA Plan where almost all the future connections will compete with other carriers which, in the absence of ITA, they would continue to have a commercial offer.
Promoting Tourism, Business as a Public Airline
We cannot fail to highlight the Italian vocation and need to have a public ITA that promotes the development of tourism outside the seasonal peaks and that facilitates the business mobility to and from the less served areas of the country such as, for example, the islands or some Adriatic areas.
Looking to the future instead of the past, a company capable of serving the commuting business inherent in the recent phenomenon of European south working, where Italy, at least for its geographical position, has many cards to play.
More generally, concerning national industrial policies, it must be observed that in France and Germany, the presence of a company of significant size, with networks centered on large airports, is capable of generating significant direct and indirect economic development along six lines:
- the development of incoming tourism;
- incremental volumes of foreign passengers passing through the Hub;
- sustainability of “thin” connections that would not be in economic equilibrium with the revenues of the so-called passengers only point to point;
- development of aircraft maintenance activities;
- development of airport handling activities;
- negotiating leverage towards the manufacturing industry for the localization of productions.
A Minumum-sized Fleet
Without going into technical explanations, the minimum size that Alitalia/ITA should have, to become a real driver of GDP, cannot be less than at least 250/300 aircraft. This number is certainly compatible with the future volumes of traffic in Italy and which would constitute the only company size consistent not only with the competitive scenario and economies of scale but above all with the depth of intervention required for a State such as Italy.
Such a public enterprise would presuppose vision, strategy and management radically different from what is currently on the tables where the industrial policy of our country is discussed.
It is well known that an investment of €3bn can support an airline of about 300 aircraft in its fleet. After all, it is enough to follow the criteria of the EEC regulation 1008/2008 and the related EAL 16 models to easily verify what would be a consistent investment with a fleet of 300 aircraft, also considering the resilience of fixed costs which from that size threshold certainly determine considerable economies of scale and purpose.
The objection that such an expansive strategy would not cope with the fiscal constraints of an indebted country like ours is specious and unfounded. The €3bn allocated for the new ITA – to which one must add at least another one or two billion for the management of the redundancies and the pending charges of the old Alitalia in Extraordinary Administration (BadCo) – are certainly not a very different sum from what would be necessary for an expansive plan.
Suffice it to mention that the giant 450 aircraft-strong FR, which operates without patents and trade secrets and with an asset of valuable airport slots lower than that of Alitalia, is one of the most capitalized airlines in the world and has a balance sheet between assets and liabilities of exactly around €3bn.
Op-Ed written by Gianni Rossi. Rossi worked for over 20 years in the aviation sector, first in Alitalia, then in AirOne as CFO, and finally in Meridiana and Eurofly of which he was CEO from 2005 to 2010. He was the last CEO of an Italian commercial airline to have presented financial statements in profit. He currently works in the financial and insurance sector. Featured image: Alitalia EI-ISD Boeing 777-200(ER). Photo: Otto Kirchof/Airways