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Alitalia's and Austrian's holidays are over. Colliding fortunes as reality strikes

25-Aug-2008

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Holiday time is over and it is back to reality for two of Europe’s airlines that are this week on a collision course as they seek a way out of their deep financial holes. For Alitalia and Austrian Airlines, the options are narrowing – and the Italian flag is probably now beyond saving.

In the world of political promises, anything is possible, but even by those standards, Italian Prime Minister, Sr Berlusconi’s recent assurance of a “miracle” for Alitalia may be a step too far.

The real problem arises when the rubber hits the road. There is something about financial accounts that have a finality about them.

Fact: Alitalia lost around EUR400 million in the last period, more than eclipsing the EUR300 million “loan” extended – probably contrary to EU subsidy rules – by the government. By any serious financial assessment, Alitalia is bankrupt.

Fact: the ailing airline’s unions display a level of intransigence that is extreme, even by airline standards. Another fact: the consequent lack of commercialism is a direct cause of the Italian flag carrier’s persistent financial losses, even while others were making money right under its nose. It was union obstinacy that caused Air France to walk away from involvement earlier this year.

And, apart from some gentle hints from Sr Berlusconi that his miracle would involve a few job cuts, no sign has emerged that the workforce would consider a radical softening of their historical position. Indeed, the Prime Minister’s extravagant assurances appear to have increased the stakes so significantly that compromise becomes near-impossible. Only the “buyers” themselves are not yet locked into this dangerous cycle.

Last week, sources in the Italian government suggested that Lufthansa was now in “pole position” to buy Alitalia, presumably after being given a sniff of high octane fuel from Frankfurt – and perhaps because there were no other starters. The Star Alliance leader is the only one left standing, after previously deciding to remain out of the race. (However, the prospect of its greatest rival being (reportedly) interested is the only thing that would revitalise Air France’s re-entry into the race. If in reality there is a contest.)

The main attraction of Alitalia is its market presence, rather than its dubious attractiveness as an airline partner. And even this is quickly eroding, as the airline is forced to wind down, to reduce losses. Other airlines have moved quickly to assume market share at Malpensa, for example, where Alitalia has reduced its operations by two thirds this year and is now only second in terms of market share.

This is another hole that Sr Berlusconi has dug for himself as he embarks on his mission: a key coalition member of his government, the Northern League, has a special attachment to Milan’s new airport and has a strong desire for it to remain a northern long haul hub, instead of rendering all to Rome. As part of its earlier proposal, Air France had insisted on moving the hub to the capital.

In Mar-08, while electioneering, Berlusconi himself stressed the importance of Malpensa, relative to Alitalia: “The loss of Alitalia would add up to some hundreds of millions of euros, while the loss of Malpensa could mean billions of euros.” That was before he was elected certainly, but the Northern league won’t be forgiving.

Milan Malpensa Airport capacity share (seats): week commencing 25-Aug-08
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Source: Centre for Asia Pacific Aviation & OAG

Italy’s second airline, Air One, has also put its hand up in the past as a buyer. A commercial partner of Lufthansa for eight years, Air One codeshares on many routes with the German flag. Its northern base in Milan was formerly at Linate, but is now evolving into Malpensa. Together with the Lufthansa-Swiss group, their accumulated 13.2% market share at the airport easily exceeds Alitalia’s.

Presence at Malpensa is a political positive, but a national combination of all three airlines would not easily slip through the EU’s competition requirements, especially where their joint share at Rome’s Fiumicino Airport is 56.9%.

Rome Fiumicino Airport capacity share (seats): week commencing 25-Aug-08
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Source: Centre for Asia Pacific Aviation & OAG

Unfortunately for the Italians, their national flag carrier is not the only one to be peering over the brink. Closer to home, Lufthansa is also reportedly this week enjoying favourite - and urgent - attention from Austrian Airlines’ board, an airline in which Air France-KLM is almost certainly a starter, even though the Austrian carrier too has all sorts of ownership and viability concerns.

One thing has to be certain. In the current environment, Lufthansa will be embarking on a highly dangerous mission if it were simultaneously to try to consummate both of these relationships. The distraction from its main game could be deadly, given the political maelstrom guaranteed to accompany a stake in Alitalia.

It will therefore have to decide between the two, perhaps leaving the other for a bid by Air France. But time is running out for Alitalia, for whom it is a matter of days now, not weeks. Only a miracle can save it now.


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