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Arrividerci Alitalia. Bonjour Fralitalia


This is the Perspective from today's edition of Europe Airline Daily - the comprehensive new pre-digested daily update on strategic news from Europe, saving you time and keeping you right up to date. Complimentary subscriptions to this report are currently available. Register now!

Last week, as two European airlines – one of them a “flag carrier” – collapsed, few would have noticed a small airline on the other side of the world reporting a profit.  It was Polynesian Blue, hardly a major company, but the event was significant in one respect. For many years, the government of tiny south Pacific nation, Samoa, had squandered much of its annual GDP running an inefficient and unsuccessful flag carrier. In October 2005, Australian airline, Virgin Blue, became a 49% shareholder in a new joint venture with the government and took over operations of the carrier. Tourism traffic has increased nearly 50% annually, the airline has repaid an establishment loan from the government and is making money!

For Italy’s flag carrier, Alitalia, which sought “admission to the receivership procedure” under Italian law on 29-Aug-08, comes all the relief of a long term invalid finally facing up to the surgery that can make a new entity of it. A new operating formula can now be developed. There will be pain inevitably, for some employees and contractors, but the end can hardly come as a surprise.

Alitalia is fortunate even to have the opportunity for a new start. That’s because it is not just an airline, but an entrée to the Italian market it has dominated for decades. So, despite the airline’s otherwise unattractive appearance – a battle-hardened (against management, that is) workforce and a weary aircraft fleet, dominated by MD-80s and -90s with an average age just shy of 20 years – at least one handsome suitor remains.

The reported restructuring plan would allow the operational parts of the airline to be isolated, with recapitalisation by a number of Italian entrepreneurs, thus reopening the door for Air France to secure a realistic minority partnership. This time around, the recalcitrant unions will be faced with fewer options, as the alternative to a partnership with Air France will be, well, not much.

Air France has confirmed its interest, following discussions mid-week in Paris. The board announced, with some nuances remaining, that "Air France-KLM confirms its intention to remain Alitalia's strategic partner. To this effect, and if it can be confirmed that the new company will be profitable, Air France-KLM is ready to take out a minority stake in the new company's capital alongside the investors,"

Presumably the Italian investors, undoubtedly expecting political sunshine for making Mr Berlusconi look good, will have escape routes if a deal with the French carrier cannot be consummated. And, in turn, if Air France cannot reach a fundamental understanding with the unions, the whole deal crashes in flames. (Despite trying to beat up a bit of competitive tension by suggesting that Lufthansa may be interested, that really seems a bridge too far at this stage.)

So, when Alitalia’s unions meet government official to thrash out an understanding today, they don’t start from a strong position. But they still have the power to undermine Berlusconi’s “miracle” - and that will be their main card. This is where Air France needs to insist steadfastly on clear and effective cutbacks up front, because, once the Italian government has the problem off its hands, the new villain in any disputes will be the foreign airline partner, which, shockingly, seeks efficiencies. And Mr Berlusconi will become the good guy.

Italy is a great footballing nation and there is no more experienced team than the nation’s political footballers. Senior government officials have already begun creating expectations guaranteed to make life difficult for the next owners. Mr Berlusconi has assured there will be less staff sacrifices than under Air France’s original proposal and at the weekend, Labour Minister, Maurizio Sacconi, opportunistically promised (or “hoped”) that layoffs will be less than 5,000, far short of the 7,000-plus that Air France had previously sought.

There are some other threats too. Brussels never likes to be left out of any local excitement and, on recent experience, the Italians will seek to push EU competition and subsidy rules beyond the limit – for example, Air One will apparently be subsumed into the reconstituted airline, some aggressive refinancing is to be done and generous layoff payments are likely to be promised to mollify unions.

Air France has enjoyed a highly successful relationship with KLM, but the smaller airline well knows the challenges of partnership with Alitalia. KLM has been to Rome before and had to go through a costly and painful exercise to extricate itself. Pre-nuptial stars in the eyes this time around will be tempered by that experience.  The prospect of lingering disputes with unions, as well as complex legal disputes with Brussels, is not the stuff of commercial good news, while the operating environment toughens for everyone.

Meanwhile, on the sidelines, Austrian, SAS and Olympic should be taking notes. It has taken 61 years for Alitalia to have a hope of sustainability and now salvation is in sight. But you don’t get to heaven without dying first. A remote Pacific island offers some alternative for those who don’t want to go that route.

Footnote: Unfortunately meanwhile, for UK-Canadian private airline, Zoom, which ceased operations on 28 August, it had no government to bail it out. Zoom will become just another statistic, even if a lot of travellers (and one or two small airports) are greatly inconvenienced.  Such is the gap between flag carriers and commercial reality.

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