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High noon for Alitalia

15-Sep-2008

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The sun is directly overhead in Rome, as unions face up to reality on Main Street.  The ultimate spaghetti western is set to play out over the next couple of days. Suppliers are stepping back from advancing credit terms and the airline’s forward sales – a critical part of the daily cash flow – are rapidly drying up. In this scenario, the end can come suddenly.

Over the weekend, as it became clearer that the Berlusconi government was powerless to intervene once again to prop up Alitalia, however willing, some hints of compromise and partial concessions did begin to appear. But the reality gap still appears too large to permit a viable solution.

On Friday, the “Extraordinary Administrator” for Alitalia, Augusto Fantozzi, announced that a key part of the rescue plan was being abandoned, at least temporarily. Due diligence work on the sale of two assets with real value, the heavy maintenance and cargo arms of the airline, was suspended. Industry group, CAI, was to have invested around EUR1 billion and secured a merger with Air One, probably with Air France-KLM as a minority partner.

This outcome, like most of the underlying problems with Italy’s flag carrier, reflected the continued intransigence of the airline’s nine unions, reluctant to give away conditions and pay levels which employees at other airlines could only dream of.

Even though the current meltdown might be portrayed as a result of high fuel costs, that factor cannot be used to explain why Alitalia has not made a profit in ten years. This is despite having just passed through three years of the best operating conditions in the history of the airline business, along with a strong Italian economy.

In fact, in its 62 years of operation, Alitalia made a profit on one year only, 1998, but compensated for that aberration by losing almost USD4 billion since then. The Italian taxpayer has generously contributed some EUR5 billion over that time to pay for the carrier’s high life. High pay levels, excessive staffing numbers and restrictive work practices have made Alitalia uncompetitive in a world that has changed rapidly since European skies were opened over a decade ago.

Undoubtedly, with his promise to find a “miracle” solution, Sr Berlusconi has inadvertently made the cause more difficult, because unions appear to have taken this as a signal that government support would be forthcoming. It is possible that a more blunt assessment would have generated greater clarity of vision. But now, whatever happens over the next few days, there is little hope of long term survival for Alitalia in anything like its existing form - if at all.

Moreover, in framing a solution, mere “survival’ of the airline would not be enough. Simply perpetuating a compromise operation will not achieve anything useful.

The chaos caused by collapse of an airline that holds a dominant position in the country’s air travel market will be politically uncomfortable for the government and for national economic activity. But it will be short term. A compromise airline – with disaffected unions and a still-inefficient operation – will only lead to more losses and continued market distortion, preventing overall recovery and efficiencies.

There is in any event a high probability that the attempted solution cobbled together by Sr Berlusconi (and apparently supported by Sr Fantozzi), would breach EU competition law, so leading to a further sequence of dispute and uncertainty, even if it did get up.

Meanwhile, as Alitalia loses market traction, other airlines are moving in to mop up much of Italy’s lucrative traffic flows, especially in the north, a region which embraces Switzerland’s affluent southern canton of Ticino. Each step in this direction is another lost market for the Italian airline, making recovery more difficult. Lufthansa for example last week announced it will launch service from Milan’s Malpensa Airport in 1Q09 to an array of cities, including Barcelona, Brussels, Budapest, Bucharest, Madrid and Paris. London and Lisbon will be added for the summer.

If a solution is not engineered today – a very unlikely prospect – the next step is likely to be liquidation of the various parts of the airline. Under current conditions and with the government prevented by EU law from subsidising the airline, Alitalia is unlikely to be able to pay its direct operating costs, such as fuel and airport charges. This would precipitate suspension of the carrier’s licence.

Sr Fantozzi has indicated that termination advices are likely to be issued quickly, for at least some of the 20,000 staff. He had previously announced plans to terminate a number of collective agreements. Transport Minister, Aletro Matteoli, has attempted to intervene to find a compromise, but without success. And the Prime Minister himself is making a last minute attempt to seek compromise. But the nature of his tone has changed, shifting the blame onto “left wing” unions, as the prospects slimmed.

Certainly, seeking to get nine unions singing from the same page at a time like this is a big ask. The effect of Alitalia collapsing is near-unthinkable, particularly for many staff. But the impact on Italy, as it loses a major employer and travel provider, will be more than economic. Alitalia is a national icon, for better or worse.

Hopefully in its departure, some recognition will arise that the days of national flag carriers are gone, along with all their anti-commercial overtones that have done so much to inhibit rational airline growth. Italy will not lose air service as a result of Alitalia’s demise. Indeed, it will quickly benefit from a flurry of foreign carrier interest that will more than fill any gaps.


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