The no-change business model case study: Alitalia

Airline Leader

The airline industry has relatively few barriers to new entry; by the same token it has been notoriously hard for flag carriers to exit. Only a handful worldwide have gone under - only Malev in Europe, while Swissair, Olympic and Sabena have been reincarnated. Alitalia may soon add to the list.

  • Alitalia's latest restructuring plan failed to gain employee approval, leading to the withdrawal of planned investments by shareholders.
  • The Italian government is not willing to provide new equity capital for Alitalia, and the airline is now in administration.
  • Potential buyers for Alitalia are limited, with only European airline groups like IAG, Air France-KLM, and Lufthansa being serious contenders.
  • Etihad, Alitalia's largest shareholder, has decided not to invest further in the struggling airline.
  • Interest from non-European airlines, such as HNA Group, Delta Air Lines, and Qatar Airways, is unlikely due to Alitalia's track record and limited strategic appeal.
  • The future of Alitalia remains uncertain, with liquidation being a possible outcome if no buyer is found.

The airline industry has relatively few barriers to new entry; by the same token it has been notoriously hard for flag carriers to exit. Only a handful worldwide have gone under - only Malev in Europe, while Swissair, Olympic and Sabena have been reincarnated. Alitalia may soon add to the list.

Alitalia's latest restructuring plan was to have included EUR1 billion of cost reductions and a target to grow revenue by 30% by 2019. The cost cuts were to have come only partly from new labour terms and through job losses, with two thirds coming from suppliers and other non labour related items.

Perhaps the greatest value of the Alitalia case study was expressed by Air France-KLM Group Jean Marc Janaillac in May-2017 when he said "We do not want to end up like Alitalia" as he was promoting the business plan for LCC start-up Boost. Air France's unions have been notoriously inertial in the face of external competition.

Alitalia has not yet disappeared, but after years of missed opportunities to adapt, and numerous airline investors, it is hard to anticipate a serious recovery. Meanwhile, Italy remains an attractive market and home-grown new entrants are being prevented from entering as Alitalia continues its death throes. The sale process was due to conclude on 05-Jun-2017.

The new Alitalia model: "administration".

Extended negotiations between the airline management and its unions had led to a reduction in the number of proposed redundancies - by around 50%, to 980 versus 2000 - and in the scale of planned pay cuts. With this compromise, union leaders were able to reach a preliminary agreement with Alitalia management on 12-Apr-2017, but this needed to be ratified by employees. In a ballot carried out between 20-Apr-2017 and 24-Apr-2017, Alitalia staff voted 67% against the plan. As a consequence of the staff's decision, Alitalia's shareholders - which include Etihad Airways with a 49% equity stake, and a consortium of mainly Italian industrial and financial investors with the balance of 51% - were no longer willing to make a planned investment of new share capital.

Furthermore, the Italian Government of Prime Minister Paolo Gentiloni made it clear that it is not willing to provide new equity capital for Alitalia. The Government would face significant hurdles in the form of EU state aid rules, even if it were willing. According to Italy's Industry Minister Carlo Calenda, Alitalia Chairman elect Luigi Gubitosi, air transport expert Stefano Paleari and Enrico Laghi, who served as a commissioner during the restructure of Italian steel plant Ilva, are to run Alitalia during the bankruptcy proceedings.

Alitalia has made itself unattractive to other airlines. The Italian Government's preference would be to find a buyer for the whole company, which was offered for sale in mid-May. However, other airlines seem unlikely to step in to buy Alitalia. Its long record of losses and the lack of appetite among employees for meaningful change would probably deter other airlines from investing.

Only a European airline group could buy a controlling stake, and only IAG, Air France-KLM and Lufthansa have the scale to be serious contenders to buy Alitalia. However, it is not obvious why any of them would want to buy into an airline with such a history of financial ill health. Air France has been there before and British Airways has previously declined to be involved.

For IAG, Alitalia offers no obvious appeal in terms of geographic proximity or otherwise, although there could arguably be some potential synergies arising in Rome Fiumicino, where Vueling has a base. Air France-KLM allowed its former 25% stake to be diluted significantly in Alitalia's last recapitalisation, and seems unlikely to want to reverse this now - particularly as it has its own restructuring to keep it busy.

Lufthansa, historically the most acquisitive of Europe's big airline groups, has certainly considered investing in Alitalia in the past and has long had an interest in growing its presence in Italy. It briefly established Lufthansa Italia in 2008 and has an Italian regional airline subsidiary in the form of Air Dolomiti.

However, Lufthansa is currently busy working on the integration of Brussels Airlines, of which it acquired full control at the start of 2017, into its Eurowings low cost brand. Moreover, Lufthansa CFO Ulrik Svensson said on 27-Apr-2017 that it was not interested in buying Alitalia.

This could feasibly change if Lufthansa could strike a deal over Alitalia with its 49% shareholder Etihad and if such a deal were also to involve airberlin. Lufthansa Group already has a wet lease agreement for 38 airberlin Boeing 737 aircraft for use in Eurowings and Austrian Airlines, but might see additional value in also taking over the core airberlin network airline that is emerging from that airline's own restructuring.

Etihad has a 30% stake in airberlin, which is also loss making, and its nascent commercial relationship with Lufthansa could possibly lead to a solution that satisfies all parties. However, Lufthansa is unlikely to be prepared to buy into Alitalia's losses without strong reassurance that its employees are prepared for the changes necessary to turn it around. Their recent vote signals the opposite, continuing a historic pattern of behaviour.

Europe's big three legacy airline groups may prefer to see what happens and, if/when Alitalia collapses, they can then move into the following vacuum. On short/medium haul point-to-point routes, Europe's LCCs (including the LCC subsidiaries of IAG, Air France-KLM and Lufthansa) will also likely take this approach. Norwegian has also been reported as denying any interest in buying Alitalia (and, anyway, would not be expected to have had any interest).

Etihad will not throw more good money after bad.

Airlines from outside Europe would be limited to a minority stake in Alitalia, as was the case when Etihad took its 49% stake in 2014. Etihad had hoped that Alitalia could genuinely restructure itself, assisted by the Abu Dhabi airline's cash and industry knowledge, and synergies with other Etihad equity partners - as well as the opportunity to become reasonably successful and return to growth. As a non EU airline, Etihad would not have been able to build an organic presence in the Italian market, other than on UAE routes.

To Etihad, Alitalia was an important part of its strategy to build European presence through codeshares, and to feed its Abu Dhabi hub. This kind of partnership can be achieved without equity investment - but only if the European partner airline continues to exist.

The alternative of moving into Alitalia's markets after its collapse was not open to Etihad, but it now finds itself in a similar position once more, and has decided not to throw more good money after bad. Expressing his disappointment, outgoing Etihad Aviation Group CEO James Hogan said in a statement on 02-May-2017, "We have done all we could to support Alitalia, as a minority shareholder, but it is clear this business requires fundamental and far-reaching restructuring to survive and grow in future. Without the support of all stakeholders for that restructuring, we are not prepared to continue to invest".

Mr Hogan added that Italy remained an important market for Etihad, which will continue its codeshare partnership with Alitalia.

Interest from other non-European airlines may also be low.

In recent times there have not been many other airlines outside Europe that have shown interest in taking minority stakes in airlines from other regions. Three that come to mind are the Chinese conglomerate HNA Group, Delta Air Lines and Qatar Airways. HNA's main European partner is TAP. In addition to owning its own airline group in China, led by Hainan Airlines, HNA has invested in airlines in Brazil (Azul), Australia (Virgin Australia) and Ghana (Africa World Airlines). HNA Group also has extensive holdings across a number of other sectors.

In Europe, its airline equity investment has so far been limited to a stake in the French airline Aigle Azur, although it has also bought aviation services companies that include the airline caterers Gate Group and Servair (49.99%), and the ground handler Swissport.

Moreover, it is in the process of becoming a shareholder in TAP Portugal by joining the Atlantic Gateway Consortium (the consortium also includes JetBlue founder and Azul Chairman David Neeleman, and the privately owned Portuguese transport group Grupo Barraqueiro). HNA has been linked in the media with a number of possible airline investments in recent years, and may be expected at least to be glancing in Alitalia's direction.

However, as with any other potential investor, the Italian airline's track record is likely to be a hurdle. Moreover, the potential for long haul feed that formed part of Etihad's rationale for investing in Alitalia would be a much smaller factor for HNA, which is looking at developing a tripartite partnership with TAP and Azul. Alitalia serves Beijing, whereas TAP has no Asia routes at all, but HNA's current European focus seems to be on developing its relationship with the Portuguese airline.

SkyTeam partner Delta is unlikely to invest.

Delta has small stakes in the Brazilian airline GOL, Aeromexico and China Eastern and 49% of Virgin Atlantic. It is also a fellow SkyTeam member with Alitalia, which is part of the North Atlantic JV with Delta and Air France-KLM. However, Alitalia has not been happy with its membership of the JV, which it views as constraining its ability to expand its network to North America. For its part, Delta has often given the impression that it merely tolerates Alitalia in SkyTeam.

Delta may prefer not to see Alitalia disappear, but it is unlikely that it would feel strongly enough about the strategic imperative to put hard cash into its Italian partner. Qatar Airways' preferred European partner is IAG. Qatar Airways recently acquired a 49% stake in Italy's second largest indigenous airline, Meridiana, and also has a 20% stake in IAG. Although the Meridiana stake signals an interest in Italy, Qatar Airways' principal European partner is IAG and its constituent airlines.

It has initiated a JV agreement with British Airways and a codeshare with Vueling, and deepening its relationship with IAG is likely to be a priority over any consideration of investing in Alitalia. Alitalia has escaped the noose before. The airline, which has not made a net profit in the 21st century, has been through many restructurings and reincarnations, including administration.

The investment by Etihad in late 2014 followed Alitalia's rescue from bankruptcy in 2009, when the company was reduced in size, acquired by private sector shareholders and merged with Air One. Prior to that it had been majority owned by the government, but the then Prime Minister Silvio Berlusconi blocked a possible majority sale to Air France-KLM on the grounds of keeping the airline Italian. It was precisely that obdurate nationalism that has led to the survival of such a weak business - but, also had created and perpetuated that weakness.

A buyer for Alitalia seems unlikely. If none is found, the only likely alternative - once the cash from a new loan is spent - is liquidation. Nevertheless, given Alitalia's Houdini-like history of escaping demise in the past, it is difficult to say with confidence that this time the undertakers should finally be called.

Alitalia is still seen by many in Italy, including among leading politicians, as an important national icon, and the airline will not be allowed to die without energetic attempts to resuscitate one way or another. Indeed, there are plenty of instances of reincarnation in European aviation, whether under the same name or a new one. For example, in addition to Alitalia itself, there are Sabena/SN Brussels Airlines/Brussels Airlines and Swissair/SWISS. In each case there was some bad tasting medicine to swallow; Alitalia's staff apparently prefer to court the alternative. But other airlines can take its place; aside from nationalism, there is no need for it. However, in Europe and globally there are also many celebrated former airlines that no longer fly. There is a market for flights to/from and within Italy, but the airline industry will meet the demand whether or not Alitalia is around to be part of it.

Other, more efficient, airlines (with considerably friendlier inflight crew) have long been usurping it on short/medium haul point-to-point routes, and its disappearance would just accelerate this process without much trouble for passengers beyond the very short term. In addition, there are plenty of hub airlines in Europe that could meet long haul demand via connecting flights, and other long haul airlines that could increase their offer of direct long haul flights beyond Europe. There is even the potential for a new, more efficient airline to take over if Alitalia clears the space. The harsh truth is that - outside a number of unhappy staff - nobody really needs Alitalia.