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Alitalia: Is this the end of the line? An airline that is no longer commercially needed

On 2-May-2017 Alitalia's Board of Directors filed with the Italian Ministry of Economic Development for "amministrazione straordinaria" (extraordinary administration). This followed confirmation by the airline's shareholders, including Etihad, that they would not provide the EUR2 billion of fresh capital previously earmarked for Alitalia. The planned new investment had been conditional on employee acceptance of Alitalia's restructuring plan. However, the workforce voted against the preliminary agreement reached with union leaders.

The Italian state has now given Alitalia guarantees for EUR600 million of bridging loans to keep it flying in the short term, and its flight schedule remains unchanged. The new debt is expected to last for around six months and the government is unlikely to follow it with any further cash.

This buys time for the administrators to explore the potential, if any, to save Alitalia, including looking for potential acquirers. The Italian airline's long record of losses, its multiple restructurings and its administrations in the past are likely to deter other airlines from investing. Alitalia has long had a Lazarus-like ability to come back from the dead, but its workforce's latest refusal to accept the need for change could be the final nail in its coffin this time. Presumably they expect some form of government salvation. But even the government may have run out of patience.

Alitalia employees voted 67% against the restructuring plan

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.

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According to media reports, negotiations between the airline and unions had led to a reduction in the number of proposed redundancies – by around 50%, to 980 versus 2,000 – and in the scale of planned pay cuts.

Union leaders had reached 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.

Shareholder investment will not now be forthcoming, leading to 'administration' and search for acquirer

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% – will no longer make a planned investment of new share capital.

Furthermore, the Italian government of Prime Minister Paolo Gentiloni has made it clear that it is not willing to provide new equity capital for Alitalia. It 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's 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 (Reuters, 02-May-2017).

Alitalia's appeal to other European airlines is not obvious…

The Italian government's preference would be to find a buyer for the whole company, which will be 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.

…whether to IAG, Air France-KLM

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.

…or Lufthansa

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.

Potentially, 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.

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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 long 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 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 with Etihad 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, Etihad Aviation Group CEO James Hogan said in a statement on 2-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 (Ghana AWA Air). 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.

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 joint venture 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 joint venture 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 death before

Alitalia, which has not made a net profit since the twentieth 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 it 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 new loan cash is spent – is liquidation. Nevertheless, given Alitalia's Houdini-like history of escaping death 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; other than 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.

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