Alitalia's culture of losses continues. Partners are hard to find
Network economics are a natural force for greater scale, but restrictions on market access, ownership and control are an unnatural barrier. Alliances and partnerships have evolved as the airline industry's way around such barriers.
Alitalia makes an interesting case study. It has 39 codeshare partners, is a SkyTeam member and is part of SkyTeam's immunised North Atlantic JV. It has previously participated in JVs with Air France-KLM on Italy-France and Italy-Netherlands. It has also been the recipient of minority equity investments from Air France-KLM in 2009 and Etihad in late 2014.
A year after entering administration in May-2017, Alitalia is still flying thanks to government loans that are now the subject of an EU State aid investigation.
A search for a bidder has been extended (again) to Oct-2018. Lufthansa, easyJet and Wizz Air are reportedly interested, but will want Alitalia to restructure and will not want the whole airline. Following Italy's inconclusive Mar-2018 general election, a return to state ownership is also being considered.
Alitalia has been kept aloft by partnerships in the past, but has also suffered from having too many masters (airlines and politicians). Outright ownership by another airline might have allowed it to import a more profit-focused culture.
The topic 'Making money (and savings) from alliances and partnerships' will be the subject of a panel discussion at CAPA's Airline Leader Summit in Dublin on 17/18 May 2018.
Panel: Making money (and savings) from alliances and partnerships
As airlines cannot operate freely around the world, but need network benefits to succeed, global alliances were established as multilateral extensions of the many bilateral partnerships that existed widely. Much has changed since the Star Alliance began, to be followed by oneworld and SkyTeam. Where the global alliances have provided an umbrella for closed and immunised JVs, so also have deep bilateral partnerships across Alliance boundaries created new models. And Ultra long haul aircraft, the internet, metasearch, long haul low cost airlines and cross border equity relationships are just some of the fundamental leaders of change. The global alliances are designed to stimulate the financial reach of airlines, but they also have a role in reducing costs. Although they may be becoming peripheral to closer bilateral partnerships, there is still an important role for them - especially for their core members.
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Summary
- Alitalia has been in SkyTeam since 2001 and in SkyTeam's North Atlantic JV since 2010.
- Alitalia had a JV with Air France-KLM on France and Netherlands routes in 2009-2017. Air France-KLM had a 25% stake in Alitalia from 2009-2014.
- Etihad acquired a 49% stake in Alitalia in 2014 and brought network benefits, other synergies and other partner airlines.
- Nevertheless, Alitalia has been unable to escape its perennial losses.
Alitalia has been in SkyTeam since 2001
Alitalia joined SkyTeam, the last of the three branded global alliances, in 2001. None of the reported bidders for Alitalia is a SkyTeam member, and this may mean that its long term membership of the alliance is in doubt.
Air France-KLM has said that it would like to keep Alitalia as a SkyTeam member, but this would be unlikely if Lufthansa were to be the successful bidder (neither easyJet nor Wizz Air is a member of any alliance, but their likely attitudes towards Alitalia's SkyTeam membership are not known).
Alitalia has been in SkyTeam's North Atlantic JV since 2010
Alitalia became a member of the North Atlantic joint venture within SkyTeam in 2010. The JV, which has antitrust immunity, already included Air France-KLM and Delta. Alitalia has always been a more peripheral junior member due to its smaller trans-Atlantic network.
North America is Alitalia's biggest long haul region, accounting for 32% of its seats outside Europe (based on the week of 23-Jul-2018, which is the seasonal peak for Alitalia's network), and the airline has grown seat capacity to the region since entering administration last summer.
Nevertheless, Alitalia serves only six destinations in North America this summer (Boston, New York JFK, Chicago, Los Angeles, Miami and Toronto). The benefits of joint venture membership are clear: it gives access to more than 300 destinations in North America and allows members to coordinate schedules and prices.
However, JV membership places constraints on members in terms of new route launches and frequencies. This caused some friction during the period of Etihad's partial ownership of Alitalia, and questions have been raised over Alitalia's future membership.
The JV is governed by a long term agreement that is valid until at least 32-Mar-2022, but the planned integration of Virgin Atlantic into the JV, and uncertainties over Alitalia's future ownership, have cast further doubts.
Alitalia was in JVs with Air France and KLM on France and Netherlands routes from 2009 to 2017
Alitalia's history of JVs involving Air France and KLM predates the North Atlantic agreement.
In 2009 Alitalia and Air France-KLM signed a JV agreement covering routes between Italy and France and routes between Italy and the Netherlands. This JV, which had competition authority approval, was aimed mainly at providing feed for Air France-KLM long haul routes at Paris CDG and Amsterdam Schiphol, but it also helped to stabilise Alitalia through that period of restructuring.
However, Alitalia chose not to renew the agreement when it expired in 2017.
At that time, Alitalia (by then an equity investment of Etihad Airways) decided to take back slots used by Air France and KLM at Milan Linate to operate its own long haul flights (but faced constraints on North American expansion due to its membership of the Air France-KLM/Delta JV).
Air France-KLM had a 25% stake in Alitalia from 2009 to 2014
In the past, Alitalia's relationship with Air France-KLM also went deeper than participation in joint venture agreements. In Jan-2009 the Franco-Dutch group bought a 25% equity stake in the Italian airline.
The previous year it had offered to buy all of the loss-making and indebted Alitalia, but opposition from Silvio Berlusconi (who was then about to become Italy's prime minister) prevented this. The bankrupt airline was sold, with most of its debt written off by the government, to a consortium of Italian financial and industrial investors prior to the investment by Air France-KLM.
The Jan-2009 deal provided for Air France-KLM to buy a controlling stake after Jan-2013 under certain conditions. When the time came, Alitalia had failed to return to profit in spite of several restructuring plans, and Air France-KLM - with problems of its own to address - declined to take up this option.
Etihad acquired a 49% stake in Alitalia in 2014
Alitalia then limped through 2013 and 2014, pursuing yet more restructuring and funded by growing debt and limited injections of capital by shareholders, before Etihad acquired a 49% stake in Dec-2014.
Etihad invested a total of EUR560 million, comprised of EUR387.5 million for the equity stake, EUR112.5 million for 75% of Alitalia's loyalty programme, and EUR60 million to buy five slot pairs from Alitalia at London Heathrow Airport. This then prompted a further EUR300 million investment by Alitalia's other shareholders and EUR300 million of new loan facilities by Italian banks.
Etihad brought network benefits, synergies and other partner airlines
Under Etihad's influence, Alitalia attempted to move its brand and product more upmarket to differentiate itself from fierce LCC competition in Italy. Alitalia also developed its long haul offer through a codeshare with Etihad, offering a much wider range of destinations in Middle East and Asia Pacific, as well as by launching new routes such as Rome-Beijing and growing its Latin America capacity.
The relationship with Etihad also brought commercial partnerships with other airlines in which the Abu Dhabi-based airline had invested.
In 2014 Alitalia and airberlin started a codeshare agreement, strengthened in 2016 to cover more than 1,400 weekly services on routes between Italy and Germany (and Austria and Switzerland).
During the Etihad years, Alitalia also began a codeshare with Virgin Australia, covering Alitalia's Abu Dhabi-Rome and Abu Dhabi-Milan Malpensa services, and developed its commercial cooperation with Air Serbia and Jet Airways.
The Etihad equity partnership promised synergies beyond those typically sought by SkyTeam and the other global alliances. These included joint action in areas such as procurement, in certain back office functions, and even in the training and deployment of crew.
Alitalia's loss-making culture has not been able to learn from other airlines
However, in spite of the positive influence of Etihad, Alitalia has proved unable to break its long term habit of annual losses.
Over the years its many partnerships of various kinds have given its people insights into how other airlines, often much more profitable airlines, go about their business. Unfortunately, the culture at Alitalia has remained resistant to change, and far too accepting of losses.
In Apr-2017 employees voted to reject what was then Alitalia's latest restructuring plan. Etihad and the other shareholders then withdrew an offer to invest fresh equity capital, which had been conditional on employee acceptance of the plan.
In May-2017 Alitalia went into administration and received state-backed loans to keep flying while administrators looked for possible bidders to save it.
A year on, the situation is essentially unchanged. The deadline to find a bidder for the business has been extended from 30-Apr-2018 to 31-Oct-2018. Lufthansa has said that it will only be interested if Alitalia carries out restructuring first, and the two LCC bidders linked with Alitalia seem unlikely to want the whole airline.
The deadline extension gives more time for another bidder - perhaps one more politically acceptable in Italy - to emerge (although, a year into Alitalia's administration, it is not clear who this might be).
Moreover, with no party currently able to form a government in Italy, it gives more time for a definition of what is politically acceptable to be clarified (and for a homegrown Italian bid, including possible state control, to be considered).
Meanwhile, and adding to the uncertainty, the EU has opened an investigation into the EUR900 million of state loans to Alitalia, for which repayment has been extended to Dec-2018.
Partnerships will continue to be important
It is no exaggeration to say that Alitalia, which has not made an annual profit this century, owes its existence to its partnerships. Without investment by a succession of equity partners, most recently Etihad, it would have gone out of business a long time ago (particularly given the EU restrictions on State aid).
Partnerships below the equity level also include SkyTeam alliance membership, joint venture agreements and codeshares. Although these may not have played such a critical role, they have certainly been important in nurturing and defending Alitalia at key times in its history.
Alitalia's future will remain uncertain until (and unless) a successful bidder emerges in Oct-2018. Nevertheless, if Alitalia can achieve yet another resurrection, it seems certain that partnerships of one kind or another will continue to play an important part in the many lives of this enduring Italian icon.
It seems reasonable meanwhile to assume that the Alitalia workforce will remain sufficiently intransigent over the need to enter into the real world of the 21st century. In those circumstances the range and nature of potential partners remains limited at best.