New entrants and rising traffic have characterised the Italian market in recent years, but the time has come for carriers to consolidate, argues David Jarach, professor of air transport marketing at SDA Bocconi University in Milan
Most service industries, and air transport is no exception, have at some point made the transition from tough regulation to complete deregulation of competitive practices.
In Italy for instance, flag carrier Alitalia's once near- total market domination is a distant memory with more than 20 carriers operating today. This fragmentation has created, at least in the short term, benefits for customers due to new frequencies and destinations and huge price cuts on some trunk routes. However, after several years of fare wars and huge losses, it seems certain that the country's airline industry will evolve towards a new post-deregulation phase of consolidation.
In France, Germany and the UK consolidation is already well under way. Italy, on the other hand, is still helping more operators to enter the domestic arena. These carriers typically provide a marginal increase in market capacity - the standard Italian start-up is based on two regional aircraft - while showing very few strategic and marketing competences. The fight for market share typically works through suicidal pricing wars.
From a financial viewpoint, such an approach only destroys shareholder value in the airlines. Moreover, it does not favour an increase in the strategic weight of the Italian airline industry. It would be better to start the consolidation process.
The short-term goal would be to reduce to no more than seven the number of carriers in the market: Alitalia, Air One, Meridiana, Volare Group, Air Dolomiti plus one or two charter carriers such as Blue Panorama and Lauda Air Italy. In the medium term, successive forms of integration between the survivors would be consistent with this goal. For instance, recent suggestions of contacts between Alitalia and Volare and Alitalia and Meridiana on closer commercial partnerships could, in future, offer these carriers an entry point into the SkyTeam Alliance.
Consolidation would also be useful for Italian carriers to acquire greater strength to react to the potential entry of low-cost carriers on domestic services. The aggressive expansion of easyJet and Ryanair into Europe's main markets, as well as Ryanair's intention to create its third continental hub in Italy, should encourage carriers to achieve new cost structures to counteract the more efficient operators.
Many small carriers will be reluctant to follow this path. Several will prefer to go their own way rather than develop an effective economic management.
The transport ministry and the Italian civil aviation authority ENAC should change their attitude towards air transport, turning from technically supporting start-ups to offering economic and fiscal incentives for industry consolidation. The US airline market started to concentrate in the mid- 1980s. Assuming the Italian market shows a 30- year lag compared to the USA, the time for consolidation has come for Italian carriers
Source: Airline Business
