Bloomberg's 24 March report that the Italian government was considering emergency financing for Alitalia to aid the flag carrier's latest rescue plan was hardly a surprise.
There appears to be a distinct lack of interest from external finance providers and existing creditors until there is a new labour agreement in place.
If anything, government support sends out the wrong signals and makes achieving the necessary change more difficult. As has been demonstrated elsewhere, it is only when management and the workforce recognise a government's unwillingness to provide further support that minds become fully focused on the task in hand. While "precipice management" is not ideal, it is sometimes necessary.
Alitalia's last turnaround plan in 2014, which was launched following Etihad Airways' investment, envisioned the Italian airline being profitable in 2017. But the ambitiousness of that goal was illustrated by Il Sole 24 Ore's November 2016 report suggesting that Alitalia would record a €400 million net loss for that year.
Now, a new target of reaching profitability in 2019 is considered by many to be optimistic.
CONSIDERABLE COST
The forthcoming pain at Alitalia is aimed at creating long-term sustainability. But there is a real risk of the unsustainable being sustained a little longer and at considerable additional cost.
There is also a need to be clear what sustainability actually means. Alitalia will have to demonstrate an attractive trading valuation arising from a real improvement in its financial performance as, well as the strategic value that lured Etihad. These are laudable objectives, but are also similar, if not identical, to those that employees, managers, analysts and owners hear every time a company embarks on a turnaround plan. The achievement of such an outcome, in tangible and real terms, is the exception rather than the rule.
Restructuring is not costless. If you are the management of a company that is both financially weak and facing a deterioration in financial performance, there is a particular need to demonstrate to those providing the funding that the plan will at least deliver the expected outcomes to structurally and fundamentally improve the airline's position in its marketplace.
All too often such plans fail to take into account what competitors are likely to do during the implementation phase and with what consequences, particularly for revised targets. In any strategy, let alone in distressed circumstances, it is better to plan for the worst rather than best case; a competitor is going to use your difficulties to their advantage.
Furthermore, the more public the plan, the better the idea the competitors will have of not only the challenges, but also where to focus their attention.
Being able to fund the transition is of course not the only management challenge. Almost by definition there is a real risk that, as a result of what economists define as "errors of omission and commission", the cash-generating capability of the business undergoing transformation/turnaround will be compromised, with damaging consequences.
At the simplest level, a turnaround plan has three key elements: the eradication of waste (including the wasteful deployment of aircraft on structurally loss-making routes); improvements in processes with, if necessary, a concomitant reduction in labour; and a plan to grow into the future following the transformation.
TANGIBLE SHRINKAGE
Such strategies may be categorised as "shrink, survive and grow". In the case of Alitalia, the most tangible cuts will be reduction of 20 narrowbody aircraft; a 51% reduction in office staff; and a 20% cut to non-flying operational roles. It has also been suggested the company is seeking to reduce pilots' salaries by 22-28%.
The growth is foreseen coming from the addition of six long-haul aircraft, which will only be introduced if the company is profitable in 2019. While this may be interpreted as a carrot-and-stick approach, such a route to profitable growth must, even at this stage, be considered more of a hope rather than an expectation.
Alitalia is of course not the only airline where management has recognised the significance of the challenges that they face; Cathay Pacific provides another clear example, having in January announced – to an apparently underwhelmed audience – its "Time to Win" programme.
The developments in Italy and Hong Kong provide very clear examples of the need for strategic plans – whatever the circumstances from which they arise – to be coherent, credible and, in particular, capable of implementation.
Management in such circumstances should be assessed in terms of its ability to walk the walk rather than talk the talk. While the coherence and credibility of a plan are important and fundamental, the ability to successfully implement it, and achieve the results, is even more so. This skill set often appears to be missing from management toolboxes.
Source: Airline Business
