One troubled Italian flag carrier. Comes complete with imminent restructuring plan, fresh funds, union and government support, reorganised management and a new hub. Are there any buyers out there? It seems not.
Alitalia intends to shape up for privatisation via a four-year restructuring plan. 'But to sell', points out former Alitalia chairman Roberto Schisano, 'you need a buyer'.
The Italian carrier has already 'done the rounds' of the major investment banks this year, yet none are willing to invest, one senior airline source reveals. 'No one has yet asked to buy shares in Alitalia,' confirms Sante Perticaro, former president of the parliamentary transport committee.
Italian investors may be interested, yet Schisano predicts they 'want to wait and let Alitalia deteriorate' before making a move. Even mounting speculation that some of Italy's eager airline entrants may be eyeing Alitalia for future investment is being quashed by the startups themselves. 'Are you kidding? We have problems of our own. We don't need Alitalia's problems,' exclaims Stefano Libotte, commercial manager of Noman.
Still, investment may be secured from further afield. Italians, weary of what they see as Alitalia's ignorance of the competitive facts of life, do not seem likely to oppose the idea of foreign interests buying even a majority interest in the ailing airline. 'Italians don't carry that level of national pride to sustain a company at all costs - even if it is the national carrier,' states Schisano.
The company's former chairman predicts that in three years' time Alitalia will have 'burnt today's money' and become a privatisation target for a foreign carrier. 'Strategically, Alitalia may be an interesting bite for someone with cash, willing to struggle their way with local politics,' he maintains.
Although Alitalia's management refused all interviews due to the sensitivity of negotiations with the European Commission, the carrier confirms in its restructuring plan that it is gearing itself up for privatisation. Whoever the buyer, Alitalia must first attain profitability, which seems far off considering Alitalia's current finances. Alitalia's 89.3 per cent shareholder, government holding company IRI, predicts a ninth consecutive year of losses for the airline in 1996, and estimates losses will reach 1.2 trillion lire ($788 million), including 800 billion lire of restructuring charges. Alitalia recorded a loss of 85.9 billion lire in 1995, mollified by the sale of its holding in Aeroporti di Roma to IRI's finance arm, Cofiri.
Profitability is, however, expected in 1997, following an injection of 3,000 billion lire (US$2 billion) of new capital into the debt-ridden carrier. IRI has pledged to inject 1,500 billion lire of this, and to 'participate in the subsequent phases of recapitalisation,' but it has not guaranteed to provide the second tranche even though it is part of the plan. The new capital will enable the carrier to pay down debt and meet restructuring costs.
In October, the European Commission was expected to specify whether the funds from IRI constitute state aid. If they do, the carrier will need the Commission's approval for the recapitalisation and the restructuring plan, and the Commission is likely to impose conditions. Italian government sources argue that the money is not state aid as this is 'a first time, last time capital injection, that will be used to improve Alitalia's competitiveness and not artificially to reduce fares'.
Schisano points out in Alitalia's favour that the carrier has to date received little financial assistance from the government. 'Alitalia has been given less state money than any of its European competitors'. Yet many in the industry see this as state aid. 'It's not a market transaction, as no rational investor would do this,' says a Brussels-based analyst.
However, the Commission is presently preoccupied with the 1,000 billion lire cash advance handed over to Alitalia in July by IRI without first notifying the Commission. The Commission is interested 'how the state is going to get around the fact that the money from IRI was given so quietly,' says a senior Commission source.
Alitalia secured government aid by referring to the 'terrible liquidation costs' that would ensue from the alternative of bankruptcy, states one Italian source. Italy's centre-left government supports Alitalia's rescue plan as 'it cannot afford another crisis', extrapolates Schisano.
Government support is intrinsically linked with employee consensus, as 'the present government can only survive by union support,' explains Schisano. In June Alitalia hammered out a deal with eight unions representing its pilots, ground staff and some cabin crew, under which employees agreed to cost cuts of 520 billion lire ($340 million) over the next four years. In exchange, they will be offered shares in the airline, equating to a stake of between 20 and 30 per cent. The unions also will be allowed three members on the board of directors and one on the board of auditors.
Alitalia's trade union agreement refers to the employee ownership scheme as 'an absolute novelty in the Italian industrial scene', superior to 'traditional' agreements 'reached across the classically hostile bargaining table' and underlining 'the general consciousness of the need for structural changes'.
Giorgio Scoppetta of Alitalia's ground and cabin crew union, FIT, welcomes the scheme as a means of employee influence in Alitalia's future. 'We want to be in a position to discuss how we are to be privatised and have a say in our future.' Scoppetta envisages that Alitalia management will purchase a shareholding of around 10 per cent in a similar defensive move.
While the scheme may offer immediate benefits, some foresee long-term repercussions. One Italian airline director predicts that the scheme may dissuade potential foreign investors. He further warns that Alitalia is effectively mortgaging itself as, although the scheme will reduce immediate costs, Alitalia will have to 'physically pay' in five years' time when employees are able to cash in their shares.
In return for the Esops, unions have agreed to a 20-30 per cent reduction in salary costs, set to save Alitalia 400 billion lire by 2000. The other 120 billion lire in employee concessions will come from productivity gains. Alitalia has stated that no employee will be fired, though 1,200 ground staff will retire early at the end of 1996 and a further 400 next year, while 1,000 cabin crew will be replaced by lower waged employees. Pilots, meanwhile, have agreed to cut overall costs. Alitalia pilots' wages are currently three times higher than their domestic competitors, claims Noman's Libotte.
Yet not all unions have agreed to the restructuring. Alitalia's main cabin crew union, Sulta, has rejected the plan. Sulta views the employee ownership scheme as a 'cultural revolution, which confuses what a union should be'. Sulta's main objection, however, is to Alitalia's planned low-cost subsidiary, Alitalia Team, due to be launched at the end of 1996. The unit is the long-awaited response to the recent spate of low cost Italian startups, which places Alitalia 'at a serious cost disadvantage of 12 per cent,' admits Alitalia's restructuring plan. Competition should further heighten with the onset of full cabotage for all European Union carriers in April 1997, which, Schisano predicts, will have the effect of driving domestic prices down by 30 per cent.
Alitalia pilots will be transferred to the low-cost airline under temporary three-year contracts. Alitalia Team plans to hire 1,500 cabin crew, under contracts assuring 30-40 per cent higher productivity than the Alitalia average, for half the wages. Alitalia flight attendants believe these limits will be imposed on them, when their contracts end at the end of 1996.
Lamberto Contigliozzi of Sulta's secretariat sees Alitalia Team as an internal competitor within the Alitalia group and says it spells the 'beginning of the end of professional cabin attendants in Italy'. Sulta is weighing up two courses of combative action - either further strikes, on top of the three this summer, or efforts to establish uniform working conditions for cabin attendants throughout Italy.
Contigliozzi predicts that in a few years, attendants will be transferred to Alitalia Team, 'the only company within the Alitalia group that can develop', or 'given an incentive to get out'.
He envisages that within five years, Alitalia Team will be highly competitive, with costs 50-60 per cent below its parent's. This will trigger off Alitalia's privatisation. 'Alitalia Team will be sold off first, before 2000, as it offers high productivity, low costs and no debts.'
Alitalia speaks in its restructuring plan of its intention gradually to transfer short, medium and long haul aircraft over to Alitalia Team. Scoppetta claims that Alitalia will transfer a fleet of 12 A321s, plus a further 24 currently on option, for European services, in addition to eight Boeing 767s for intercontinental flights, predominantly to North America, South America and Asia. The new carrier will cover both existing and new destinations under a low-fare structure, he adds.
Avianova will continue to focus on regional and domestic destinations, but Contigliozzi expects it to merge with Alitalia Team within two years. Meanwhile, Air Europe's chairman Lupo Rattazzi confirms that Alitalia is looking to create a new longhaul and shorthaul charter operation by merging Air Europe, in which Alitalia has a 24.5 per cent stake, with Eurofly, which is 45 per cent owned by the Italian flag carrier.
Alitalia will continue to operate some European routes, using 40-50 MD-80s, and long-range routes, mainly with B767s. Contigliozzi predicts that Alitalia's A300s will be phased out, as will its B747s in 1997 and its MD-11s in 2000. In its restructuring plan, Alitalia states that it will add 15 long and short-medium range aircraft to its fleet between 1998 and 2000.
The new fleet plan may combat problems experienced with Alitalia's fleet, which experts criticise for its age and diversity. 'Historically Alitalia has operated planes which are too large for the route network they serve, with a higher capacity base than it needs. Alitalia's load factor is 10 points lower than its better competitors, which increases unit costs,' says Schisano.
Alitalia's current fleet concerns centre on insufficient short-range aircraft, as deliveries of Fokker 70s to Avianova have been scuppered by the Dutch company's bankruptcy. To date, the airline has five F70s, but it based its original regional fleet plan on 15. Plans to launch twice-daily weekday flights to London/City have been postponed because of a shortage of F70s.
Help is at hand, however, in the form of Italian startup Alpi Eagles. 'Alitalia is thinking about transferring routes and its fleet of F70s under an imminent commercial agreement with Alpi Eagles', confirms the carrier's commercial director, Michael Harrington, a former Alitalia manager. The aircraft would operate alongside Alpi Eagles' fleet of four F100s.
Alpi Eagles is just one of a plethora of Italian start-ups whose appearance has caused a commotion in the hitherto stagnant domestic market. Air One's entry on the profitable Rome-Milan trunk route has been the most significant, and the carrier was set to step up the competitive pressure by launching services on Turin-Rome and Naples-Milan in October.
Air One stresses that Alitalia will benefit from competition. Not only is it stimulating the domestic market by attracting new passengers, but Air One is also providing longhaul traffic for Alitalia, says a spokesman. Air One says that traffic on Rome-Milan rose 15 per cent in the first quarter of 1996, and claims a 24 per cent market share on the route. Moreover, the spokesman adds: 'Competition will force Alitalia to become more efficient, raise productivity, lower costs and force its own employees to face reality.'
Indeed, employee attitude has so far been a key disabling factor in Alitalia's development. 'Alitalia needs to change the mind-set of its employees, who have been protected from commercial realism,' says one London-based banker. 'Alitalia's profit margins fell when people became familiar with the superior quality of service, and friendlier atmosphere and punctuality offered by competitors,' continues a former Alitalia employee.
Others concur. 'Alitalia must turn its workforce from a liability into an asset by establishing an employee rewards/punishment system and real leadership from the top,' says one US-based consultant. Indeed, Alitalia's new chairman, Fausto Cereti, and managing director Domenico Cempella, have already made some progress. Just after their appointment in March, they cut the number of top executives by seven to four who now report to a general management division.
The aviation consultant further advises Alitalia to improve its customer service by focusing on exactly what product it means to sell. 'Alitalia is trying to be all things for all people; trying to build up a higher quality product, and simultaneously offer an affordable domestic service.'
He urges Alitalia to pay particular attention to the service quality on its European routes, where its revenue share is 'lagging way behind', though he sees this improving via an effective European marketing alliance.
Schisano, however, is confident that Alitalia has the capability to stand alone in European and domestic markets. He warns against an alliance with a powerful north European partner, such as KLM or British Airways, which would put Alitalia in danger of being 'swallowed up'.
Alitalia is currently said to be reviewing its codesharing and joint purchasing agreement with Malev Hungarian Airlines, with a view to selling its 30 per cent stake in the airline.
Alitalia is in dire need of close partners further afield in North America and Asia; currently it has only a limited alliance with Continental Airlines. Alitalia's lonely stance is not due to a 'lack of desire or determination' on the carrier's behalf but is because 'Alitalia is not a palatable partner', says Schisano.
Continental's president Gordon Bethune confirms that Continental and Alitalia are considering expanding their daily Newark-Rome flight to a twice-daily service and starting a Newark-Milan flight, to be operated by Continental. Bethune says the two carriers were to decide by the end of September whether to 'expand or kill the whole thing'. If the deal does not work, Bethune claims he would 'rather take the plane and go to Portugal with it'. Continental is due to start a Newark-Lisbon service in May 1997, using a Boeing 757.
Alitalia is also rumoured to be speaking with Arab carriers with a view to a potential alliance. Schisano sees this as an excellent plan. 'Rome is the best way to get to the Middle East, offering rich business traffic.' Alliances will not, however, involve stock ownership which restricts commercial freedom, a government source predicts.
Alitalia may also invite potential partners to invest in the development of Milan/Malpensa as a hub for international and European flights, in addition to the present short-haul operation at slot-constrained Milan/Linate. When construction work is finished in 1998, Malpensa should enable Alitalia to attract long haul passengers from the north of Italy, who previously turned to airports such as Munich and Zürich, rather than flying via Rome. Improved road and rail links should combat Malpensa's current poor connections to the centre of Milan. Still, Schisano warns that Alitalia would have been better served defending Milan/Linate as 'it is way too late with Malpensa - that market already belongs to Swissair and others'.
Alitalia foresees Malpensa as marking the start of the company's relaunch and growth. Following the financial restructuring plan, Malpensa will help the carrier 'achieve a solid position among its major competitors' , says the plan.
Others do not share Alitalia's optimism. 'Alitalia will hobble along for some time, until the next crisis in a few years. That will be the final showdown,' predicts Schisano.
Source: Airline Business
