KEVIN O'TOOLE / ROME
Alitalia's new chief executive suggests that the photographer should not take a picture of him smiling. The airline's situation is too grave for that. He is, of course, joking, but not entirely. Despite his easy-going manner, Francesco Mengozzi is deadly earnest about the need for a fundamental reorganisation at Italy's flag carrier. Having spent much of the past decade preparing other of Italy's state-owned companies for privatisation, he knows of what he speaks.
After six months in the job Mengozzi has already signed the carrier up to SkyTeam, ending a year of uncertainty over Alitalia's alliance strategy. Meanwhile executives are hard at work finalising a new business plan, which is due to be put to the group's state shareholder by the start of October. The aim is to chart a path to recovery, which will, at long last, allow Alitalia to press ahead with the last phase of its privatisation.
Mengozzi is not the first new chief executive to come up with a new business plan. Over the past decade, three predecessors have sat in the chief executive's office at Alitalia's imposing concrete headquarters perched outside Rome. Each has set out a new plan only to see it fall victim to a mix of politics, labour unrest or just bad timing. There are reasons, however, to wonder whether Mengozzi might just be the right man at the right time to pull off that elusive privatisation.
When he arrived at Alitalia back in February he was something of an unknown quantity. As Mengozzi himself admits, he is not "an industry man" and seems genuinely surprised to have been asked to head the airline. His background is firmly rooted in finance and administration, most recently as director general for the Italian state railways. In fact he confesses that he was considering a move to an investment bank when the unexpected summons came to head Alitalia. He accepted, but as much out of a sense of civic duty as any personal career aspiration. "Like military service," he suggests with a smile.
However, it is perhaps not too hard to uncover why Alitalia's state owners chose to turn to a pragmatic administrator like Mengozzi. Since the early 1990s he has played a part in the great tide of privatisations which have swept their way through Italy's bloated state-held sector. Not long after starting out in financial services as a young law graduate in the early 1970s, he found himself within IRI, the giant state holding company, which at one time seemed to hold the bulk of Italian industry, including Alitalia.
He was soon involved in setting up a new business unit as a vehicle through which to reorganise and sell off IRI holdings in sectors ranging from construction and engineering through to Gruppo Autostrade which runs Italy's freeways. Then, after a spell at state broadcaster RAI, he moved out of IRI to become director general of Italy's notorious State Railway Company. A former Italian prime minister was once quoted as remarking that the world holds two kinds of madmen: those who think that they are Napoleon and those deluded into thinking that they can reform Italy's railways. Despite these odds, Mengozzi was instrumental in seeing through a major reorganisation of the company and its finances, including the sale of Grandi Stazioni, which holds the country's major railway stations, as well as helping to put the business on course to make a profit this year.
He is certain that Alitalia too is capable of being seen safely through to privatisation. That change of ownership he believes is likely to mark the real chance for change at the airline. "It is my deep conviction that it is possible to achieve much more change within a company when the shareholders change than when you just change the management," he says.
The concept of privatisation is much better accepted in Italy now than it was even a few years ago, he adds, pointing to the massive privatisation programme which has taken place over the past decade and of which he himself was a part. "The environment is different today. Privatisation has been accepted in Italy as a necessity." Neither does he see the same national sensitivities at play surrounding the prospect of selling the bearer of the national flag. "That mentality has disappeared. It's perceived as a company ready for full privatisation. There are no more psychological barriers to go through," he argues.
However, Mengozzi is at great pains to avoid any speculation on the likely shape or timing of a privatisation, carefully leaving such questions to the government shareholder. The management's task, he says, is rather to deliver the necessary restructuring which will allow the privatisation to take place. Perhaps wisely he is clearly not about to give public advice to the group's political masters.
In fact, Alitalia is still getting to know its new owner. Even since Mengozzi was appointed, a new coalition has come to power. The man who now ultimately controls the majority stake in Alitalia is the influential finance minister Giulio Tremonti. So far the relationship appears to be going well enough. Tremonti turned up as a last-minute guest at the SkyTeam launch at the end of July. Although he declined to speak at the event, his presence at the Alitalia headquarters was taken as a sign that his blessing had indeed been given to the deal.
Alliance restart
It was in large measure the issue of global alliance partner that confounded Alitalia's previous management team, headed by Domenico Cempella, a charismatic leader with a lifetime spent in aviation. Having successfully steered the carrier through some potentially fatal labour disputes and secured a major injection of state capital in 1996, he set out a strategy based on two main pillars. First was an ambitious alliance with KLM, which had won out over Air France and Swissair in the contest for Alitalia's hand. That would effectively have seen the Dutch and Italian carriers fully merge operations. Second was the creation of a major hub at Milan Malpensa to serve Italy's rich industrial heartland.
In the event, the opening of Malpensa was dogged by technical problems, plus running legal disputes over the winding down of the old Linate airport, from where a whole range of carriers still operate. Then in April 2000, KLM announced that it was pulling out of the alliance, citing lack of progress at Malpensa, as well as continuing delays and uncertainties over the completion of the Alitalia privatisation. After the first phase, which included 20% for employees as the price of industrial peace, the sell-off had stalled, leaving a controlling 53% in the hands of IRI That has since been transferred direct to finance ministry, pending a political decision. KLM was not reassured.
Alitalia's management soldiered on, talking of concentrating on a transatlantic partner and possibly going it alone in Europe. But with the group's strategy coming under heavy fire and losses again starting to mount, Cempella decided it was time to hand in his notice.
His successor acknowledges that the KLM withdrawal was a nightmare. "To tell the truth, Alitalia received a big punch to its stomach when the joint venture with KLM was suddenly cancelled," says Mengozzi. "It caused a major strategic imbalance for Alitalia." Some of the joint activities were already in place. For example, Alitalia had just given up its own offices and staff in Australia and faced having no presence there. Legal wrangles continue.
Contacts had been reopened with Air France (this time with the SkyTeam alliance in place), as well as Swissair and a chastened KLM. Mengozzi picked up the talks and made a typically pragmatic decision to go for the more achievable deal on offer from Air France.
"I felt that it was better to go with a lighter alliance model. Full cross-border mergers are very, very, very difficult, especially in a sector which has a national presence," he says. His experience in railways, albeit with a deal on a smaller scale, had also taught the risks of over- ambition. "A lighter commercial venture is more realistic, more feasible," he says, adding that Air France was of like mind. He also notes that, in any case, the European airline industry has yet to produce a successful model for cross-border merger, as opposed to outright takeover.
Air France relationship
Nevertheless, the relationship with Air France aims to go deeper than simple code-sharing. Mengozzi describes a two-pronged strategy. The first is what is now being referred to as "the bundle". That is the joint venture agreement due to start next April under which the two carriers will profit-share on the market between France and Italy. In the first year, Alitalia will take 40% of the total net operating income, reflecting its current share against Air France. But after three years the plan is to have reached an even balance. The aim is to harmonise capacity in the market and to co-ordinate on sales. However, there will be no mixing of sales forces. Air France president Jean-Cyril Spinetta repeats the old warnings about how merged sales organisations rarely manage to retain all their previous business.
The second prong of the strategy is to work on a "multi-hub strategy" based around Rome, Malpensa and Paris Charles de Gaulle (CDG). In the near term that would seem to mean finding ways in which Alitalia can profit from the CDG link to increase the scope of its intercontinental network.
Spinetta is evangelical on the subject of alliance benefits, having seen SkyTeam soar since its launch last year. He points out that only two years ago Air France was offering only seven US cities. With the Delta Air Lines partnership in place it offers 101, of which 13 are direct. "Alitalia will be in a similar situation," he says, warming to the theme. The French group makes a conservative estimate that it saw a bottom line profit of $85 million from alliances in the last financial year.
Alitalia too is banking on similar benefits. It hopes to gain around $120 million (€130 million) in operating profit from the Air France tie-up by 2003 and build that to $170 million by 2005. The Delta tie-up is initially set at a more modest $15-18 million, but that is not factoring in the possibility of antitrust immunity. A joint SkyTeam application has been lodged in Washington by Alitalia, Air France, Czech Airlines and Delta. The necessary US-Italian open skies deal has long been in place, but until now Alitalia lacked a partner with which to exploit the corresponding promise of immunity. The application could still founder in Brussels as the European Commission seeks to extend its reach, but at least Alitalia is in the game.
Neither Mengozzi nor Spinetta are keen to force the pace, and both talk of the need for "equality and balance" in the relationship. Yet there are hints that neither would be averse to moving much further as and when the opportunity presents. Ever diplomatic, Mengozzi is extremely wary of discussing the issue of equity, especially when asked the question at the SkyTeam briefing in front of his implacable shareholder. However, Spinetta confirmed that Air France would indeed be interested in a "small crossholding" if their owners approve. No-one is talking of mergers or control, but some analysts believe that an Air France holding could help to provide stability and even act as a bulwark against the union holding. It is also possible that the state may retain a wedge of shares. Air France itself is not a bad model of a carrier which has emerged from a painful restructuring and reasserted its grip on its natural market. Yet the French state still holds some 56% of the group.
From the start there seems to be a better feeling in Rome about this alliance than with the Dutch tie-up, despite the undoubted logic behind a merger with KLM. Spinetta even went so far as to give his SkyTeam welcome in Italian, apparently the language of his Corsican forebears. Mengozzi and Spinetta both in their way have backgrounds in state service while Delta's Leo Mullin is similarly a thoughtful consultant who, like Mengozzi, has also run a railway. "Maybe there could be a cultural affinity there," ponders Mengozzi.
More crucially there are some sound commercial reasons why the alliance should benefit both sides. For Air France it provides access to Europe's fourth largest market and feed for its expanding Paris hub. Already Air France is connecting 40-50% of passengers at CDG. At the same time Alitalia needs to restore its failing grip on its own domestic market, especially in the rich northern provinces centred on Milan.
Successive Alitalia managements have fretted about the loss of traffic from the key markets to the north. The region contains close to half of the country's population and drives the Italian economy, yet passengers from this industrial heartland have lacked a major hub of their own. Most have found it just as convenient to connect via the major hubs outside Italy as to fly south to Rome. Estimates are that Alitalia loses around 1.2 million passengers a year from the Milan region, with half travelling to London and Paris and the remainder to Amsterdam, Frankfurt and Madrid.
The launch of Malpensa three years ago, together with the KLM alliance, was meant to reverse the trend. Instead it has worsened. Mengozzi demonstrates the extent of the crisis with one bleak set of figures. They show that Alitalia captures only a third of traffic out of northern Italy. That includes just over half the domestic traffic, but less than an eighth on international routes and around a quarter on intercontinental. An estimated 70% of air freight also leaves Italy by road on the way to the big cargo hubs such as Frankfurt.
In the event, the development of Malpensa has lacked conviction and its role continues to be undermined by the lingering presence of the old Linate airport, much closer to the town centre than its distant replacement. All but the big Rome shuttle services were meant to transfer to the new hub, but most carriers were reluctant to move out of town. Competition complaints to Brussels resulted in a compromise which has still left many services at Linate. Besides its lack of critical mass, Malpensa has also faced operational and environmental problems which have propelled it to the top of the European league for delays.
Mengozzi agrees that the delays in launching Malpensa as a full hub and the low level of connections have helped breed "mistrust". But with the worst of the operational problems now over, he says it is time to "repair the perception of the market". And if Alitalia cannot keep passengers within its own network then it can at least now work to keep them within the family through the Air France link. Mengozzi is nothing if not realistic and concedes that traffic cannot be forced through Rome or anywhere else where there is a geographical disadvantage. Instead he talks of "natural hubs for natural flows".
He is equally realistic about Alitalia's role in the world. "People within Alitalia are asking whether we want to be a global carrier. I would say that we want to be a profitable carrier with strong global ambitions, but they have to be weighed against the means we have at our disposal," he says, adding that the company is prepared to underwrite development plans but only if they are soundly argued in terms of finance and economics.
Recapitalisation required
Mengozzi is also clear that the alliance on its own will not rescue Alitalia. "An alliance was necessary but it is not alone sufficient," he says, pointing to the parlous state of the airline which has seen breakeven load factors rise above 74%. That led to an operating loss of $240 million this year. Mengozzi expects much the same this year. A further recapitalisation is badly needed and so is a hard look at the network and a fleet which still contains too many aircraft types.
These issues are to be addressed in the new business plan on which all of the management attentions are now focused. "There are a lot of people working around the plan. It's something new for Alitalia," he says. Executives agree that the corporate offices have seldom felt so busy. Mengozzi is clear that the employees need to believe in the plan and to "be aware that there is a way out" of the current situation. "We need to launch a credible recovery plan which is believed in by everyone in the company," he says.
The plan, when it materialises, will have to be strong enough to convince the state shareholder and ultimately the financial markets that Alitalia is headed in the right direction. There are still no guarantees that this latest restructuring attempt will succeed better than its forerunners or stay clear of the unpredictable twists of politics in Rome. However, Mengozzi's experience may serve him well.
Source: Airline Business