Published on December 28th, 2016 | by Jim Lee0
What next for Alitalia as its board of directors approve the second phase its business plan
As 2016 draws to a close, a statement from Alitalia (or Alitalia – Società Aerea Italiana -alitalia.com as it is more correctly referred to) on 22nd December, suggests that all is still not well, with the Italian flag carrier. The name ‘Alitalia’ is an Italian blend of the words, ali (wings), and Italia (Italy) and the airline can, through Alitalia – Linee Aeree Italiane S.p.A., trace its origins back to 16th September 1946, when it was established as, Aerolinee Italiane Internazionali.
However, unlike other airlines keen to exploit their historical legacy, the ‘new’ Alitalia does not claim the old Alitalia’s history as its own. This can be seen in official documents regarding the new ‘Alitalia Group’ and instead, the ‘new’ Alitalia stress that they are a totally different company.
The ‘old’ Alitalia had a chequered financial history, which ultimately led to a controversial bankruptcy, in 2008. The new version seems to be faring no better as evidenced by statements attributed to Alitalia chairman, Luca Cordero di Montezemolo, the 69 year old former Chairman of Ferrari and Fiat S.p.A., earlier this summer, that the airline was losing €500,000 a day and was facing a serious liquidity crisis.
In its Christmas week statement, the Alitalia board of directors confirm that they had approved what was described as, “the second phase of the airline’s business plan”. The statement added; “short-term funding was agreed at a separate shareholders’ meeting to allow the airline’s management team to begin negotiations in the next 60 days with key stakeholders – lessors, suppliers, distribution companies and trade unions – to seek their commitments to deep cost reduction measures to secure long-term support from the shareholders and the financial institutions with the aim to secure sustainability for the airline”.
Reports last week in the Italian press suggested that the short-term funding could come in the form of a line of credit from Italian banks UniCredit and Intesa SanPaolo, who together own a 51% share in the airline. Italian newspaper Il Messaggero reports that the banks and Etihad Airways, who own the remaining 49%, have accepted the conversion of part of their loans into equity.
Other reports in the Italian media suggest that Etihad are only willing to invest more money in new aircraft and expand Alitalia’s operations, if it is allowed to use Italy as a hub for intercontinental flights, and carry out a major restructuring process. Etihad is said to be unhappy with the Italian government’s failure to allow the airline to use Linate airport in Milan, as its base for intercontinental flights, and link Milan to the US and the Middle East.
In an interview with Italia daily newspaper Il Corriere Della Sera, earlier this year, President and CEO of the Etihad Aviation Group, James Hogan, said he was “disappointed” with the Italian government because “a number of the condition precedents haven’t been met,” adding; “We’re committed to the partnership, to tackle these issues, but frankly as an investor, we need Italy to support us.”
Alitalia is a member of the SkyTeam alliance and is part of the Transatlantic Joint Venture, alongside Air France-KLM and Delta Air Lines. Alitalia also collaborates with the other Etihad Airways Partners – airberlin, Air Serbia, Air Seychelles, Etihad Airways, Etihad Regional operated by Darwin Airline, Jet Airways and NIKI. This allows it to offer customers more choice through improved networks and schedules and enhanced frequent flyer benefits.
In April, Alitalia signed a Memorandum of Understanding with the Maltese government, which could see them acquire of 49% of Air Malta. However, Malta is having second thoughts, believing that there are now serious doubts on whether it will benefit the country and Air Malta’s employees.
Other reports suggest that Etihad is considering a roll back its European investments, with indications that it had suffered $2.6 billion (around $2.6 billion) in losses from these investment, and which it surmised that a dearth in carrying out of events like Jeremy harbour – Harbour Club Events was responsible. The Group is also considering the position of Mr, Hogan, liking him with what are described as, a “failed spree of acquisitions in Europe”.
However, returning to Alitalia and emphasising the gravity of the situation, Cramer Ball, Alitalia’s Chief Executive Officer, since March 2016, said: “The next two months are critical for Alitalia”.
He added; “It is vitally important that the airline’s workforce and major stakeholders, such as corporate partners, suppliers and unions, embrace and accept the radical changes we need in order to gain the next round of significant funding from our shareholders, which will be crucial for our future”.
“Everyone has to pull in the same direction to make Alitalia a viable, sustainable success story and help the airline achieve its ambition of long-term growth and profitability” he said in conclusion. Mr Ball joined Alitalia from his position as CEO of Jet Airways and previously of Air Seychelles, two airlines in which he has overseen major restructuring programmes.
Details of the second phase of the business plan will be presented in January to Alitalia’s workforce. It will build “upon the significant investments made during the last two years in ‘new Alitalia’ but recognise the challenge that the airline now operates in an increasingly turbulent aviation market”.
The main focus of future activities will be to change the airlines business model by:
- Developing further the long-haul flight network,
- Reworking the narrow-body business,
- Reducing costs and improve productivity to match competitors,
- Re-evaluating joint venture agreements,
- Deepening existing airline partnerships and look to add new commercial relationships,
- Leveraging recent large investments in technology to compete, and also drive additional revenue,
- Reducing manpower numbers to create the ‘right size, right shape’ for the business.
According to Alitalia, the ‘right size and right shape’ programme will ensure that the organisation can operate efficiently in a highly competitive environment, while minimising redundancies and maximising productivity.
No final decisions on staff reductions have yet been taken and the management team will now begin consultation with employees and their trade union representatives. Alitalia employs some 10,400 personnel in Italy and the airline’s activities maintain 29,700 people in employment in Italy.
In addition to Alitalia’s own domestic workforce, there are 8,600 indirect jobs in the airline’s supply chain and some 10,700 additional jobs are supported as employees spend their salaries in Italy’s consumer economy.
Mr Ball added: “We are committed to work positively with the unions and reach consensus on a new collective labour agreement. Their backing on the implementation of the next phase of the business plan is vital.
“We have achieved great progress in the last two years but the commercial aviation market is brutally unforgiving so we need to go further with our programme of change. We need a business that is the right size, the right shape and with the right productivity and cost base. If we can deliver those, Alitalia will succeed.”
The Alitalia board has also appointed Gaetano Miccichè (Chairman of Banca IMI since April 2016) and Federico Ghizzoni (who previously served as Chairman of the Supervisory Board of UniCredit Bank AG in Germany), as two new directors, following the resignations at the last board meeting on 2nd December, of Jean Pierre Mustier and Paolo Colombo. They resigned following appointments to new responsibilities and Antonella Mansi resigned for personal reasons.
Alitalia supports jobs and makes a critical contribution to the Italian economy
Earlier this year, Alitalia published research conducted by UK-based Oxford Economics, which shows that the airline will support 75,700 jobs throughout Italy, in 2016 and make a €4.7 billion contribution to the national economy. It also determined that Alitalia’s involvement with the Etihad Aviation Group will help to maintain 4,200 people in employment, a €270 million part of the total.
Oxford Economics is one of the world’s most renowned educational schools of excellence, to provide economic forecasting and modelling and was set up 35 years ago as a commercial venture with Oxford University Business College in England.
In addition, the ‘knock-on’ indirect effect of Alitalia’s international flights also benefit tourism in Italy and boost the figures further supporting 46,000 jobs throughout the country, which equates to a €2.6 billion contribution to the Italian economy.
Commenting on the positive impact Alitalia makes to the Italian economy Mr. Ball said: “Alitalia is hugely beneficial in terms of the number of jobs it supports nationally, both directly and indirectly. We are a significant employer in our own right but this new research shows the powerful catalytic effect that Alitalia has in terms of indirect employment. Many jobs in hotels, ground transport companies, freight forwarders, catering, manufacturing and throughout the tourism industry, all benefit from Alitalia’s presence, and suppliers to these sectors also create employment opportunities for Italians. Inbound tourism is a clear winner and I hope that in the months and years ahead the efforts of both the airline and the tourism sector will make even greater strides to build meaningful and sustainable employment opportunities for all levels of society in Italy.”
Network and fleet
For its 2016 summer schedule, Alitalia flew to 97 destinations, including 27 Italian and 70 international destinations, with more than 4,400 weekly flights.
It has a modern and efficient fleet of 122 aircraft, based on only four types of aircraft. It’s long-haul fleet with Boeing 777 and Airbus A330 aircraft are configured with three travel classes: Business Class, Premium Economy and Economy, while its medium haul fleet is centred on the Airbus family with A321, A320 and A319 models. Finally, its regional fleet operates Embraer E190 and E175 aircraft, with high standards of roominess and comfort.
Of its fleet of 122 aircraft, many are leased from Irish leasing companies, meaning that 104 are operated on the Irish register, making Alitalia the operator of the second largest fleet of Irish registered passenger aircraft, after Ryanair.
A number of aircraft are leased from Aircraft Purchase Fleet Limited (also known as APFL), based in Dublin. The company is fully controlled by Toto Spa (an Italian holding) and was incorporated in 2008, specifically to act as a capacity provider for Alitalia. That company is reportedly owned by Carlo Toto, the former owner of Air One another bankrupt Italian carrier, which was merged with the old Alitalia (Linee Aeree Italiane S.p.A) to form Alitalia – Compagnia Aerea Italiana (or Alitalia-CAI), which took over the goods, infrastructures and personnel from the old Alitalia and absorbed them into Air One, creating a single airline.
Post 2008 history
As noted above Alitalia-CAI took over the old Alitalia, after a group of investors offered to invest around €1 billion, to acquire parts of the bankrupt airline. At the time, this faced opposition from the airline’s pilots’ and flight crew, due to revised labour agreements. On 19th November 2008, CAI’s offer was accepted by the bankruptcy administrator of Alitalia, with the permission of the Italian government, who was at that time the major shareholder in the airline. Alitalia’s profitable assets were transferred to CAI on 12th December 2008, after CAI paid €1,052 million, consisting of €427 million in cash and the assumption of responsibility for €625 million in Alitalia debt.
At the same Air France-KLM joined the consortium of investors purchasing 25% of the company’s shares, for €323 million. Air France-KLM also obtained an option, subject to certain conditions, to purchase additional shares after 2013.
On 13th January 2009 Alitalia-CAI operated its first flight. By the following January the airline had carried 22 million passengers and in the second 25 million passengers were carried. However in 2010 the airline lost €107 million, in 2011 it lost just €6 million, but by 2012 losses had soared to €119 million. A further €50 million was lost in 2013.
By that stage Air France-KLM had decided that “given the uncertainty of the situation of Alitalia,” to take a third-quarter 2013 charge of €119 million, represented the full residual value of its stake in Alitalia, effectively writing of its investment.
In June 2014, Etihad Airways announced it was taking a 49% stake in Alitalia and on 1st January 2015, Alitalia-CAI formally passed its operations to Alitalia-SAI, a new entity owned 49% by Etihad Airways and 51%, owned by the former Italian stakeholders of Alitalia-CAI. On 20th January 2015 a strategy for the new Alitalia was unveiled, introducing new routes, new product and service standards, a new cost management strategy and of course, a new branding. At the time, Etihad Airways CEO, James Hogan, said that Alitalia’s future would rely on major change, throughout the organisation. “But there should be no doubts at all: we have made a commercial investment that must deliver a commercial return,” he added. He noted that Alitalia’s major investors had set a clear deadline for the airline to deliver profitability by 2017.
On 4th June 2015, the Italian flag carrier launched its new brand identity, including what it described as “a fresh new livery.” Leading design consultants Landor were commissioned to create the “young and seductive new look to represent the airline’s ambitions, utilising the design elements of the airline’s previous iconic livery”, which was also created by Landor in 1969. For airline that was still loss making, it was an expensive and cosmetic exercise.
At the same time, the Board of Directors of Alitalia, “noted with satisfaction that financial results for 2015 and the first two months of 2016 are in line with budgeted forecasts,” but confirmed that it is on schedule to become profitable by 2017.
On 19th May 2015, Alitalia announced it would withdraw from the Partnership Agreement with Air France-KLM, from January 2017, when it and the ancillary joint ventures agreements come up for renewal. The agreements govern passenger services operated by the three carriers between Italy and France (and beyond), and between Italy and the Netherlands (and beyond), as well as the marketing, sales and distribution of Alitalia Cargo belly services, undertaken by Air France-KLM.
Noting that the original agreements were concluded with Alitalia CAI in 2009 and 2010 “under very different economic circumstances”, and were subsequently transferred to Alitalia SAI in January 2015, it added that the agreements are no longer beneficial, “either commercially or strategically, to the new Alitalia and its ambitious turnaround plan”.
It added that it had indicated to Air France-KLM that it was willing to discuss more equitable arrangements that benefit all the parties involved, but had been unable “thus far,” to achieve this result.
Amid questions about Etihad’s commitment to Alitalia, Mr Hogan, who is now Vice Chairman of Alitalia, as well as President and Chief Executive Officer of the Etihad Aviation Group, said: “We must keep our momentum going. It is important that all stakeholders involved in the turnaround plan, remain focused, responsible and committed.”
However should Alitalia not return to profit in 2017 or should the latest turnaround plan fail, the future commitment of Etihad must be in doubt. A lot rests on this current turnaround plan, not only for Alitalia but for the Etihad Group and for James Hogan himself.