Is Alitalia on thin ice?

Alitalia, Italy’s flagship carrier, could be facing financial collapse according to the company’s chairman as quoted in Italian new reports of August 24, 2004.   Since the unification of the European union, and the deregulation of the European airline markets, Alitalia has suffered significant operating losses (their last operating profit was in 1998) and a decline in ridership.   Many low-cost airlines like Ryanair and AirOne have gained significant market share in the Italian airline market.  

In July, the European Commission approved an approx. $500 million dollar loan to the airline, to avoid bankruptcy, and to halt the potential loss of 30,000 total jobs.   Management claims that the company will collapse within 20 days without the loan and without a labor restructuring plan that needs to be approved by the labor union.   The two sides are expected to commence talks later this week.  

If you are making plans to Italy in the near future, you may want to consider an alternate airline such as Delta, American, or Continental (among others).   It may help you sleep better at night.

I could be wrong, however, I believe that the airline will still be operating in 20 days.   It would be viewed as a huge national embarrassment if the national airline were to cease operations.   The Italian government will somehow step in, as required by national law when there are so many jobs on the line, to assist the company.   Alitalia management and the labor union will have to come to a quick accord and put their egos aside in the short term.

In the long term, there is not one company that can survive by posting loss after loss after loss.   Eventually they will all (management, labor union, employees, Italian government and the Italian taxpayers) have to work together to come up with a solution if they want to save Alitalia from financial ruin.   Of course, this will not be an easy task.  

Update for Sept 7, 2004

Discussions are ongoing between Alitalia management and the labor unions.   Management has proposed slashing a third of its work force and collapsing the company into two separate spin-offs as part of a last ditch effort to salvage the company.  

Management claims it will have to file for bankruptcy if the plan is not approved by the labor union.   They are demanding that an agreement be in place by September 15, 2004 so they can access an approximately $500 million dollar bridge loan.  

One company, AZ Fly, would be created with about 7,000 employees.   Another company, called AZ Service, would be created with another 7,000 employees, while the remaining 7,000 jobs would be eliminated.  

The final form of the restructuring is expected to be presented this coming week.  

Update for Sept 23, 2004

Alitalia’s board of directors recently unveiled a 4-year rescue plan that will jettison the airline back into profitability for 2006.   The plan, a one-page statement, includes job cuts of 3,700 employees, which will save the company approximately $340 million dollars (280 million Euros).  

The plan also indicates that the company needs to aggressively pursue other cost-cutting measures, along with new revenue generation.  

The plan allows the company to tap into a $400 million dollar emergency loan to help the company survive without filing for bankruptcy, which management claims would have been unavoidable without the additional funding.  

The labor union did not approve of the idea of splitting the company in two as mentioned in the above post.   These talks are still being worked out.  

In the meantime, the Italian government is looking to reduce its ownership stake in Alitalia to less than a 51% majority.  

I believe it will take more than a 3,700 job cut to bring Alitalia back into profitability.   To turn a profit in 2006 would be a true miracle.   The plan is a great first step, but they will need more than that.   They will probably need to form a strategic alliance, similar to Air France and KLM, in order to survive.   They’ll also need to do a better job of customer service, and offer more competitive fares; otherwise airlines such as Ryanair and AirOne will continue to gain market share in the lucrative Italian airline market.  

Update for Nov 8, 2004

A referendum is now taking place through Nov 10 regarding the restructuring plan that was recently approved by Alitalia trade unions and company management.   The plan must be approved by the pilots, flight attendants, and other employees of the company.  

The European Commission must also approve the plan, which has received a complaint by eight European airlines, among them, Lufthansa, British Airways, and Iberia.   These airlines claim that Alitalia is violating state aid rules and hampering competition with its plan to shift its existing debt in a spin-off company called AZ Service.   This would in turn, make the flight operations portion of the company more attractive to investors.   They claim the debt should be distributed on the basis of which it was incurred.  

In the mean time, Alitalia auditor Deloitte and Touche recently cleared the first-half of the year accounts for the company, which posted a staggering loss of $787 Million dollars for the 6-month period.  

The Italian government will also pick up most of the cost for the workers that are laid off as a result of the restructuring, providing two years of assistance as Alitalia employees, and then three years under another program.   No wonder why Italy’s unemployment rate is so high…the government does not provide enough incentives to work.  

Does this constitute state aid? The Italian government is denying that it does.   Meanwhile, many European airlines claim that it does, which would be illegal under the European Community treaties, and would nullify the bridge loan that Alitalia received to keep it afloat.   The European Commission will have to decide this as well.  

The drama continues...

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