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Alitalia needs buyer to survive
By Sebastian Steinke
The review of operations reported by Italian transport minister Alessandro Bianchi at the beginning of November sounded graver than ever before: the Italian government needed to sell its 49.9 percent share in Linee Aeree Italiane S.p.A., or Alitalia for short, within two to three months, otherwise he could no longer rule out the possibility of the airline becoming insolvent. As recently as the middle of September Maurizio Prato, the new chairman, had issued a reassuring statement on taking up office that the cash reserves were sufficient for a whole year.
Airbus A321
The long-established company, which has a workforce of around 11,200, is losing over a million euros a day. Despite earlier government assistance to the tune of over five billion euros, the airline has accumulated net debts of €1.2 billion, roughly equal to its present stock market value. For the financial year 2007 the airline is expecting another loss, this time of about €400 million before exceptional items. Alitalia's net loss for the first six months of 2007 was at least an improvement on the same period in 2006, having fallen from €220 million to €211 million. Thanks to a rise in passenger numbers, consolidated net sales for the first six months had risen by 3 percent to €2.31 billion. But this tactical success is not sufficient to save the airline, which has been running a deficit for years, without help from outside.
In a protracted process in which potential investors have at times acted as if they were participants in a game of poker, the Italian government has already been trying for a year to sell at least 31 percent and, if possible, its entire equity share of 49.9 percent to private investors. But the first round of bidding was abandoned in July after all the candidates withdrew. The government had demanded of them that they should guarantee “reasonable coverage of the (Italian) territory”, not make too many employees redundant and preserve the national identity and brand name of Alitalia. But how could any investor possibly succeed at the necessary radical reorganisation under these tough conditions?
The government sacked Alitalia's chairman, Berardino Libonati, and in his place appointed the experienced administrative lawyer, Maurizio Prato, who as president of the state-owned equity holding company, Fintecna, had already had dealings with Alitalia's ground services, engineering and IT division, Aeroservizi, which had been hived off in May 2005. According to rumours circulating as this issue went to press on 20 November, Prato has been tasked once more with finding a purchaser by the end of 2007, but this time the government's demands have been relaxed and the negotiations no longer have to go through the Ministry of Finance, as had previously been the case. Apparently the government would prefer a purchaser from the industry rather than just a financial investor. Italy's foreign minister D'Alema even ventured to say in public that an ideal investor did not necessarily have to come from Europe.
At present there are six candidate investors: 1) Air France-KLM, which already has a 2 percent stake in SkyTeam Member Alitalia; 2) Lufthansa, for which the north Italian market is of critical importance, especially for Munich but also for Zurich; 3) Air One, the second biggest Italian airline and the strongest domestic candidate, which is being advised by Goldman Sachs; 4) the American private equity group Texas Pacific Group, which has taken equity stakes in airlines in need of restructuring in the past; 5) Russian airline Aeroflot, which has joined forces with the big Italian bank, Unicredit, and apparently is willing to pay up to a billion euros for Alitalia, but is complaining that it has not yet been given adequate access to the Italians' financial data; and 6) a group of entrepreneurs headed by former Italian judge Antonio Baldassarre. Only on 7 November the Alitalia Board confirmed that he failed to come up with evidence of his financial resources for coming onboard by the deadline set and must therefore be ruled out.
All the takeover candidates are keeping their true interest in purchasing Alitalia close to their chests, but it is likely that too strong a demand would reduce the present pressure for restructuring and possibly raise the price that the state is asking. Apart from that, any investor with serious restructuring intentions will have to contend with a workforce which in the past has not hesitated to take strike action.
The two likely favourites, Lufthansa and Air France, would acquire a dominant position in the lucrative Italian market through the purchase. Northern Italy in particular and especially the area around Milan are among the most affluent regions in the whole EU, with some of the busiest traffic routes. Lombardy boasts a population of 9.3 million people, and its 4.4 million employed persons, working for 800,000 companies, generate 20 percent of Italian gross domestic product. By comparison, only 5.2 million people live in Lazio, the region around Rome and the adjoining coast, generating ten percent of GDP. (In all fairness, however, one should add that up to 17 million live in the greater Rome area, including its further surroundings.)
Yet it is in the smaller capital city rather than in the richer industrial and trading metropolis of Milan, with its more favourable geographic position from the point of view of air traffic, that Alitalia is planning to concentrate its long-haul network from the summer flight schedule 2008, when the present dual-hub system is due to be abandoned for cost reasons. Up to 150 flights in Milan could be affected by this radical measure. There the passengers are already spread over several different locations: the European business travellers in their droves prefer to use the convenient airport of Linate which is close to the city, whereas the long-haul connections are handled from the more distant airport of Malpensa. On top of this, the less prominent cargo airport of Serio in Bergamo is currently enjoying a new surge in passenger numbers thanks to the low-cost airlines, especially Ryanair. But on its own admission Malpensa too is also currently negotiating with Ryanair over the stationing of 10 aircraft which could support fifty routes. easyJet and Germanwings already operate out of Malpensa.
Alitalia's abandonment of Malpensa as a base for its long-haul operations and its cost-cutting concentration on Rome are part of the strategy put forward in the “Business Plan 2008-2010”, which the Board of Directors adopted only on 7 September 2007 in parallel to the search for investors and the financial struggle for survival. According to this document, management had come to the conclusion that the accumulated and expected future losses could not be sustained for much longer. For financial and competition reasons, it would no longer be possible in the future to supply two different hubs with feeder flights efficiently and productively. Therefore the entire network, product quality, operating costs, employment contracts and human resources organisation must be reformed as a matter of urgency. As part of this, a new “Mille-Miglia” (“1000 miles”) frequent flyer programme which takes into account the booking class as well as the distance flown should be introduced in 2008.
Whereas the air traffic was concentrated ever more strongly on the large hub airlines, Alitalia had lost a lot of ground compared with the competition. This was due partly to the fragmented Italian market and airport system, but partly also to ageing infrastructure and bureaucratic obstacles which were weighing down on the biggest national airline and preventing it from developing as it would like. Continuing to cling inflexibly to Alitalia's independence would only reinforce its subordinate and increasingly regional role then the Board's paper claimed.
The three foremost goals of the strategy paper, which is also known internally as the “Survival and restructuring plan”, are to reduce the size of the company and thereby improve efficiency, retain the Alitalia brand and involve third parties so as to gain access to their financial resources.
In detail, the plan envisages a series of measures. In Milan-Malpensa the routes offered will be expanded to include more non-stop flights, which can no longer be handled in the constrained conditions at Linate. The low fares segment for private travellers is to be expanded under the brand Volare Web. Air Europe will expand its long-haul charter flights. Air cargo operations are to be concentrated in Malpensa, along with the related staff and maintenance. It is in Rome-Fiumicino that Alitalia is planning the biggest growth, assuming that an agreement can be reached on expansion there, which under no circumstances must be allowed to result in higher prices. All the loss-making flights which cannot break even in the short-term will be discontinued. In the short-term the long-haul fleet will be cut back and only grow again in the medium term, when new aircraft enter into service. The short- and medium-haul fleets will generally be trimmed back.
If the plan is implemented, the company management anticipates that it can increase earnings before interest, taxes, depreciation, amortization and rent (EBITDAR) from 2.6 percent in 2006 to 11 percent in 2010. Moreover, greater efficiency and productivity of the smaller fleet should reduce unit costs by eight percent between 2007 and 2010.
The Alitalia planners predict that, even if the first phase of restructuring can still be implemented from the company's own resources, from 2010 its liquidity will no longer be sufficient. The board is therefore recommending a further issue of capital. At the same time management is asking for a significant improvement in operating performance: the number of passengers handled by the Alitalia Group must grow by 3.8 percent a year from the 25.5 million passengers expected for 2007 to 28.7 million by the year 2010. Yet during this period the Group's seat capacity is only planned to rise by 1.6% per year. Whether this ambitious plan can be implemented on the scale hoped for remains to be seen. Meanwhile Alitalia expects its EBITDAR for the second half of 2007 to come in at only 3.5 percent of sales, compared with the planned 8 percent.
As of 30 June 2007 Alitalia's fleet consisted of 186 aircraft, whose average age was 11.9 years. 167 of these were short- and medium-haul aircraft, the remaining 29 being long-haul aircraft. 59% or 110 aircraft in the Group fleet were owned outright by the airline, while 70 aircraft were leased with a later purchase option. On top of this there are six wet-leased Volare jets .
From page 20 of FLUG REVUE 1/2008
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