Staying alive: Alitalia given $443 million government loan
Seemingly, the Italian government is still hopeful to properly bid farewell to Alitalia, as it would head to a new, not yet found owner. Signing papers to grant another loan, pending the approval of the European Commission (EC), to the tune of the classic Bee Gees’ song, the Italian Council of Ministers granted a whopping $443 million (€400 million) loan on December 2, 2019. The troubled Italian carrier has been bankrupt since 2017 when it entered the legal proceedings after its unions had voted no to a restructuring process of the airline.
“The negative vote has determined the inability to implement the relaunch and restructuring of the Company,” stated the press release, issued on May 2, 2017, announcing the administration process to keep Alitalia afloat.
Yet the whole process reminds of a scene out of “The Office”, where the Scranton branch attempts to practice First Aid to the same Bee Gees’ tune, Staying Alive. Multiple deadlines and potential investors later, the Italian airline is still on the brink of collapse. The latest deadline for a new owner is set to May 31, 2020, providing a glimmer of hope for Alitalia to survive the winter and potentially start the summer with a new investor on its side, finally ending a potential three-year struggle to lay down proper foundations for it future.
For Italy, maintaining connectivity through Alitalia is crucial. Tourism accounts for 13% of the country’s Gross Domestic Product (GDP), according to data presented by The Italian Government Tourist Board (ENIT). Rome Fiumicino (FCO) is one of the biggest airports in Europe, as it welcomed 42.89 million passengers in 2018. In total, 184 million people arrived to Italy via air in 2018. In addition, Eurostat data indicates that the country is the fourth largest intra-European travel market.
Alitalia, meanwhile, accounted for 38.8% of passengers carried through Rome’s FCO and is the second airline in terms of domestic and international traffic; the first and third airlines are Ryanair and easyJet, respectively. This already highlights two things: the importance of the wellbeing of the airline to Italy and one of the many reasons why the airline is struggling to keep itself afloat – low-cost carrier presence.
Vital Alitalia connections
Firstly, the Italian airline ensures regional connectivity within the country where 64 million people traveled on domestic scheduled and non-scheduled flights, states the 2018 traffic report published by the Italian Civil Aviation Authority (ENAC). Domestically, Alitalia, together with its regional subsidiary Alitalia CityLiner, is the biggest airline – the group carried 12.1 million passengers in 2017, the latest available data by ENAC indicates.
Such connections like Catania (CTA) – Fiumicino (FCO), Palermo (PMO) – Fiumicino (FCO), Milan-Linate (LIN) – Fiumicino (FCO) are the most popular domestic destinations within Italy, attracting more than 1 million passengers per year. The CTA – FCO route, which is the most popular intra-Italy route, is a battlefield between Alitalia and Ryanair. Alitalia offers nine daily connections, while Ryanair offers three connections. The former serves the route with an Airbus A320, the latter uses a Boeing 737.
If a passenger were to book a one-way trip on January 10, 2020, the Irish low-cost carrier’s prices cap out at $65 (€59), while Alitalia’s most expensive connection is $123 for a basic economy ticket. The cheapest options are an Alitalia flight at 8:20 PM for $43 and Ryanair’s departure just 10 minutes earlier for a more expensive price of $55 (€50). However, the low-cost carrier has much less pressure on yields due to its business model, even if Alitalia does not offer a Business class on this flight. In addition, on average, the Italian airline’s A320 fleet is much older (average age of 12.9 years) versus Ryanair’s younger fleet of 737s (average age of 8.9 years) according to planespotters.net data. The difference of four years can include a very expensive D Check, which also drives up the total unit cost for the airline. In essence, Ryanair can afford to offer these cheaper prices, while Alitalia has to crank up its fares in order to make up its costs, potentially driving customers to choose the cheaper option.
The fact that Alitalia is losing out on market share in its own home market is evident by data provided by ENAC – out of the 42 airports operating in Italy, Alitalia has the biggest share in only five of them. Furthermore, low-cost carriers have slowly started to dominate the skies above the South European country: in 2004, 6.2% of total travelers flew in or out of Italy with a no-frills airline. Just 10 years later, in 2014, the number was 45.8%, while in 2018, the market share grew to 51.3%.
However, low-cost carriers on domestic routes are not the only troublemakers in Italy. Many mainline carriers have also heavily increased their presence in the country, including such groups as International Airlines Group (IAG) (IAG) or Lufthansa Group. Lufthansa (LHAB) (LHA) (the airline) alone grew by 8.4% in the country from 2017 to 2018, while British Airways, the seventh biggest airline in the country by passenger numbers, increased its presence by 7.5%. During the same period, Alitalia only grew by 1%.
But the Italian flag carrier’s presence remains fairly firm regarding transferred passengers. After all, Alitalia flew 21.7 million customers in 2018. At the same time, this possesses a huge risk for Italy and its connectivity, as highlighted by Aeroporti di Roma, the holding company that operates both airports in Rome, whose “business performance is also affected by situations concerning the main Italian carrier (Alitalia)” and other airlines operating in the airport. If it were to go down, replacing a network consisting of 94 destinations would not be an easy job, given the scale of Alitalia, despite the economic hardships.
In October 2019, it was also reported that Ferrovie Dello Stato Italiane, a national railway company and Atlantia, a toll-road operator in Italy, committed to being the saviors of Alitalia. The two companies were also looking for a third party – an experienced airline, which is seemingly a difficult task.
The potential investor list still includes several high profile players in the aviation industry, like the Lufthansa Group and Delta Air Lines. But several factors could hinder a potential deal with either of the two. Firstly, the Chief Executive Officer of Lufthansa (LHAB) (LHA) , Carsten Spohr, publicly stated that the German airline group would be interested in a stake only if Alitalia were to go through a restructuring process, including job cuts – a big no no from the carrier’s unions, as evident by the refusal in 2017. Another potential hurdle would be the stamp of approval from the European Commission, as Lufthansa (LHAB) (LHA) already owns a few airlines in Italy’s neighboring countries, namely Austria and Switzerland.
Delta Air Lines was already rumored to be looking for a way out of the rescue plan. Reported by Corriere Della Sera in October 2019, the Atlanta-based airline is reportedly stomping its foot down and saying that it will not increase the initial offer of $112 million (€100 million), as Delta is not interested in a bidding war. Thus, the list of potential investors shortens to basically nothing. On the other hand, the market between Italy and North America is growing rapidly, showcasing a 15% increase in passenger numbers between 2017 and 2018, thus it would be a great opportunity for Delta to jump in early and get ahead of its competitors; something it has done just recently by acquiring a 20% stake in LATAM.
Another option would be the nationalization of the carrier. But the previous Italian government has ruled out the option, as it wanted a “market solution” to keep Alitalia running. However, the solution would encounter the same two issues mentioned previously – the inability to cut costs due to its unions, which are also pressing for a solution to Alitalia’s financial crisis. Future prospects, whatever they might be, are still grim – the current operational environment in the industry, the fact that Alitalia boasts a fairy old fleet, averaging an age of 12.7 years, with no potential orders or new deliveries in sight and union struggles casts a shadow of doubt whether the continuous loans will help save Alitalia.
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