Italy’s troubled flagship airline, is again on the brink of bankruptcy

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Alitalia
Alitalia

Alitalia, Italy’s troubled flagship airline, is again on the brink of bankruptcy, with analysts predicting it will be difficult for the struggling carrier to survive independently and resume its role as a significant European player.

The Rome-based company has limped from crisis to crisis over the last 20 years or more. The last time it faced catastrophe, in 2014, Abu Dhabi-based Etihad Airways took a large minority stake in the company and started making changes. But now, spurned by high labor costs, difficult trade union problems, and an aging fleet, Etihad said it would no longer play that role.

“Alitalia needs fundamental and far-reaching restructuring to survive,” Etihad Aviation Group CEO James Hogan said in a statement. “Etihad is not prepared to continue pumping money into” Alitalia.

That is a dramatic turnaround from 2014, when Hogan said Alitalia should be “the sexiest airline” in Europe. “If we didn’t believe Alitalia could restructure and win, we wouldn’t be here,” Hogan said at the time.

Without Etihad’s deep pockets, Alitalia is in big trouble. The Italian government has agreed to give Alitalia access to a bridge loan worth 600 million euros (660 million U.S. dollars). But with the company losing money at the rate of nearly two million euros per day, it will go through the bridge loan money quickly.

“The money from the government buys Alitalia another year at most, but it doesn’t address the company’s biggest problems,” Andrea Giuricin, an economist and fellow with the Milan-based Bruno Leoni think tank, told Xinhua.

Giuricin said that because of flying routes with too much competition — especially from low-cost competitors such as EasyJet and RyanAir — Alitalia flights are on average around 76 percent full, whereas healthy rivals like Germany’s Lufthansa, Air France, and Netherlands-based KLM are on average about 10 percentage points fuller, something reflected in their bottom lines. The discount carriers are generally at least 90 percent full on their routes, Giuricin said.

Competition from discount carriers has been so difficult for Alitalia, Giuricin said, that it is no longer the largest carrier in Italy: that distinction goes to Ryanair, which accounts for 24 percent of Italy’s domestic air traffic, compared to just 17 percent for Alitalia. Ten years ago, Alitalia controlled nearly a third of Italy’s domestic air travel market.

“Alitalia is simply too inefficient to complete against leaner and better-managed rivals,” Giuricin said.

The next steps for Alitalia are far from clear. It will continue operating with the backing of the Italian Treasury, though analysts agreed the cash-strapped government cannot afford to keep propping the company up financially.

“It would be a very unpopular choice for the government to send money to floundering Alitalia while raising taxes and cutting back on spending in some many other areas,” Oliviero Fiorini, a political affairs analyst with ABS Securities, said in an interview.

The most likely scenario is that Alitalia will be forced to dramatically scale back operations to a sustainable level, go out of business and sell its assets such as aircraft and landing slots at busy airports like London’s Heathrow and the New York-area airports, or look for yet another airline to partner with.

Giuricin said that the latter option would be the best one for Alitalia, though the company’s three billion euros of debt, Etihad’s difficult experience in that role, and Alitalia’s bad treatment of Air France and KLM when they sought a partnership 10 years ago make that less likely.

“Lufthansa has a history of taking over troubled airlines, which is what they did with Belgium’s Sabena and Swiss Air,” Giuricin said. “But there aren’t strong signals that they’re interested in Alitalia, and even if they are interested, they’d be better off waiting until things get so bad that Alitalia renegotiates its debt and cuts back to become a smaller and hopefully healthier company. Then it’s possible they could step in.”

 

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