Over the last few weeks there has been news about Alitalia being about to go bankrupt for the fourth time, but what really caused this many problems for the Italian national carrier?
There are different opinions: some people say what caused Alitalia to be in its actual conditions was the missed sale to Air France-KLM; some say it was the bet on creating an international hub in Malpensa and some go way back to Umberto Nordio’s administration during the ‘Golden Era’ of the airline.
Alitalia’s golden era and Umberto Nordio’s management (1973-1988)
It was 1973 when the first oil crisis hit. Cesare Romiti was Alitalia’s top manager at the time, but he had to resign because of his bad performance, caused in part by the oil crisis itself.
Umberto Nordio, 54 and a retired official of the Italian Navy, took Romiti’s role and kept it for fifteen years, during which Alitalia always had good profits. This period also was the national carrier’s ‘golden era’: excellent service on board, selected crews and such a good image to make Alitalia a synonymous of ‘Made in Italy’.
The carrier’s golden era caused a lot of indirect problems to the company: pilots and cabin crews started to defend their luxury pays, they latch on to their privileges and benefits, they created Aquila selvaggia, a union which had huge power, so big it easily grounded planes and occupied airports.
Nordio resisted for a bit, but then had to give up, particularly because he was put under pressure by the Iri, political parties and the tensions between the company and the unions.
Nordio convened Alitalia’s Management Board and resigns, making international headlines, such as the New York Times.
Alitalia’s first loss (1996)
Since 8 years after Nordio’s resignation, Alitalia has always had financial problems: 1996 was the first year Alitalia had experienced a loss after a long streak of profitable years, losing an outstanding €625 million (using the current value of the euro).
At that time, Alitalia was still State-owned and Lamberto Dini’s government, which used to control the national carrier via I.R.I., gave the OK for a capital increase of Lire 1500 billion (around €775 million).
That capital increase would later reveal to be the first of many to happen during the last 20 years, as money has never been and will never be enough for Alitalia. Data by Mediobanca suggest that Alitalia has cost taxpayers around €7.4 billion between 1974 and 2014.
Ever since 1996 Alitalia has been losing money, mostly because of bad decision-making and substantial (and usually unsuccessful) changes in the management board.
The bet on creating a hub in Malpensa (1985-2008)
In the 90s Alitalia had the intention to create an international hub in Milan Malpensa (MXP; LIMC), which the carrier meant to use as a hub. The new airport was very close to the already important Linate, which still proves to be an important focus for Alitalia’s development from Milan.
This idea was supported only by political motivations. In those years the Lega was a very strong political party in Italy and it was all about Lombardia and its development. There was no economical or industrial justification whatsoever to the huge investment the development of Malpensa meant to Alitalia and the government.
Malpensa in 2017
As of today, Milan Malpensa has been almost completely abandoned by the troubled carrier, leaving just some long-haul routes out of it, while Linate is still the focus-airport for Milan, with almost all of AZ’s routes operating out of Milan’s city airport, which leaves Roma Fiumicino (FCO; LIRF) as Alitalia’s only current hub.
Recently the national carrier has also announced it would drop its Rome Fiumicino-Milan Malpensa service from the 31st of January. There are also rumors that Alitalia might cut its international services out of MXP.
The offer from Air France-KLM (2008)
The ‘Malpensa 2000’ project was abandoned almost at the same time the offer from Air France-KLM had arrived: €1,7 billion to buy all of Alitalia, but with the requirement that 2100 jobs would be cut.
At that time, Romano Prodi was the Prime Minister and Alitalia was barely able to survive, suffering the attack from LCCs and cutting non-profitable routes.
So Prodi said he was ready to sell Alitalia to the French-Dutch aviation group, but elections were coming and Silvio Berlusconi, who was largely expected to win them, said a determinate ‘NO’ to the offer by the French-Dutch group in name of ‘Italianity’.
After his political success, Berlusconi sold Alitalia to a group of ‘capitani coraggiosi’ (direct translation: ‘courageous captains’), which offered the same as Air France-KLM but didn’t want to take the carrier’s debts with them.
These courageous captains included the ex-Telecom Italia manager Roberto Colannino; the Benetton family, already members of Autostrade and Aeroporti di Roma; the Riva family, owners of steel giant Ilva; and the Ligresti, Marcegaglia and Tronchetti Provera families. Also three of Italy’s most important banks took part in the acquisition: Unicredit, Intesa San Paolo and Monte dei Paschi di Siena.
So a new company, Alitalia-CAI (2009-2014), was born with all of Alitalia-LAI’s (1947-2009) profitable assets. All of Alitalia’s old debts remained with the old company, which was destined to soon go bankrupt.
The government actually only received half of the money Air France-KLM had offered for the whole Alitalia and the 2000 job cuts asked for by the French-Dutch to complete the stock-exchange, soon became 7000 after privatization.
Alitalia’s survival (2009-2014)
For some years, Collannino, as president, and Rocco Sabelli, as CEO, were able to make Alitalia break even, cutting the expenses they could. But they soon realize that a strong alliance is needed to save Alitalia.
And that’s when Etihad came in, trying to save the Italian national carrier from going bankrupt for the third time.
Etihad becomes Alitalia’s largest shareholder (2014-now)
It was December 23rd, 2014 when Etihad announced it closed a deal with Alitalia-CAI to buy 49% of the already troubled carrier.
They promised they would make the Italian carrier “Europe’s sexiest carrier” and that Alitalia would break even by 2017.
The plan later changed, and Alitalia’s management proudly announced the carrier would be able to make a profit by the end of 2017.
An “unexpected” failure
This happened just four months before the start of the airline’s most recent money problems. How is it possible that the airline’s management noticed Alitalia was in such a bad situation just in December?
Somebody knew and did nothing, or better, they have hidden the situation from the media as long as possible.
Luca Cordero di Montezemolo, president of AZ, had said to the government that “Alitalia loses half a million euro a day” (Translation from: “Alitalia perde mezzo milione di euro al giorno”) way back in July.
In the end of September, more bad news arrived to the ears of the management board: not even the minimum goal of a loss of around 140 million is possible anymore, Alitalia has in fact already lost 200 million by the end of June and the skies don’t seem to be getting brighter.
The predicted loss for 2016 was more than 400 million and Alitalia’s liquidity had fallen down to 20 million between October and November, when an airline as big as Alitalia should have around 300 million of liquidity always available.
James Hogan is facing the possibility of another meltdown and reacted attacking the government, saying they didn’t respect some key aspects of the alliance between the two airlines.
Even Carlo Calenda, the actual Minister of Economic Development, said the company was “badly managed” and it still is, because no industrial plan has yet been approved by the shareholders.
One of the possible solutions: splitting Alitalia in two
One of the possibilities is to split Alitalia in two different companies: one to become a short/medium haul low cost carrier in competition with Ryanair, easyJet and the recently developing Blue Air; one to acquire all of Alitalia’s current long-haul routes, which are the most profitable routes, remaining a full-service airline.
This is exactly what the 2013 industrial plan meant to make happen, but then Etihad arrived and it was abandoned.
Creating a new LCC? A very difficult task
Creating a brand new LCC using the Alitalia brand would be very difficult because the Italian airline market has not even tried to protect itself from foreign invasion, thing that many other nations have done (Germany, for example, has forced LCCs to use smaller airports further from the cities and is giving LCCs trouble over getting the permission to start new routes).
The cost of work and taxes would also prove to be a problem for the new LCC, because Ryanair, for example, pays a lot less taxes and spends about 30% less in employees’ pays.
Long-haul flights? There are problems on this part too
Alitalia would also have problems with its long-haul carrier, mainly because of the old alliance with Air France-KLM and Delta on flights to the US, which doesn’t give Alitalia the possibility to start new routes to the United States, and because there would be the need to find a strong partner able to finance and maintain new planes.
A solution is very far away
So, in conclusion, Alitalia still has a future of losing money ahead and that won’t change for a while. The expected loss for 2016 has now reached 600 million and at least 1600 jobs will be cut. To make things worse, James Hogan will leave its position of CEO in the Italian airline in the second half of 2017, after working with Etihad for more than 10 years.
If everything goes well with the new industrial plan that still has to be presented, maybe the carrier will be able to break even in 2020/2021.
The only things Alitalia can do for now is hope that shareholders keep feeding this money-eating monster until the managers find a way to save it or wait until they surrender, letting what could be one of Italy’s most valuable assets go bankrupt.