I’ll explain what will happen between Lufthansa and Ita Airways

24 January 20222 years ago babelfish

How much is the Lufthansa group willing to pay to purchase a qualifying stake in Ita Airways. And how the Italian government must move. Paolo Rubino's analysis

The chronicles of Ita Airways tell us that the company's top management is close to the long-awaited conclusion of a pact with one of the major leading groups in European and world air transport.

Media noise or concluding announcement? If the facts are lined up, filtering the mists of speculation and rhetoric, the following emerges:

September 30, 2021: Ita, in the person of its President Altavilla, announces the acquisition of 59 airplanes of the Airbus family of which 28 are owned, 31 are leased.
October 15, 2021: Ita begins its transport business and, at the same time, Altavilla announces the purchase of the Alitalia brand from the liquidator.
On 16 October 2021: the President himself declares, however, that that brand will not be used and on the following 19 October he clarifies that "most of the potential allies with whom we discussed the brand told me that Alitalia would have been a ballast in a alliance discussion. A discontinuity was necessary ”.
January 15, 2022: at the hearing of the Transport Committee of the Chamber of Deputies, the top management informs that, in the first 2021 budget, in the 75 days of industrial activity since October 15, the income statement will close with a loss, before the financial charges and taxes, of 170 million euros, although this result lacks, for now, a resolution of the Board of Directors. In the same circumstance other information is provided which, however, are not facts, rather intentions and opinions, that is, in the words of Altavilla
"That we can reach June – 2022 – to have a concrete alliance project – and that – we are working on it with the utmost commitment"
that "since the elaboration of the industrial plan that will determine the prospective value of the company has not been completed, it is too early to talk about shares" to be sold to the alleged ally and, in any case, this summit would have clear in mind the indispensable conditions to be placed on the future ally, “First of all the recognition of the centrality of Fiumicino and Milan Linate in the future network of this alliance: therefore we will not accept proposals that downsize Fiumicino and Linate, also because this would open the door to downsizing, including employment. Secondly, we believe that Italy has all the prerogatives to maintain some long-haul routes without the long-haul being absorbed by the future partner ”. Altavilla adds that the Alitalia brand is “destined to be used in analogy with what happens with other operators who have other brands in their portfolio. We have identified a very clear mission for the Alitalia brand ”thus overturning what it declared on 16 and 19 October 2021.

Therefore, the facts tell us that, in the absence of updates, the fleet plan is confirmed. This is certainly good news, albeit marred by serious commercial, strategic and financial naivety. A single supplier Airbus and the apparently definitive renounce the partnership with Boeing, long in the industrial tradition of Italian aviation, on the commercial level; a mix of orders unbalanced on the medium range on a strategic level; a mix of sources unbalanced on leasing in terms of medium and long-term financial convenience, however, also here with a single supplier from a commercial point of view.

Furthermore, the network plan is confirmed, in which the operational centrality of Fiumicino and Linate is assumed. Good news that there is a plan for the use of the fleet, albeit marred by a certain lameness and obsolescence, in particular for Northern Italy where the identification of the strategic pole in the city airport of Linate appears rather a legacy of the 80s, devoid of energy to meet the contemporary demand of that succulent traffic basin and not very lucid in considering the invincible competition of high-speed rail in the national and European medium range.

There is also a change of course in the commercial strategy in the resurrection of the Alitalia brand. Good thing since that brand undoubtedly has a greater attractiveness, compared to the anonymous Ita, to catalyze bookings and sales in the parallel and fundamental world of CRS and the web, although nothing is said about what the mission "very clear "Of the reborn brand. It is reiterated that there is an industrial plan which had foreseen a loss of 170 million euros in 2021, or 2.2 million per day. Interesting result that confirms, incorporating the inflation rate, the daily losses from 2004 onwards constant through the most varied types of management that corporate alchemy can imagine. It is also confirmed that the negotiations for an alliance are proceeding and even a deadline is identified for these in the next month of June.

It is a good thing that this decisive pillar continues to imbue the strategic thinking of top management with itself, although, once again, there is a sense of stale in placing a path that dates back to the 90s as the pivot of the strategy and which, in the contemporary scenario, it appears devoid of creative force in its self-referentiality unable to see the new horizon of intermodality. One would also wonder why a new alliance is being sought since Ita is part of Skyteam . Are there and possibly what are the reasons for dissatisfaction with this cartel which Alitalia has already been part of for twenty years? And what are the expected benefits from an epoch-making, for expenditure of money and intellectual energy, migration to a new booking system, to new maintenance, handling, catering, loyalty programs, etc. etc.? It is also announced that "the elaboration of the industrial plan which will determine the prospective value of the company" is underway.

Having a plan is a good thing, but isn't there already one? The same that "legitimizes" the loss of 170 million in the first year of the company? Finally, it is confirmed that the management is "working with the utmost commitment". And here's really good news, albeit a little redundant.

On closer inspection, if we put together the established facts and the declared intentions, a rather precise profile emerges: a so-called "capacity provider", a mere producer of flight hours on behalf of a third party, a "phasonist" to adopt a term known to the 'textile industry. It would seem to have all the characteristics: single-brand fleet, an evident signal of functionality to the fleet strategies of a large player who would never give up the benefits of at least one double source of supply. It is highly flexible, given the imbalance on the leasing which allows the customer to cut the order more quickly if necessary according to their production objectives. A solid spoke airport such as Linate, a catalyst of feeder traffic for the large continental hubs, not very attentive to environmental compatibility.

But this isn't usually crucial for a phasonist. A large destination airport such as Fiumicino. And rightly which third party would like to miss the unparalleled appeal of the Rome destination. The Colosseum, at least for now, certainly cannot be transferred elsewhere. Wide, and uncritical, willingness to migrate from technological and IT infrastructures to others, but a phasonist cannot avoid this because he does not develop his own systems, he must work on and with those of the client, obviously paying the usage fees. This profile of phasonist, due to its logistical proximity and strategic vocation to pure hub & spoke above all, but also for synergies in large purchases, for the potential for income growth in sales of maintenance, IT, catering and other services, is certainly functional to the strategy and organizational structure of the Air France group, like those of the Lufthansa group. Little to those of the IAG (British) group which, not surprisingly, has always declined interest. Almost not at all to large US companies, at least under the current international legislation governing air transport.

But must a client necessarily acquire the ownership, even partial, of his own phasonist? In theory no, but certainly the stabilization of an ancillary relationship would be favored by corporate control. In this Lufthansa has shown not to skimp in the past by acquiring control, among many others, of three former flag carriers, the Austrian, the Swiss, the Sabena. A little different is the approach of Air France which, in the operation with the Dutch KLM, has shown that it wants to enhance not so much the role of the carrier as a phasonist, but that of a partner, albeit of lesser importance, in planning a municipality future. The drive of the Ita summit towards the option of the German group, to be honest never declared, rather often insinuated by commentators, would therefore seem to lead to a future of Ita / Alitalia as a capacity provider along the lines of Austrians, Swiss and Belgians.

How much is the Lufthansa group willing to pay to purchase a qualifying stake in the Italian company? It is unlikely that this type of purchase is based on the appreciation of the future value of the company, as Altavilla would seem to fear when he reports on the elaboration of yet another new industrial plan. The evaluation of the buyer's price will be based, much more easily, on the margins that the new capacity provider will be able to produce for the buying group in terms of greater power in large fleet purchases; incremental income for maintenance, catering, handling sales; the lower commercial cost of attracting customers from the decisive Italian market. The economic, financial and patrimonial fate of the capacity provider is not a priority, although certainly the purchasing group will not be indifferent to the economic stability of its phasonist. But in general, the client's input will be to pursue stability through high cost flexibility, primarily of work.

A very different scenario if the relationship between the acquiring group, Lufthansa, and Ita / Alitalia were to be based on a sale, by the Ita ownership, of a significant package of shares in exchange for a stake to be obtained in the group. But for this the portfolio should be opened by the current owner of Ita, the Italian state. The stock market capitalization of the group is now approximately € 8 billion. If the transfer of Ita / Alitalia in a private transaction with the German federal government could create an initial package, paid card for card, of a few points and as long as the ongoing management impoverishment is stopped quickly, in order to really count on the board, the rest should be acquired. from the market until a threshold of at least 10% is reached.

If this visionary project were to come to life, the protagonist should be the Italian government, certainly not the Ita company. But if this investment were to create a real “New European Airline” group, it might be worth it.

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/smartcity/ita-airways-lufthansa/ on Mon, 24 Jan 2022 17:13:54 +0000.