Alitalia? Close or double down. that’s how

6 April 20213 years ago babelfish

There are two only alternatives for Alitalia. The intervention of Gianni Rossi, for over 20 years in the aviation sector, first in Alitalia, then in AirOne as CFO, finally in Meridiana and Eurofly of which he was CEO from 2005 to 2010.

As things stand, the plan of the umpteenth Alitalia phoenix , now called Ita, in addition to being revealed, for anyone with minimal competence, unsustainable in the medium term, is also evidently devoid of any public utility value, useless for the development of the country. Seriousness and urgency of projects and decisions, in the scenario of the post-pandemic reset of the sector, are now unavoidable and almost out of time.

The only two alternatives, respectful of public money and European standards, on the table of those called to decide are placed at the two extremes of the analysis:

the performing settlement of employees and the central / national management of public service obligations including contributions to LCC (low cost carriers) by airports: the only service that would have a concrete public utility and that would cost less than 1 / 20 of the amounts allocated for Ita;
achieve the "business discontinuity" invoked by Brussels, not through a reduction of the perimeter, but rather through a project that contemplates a significant increase in activities up to 300 aircraft, of which at least 75% are new and owned, and which has as a line strategic founding the reduction of unit costs (to be started due to opportunity and necessity already within the extraordinary administration) in order to be able to compete in Europe in the near future on an equal footing with real competitors: low-cost carriers and be significantly present in the long term passenger and cargo haul. This project could certainly preserve all the employees, the goodwill, the assets (including the slots), the brands and the know-how of Alitalia in AS and of the former Meridiana Fly, thus leading to the rebirth of one of the most important of our country.

The reasons that lead us to declare only two such drastic and radically opposite paths as viable are not the consequence of emotions and rhetoric, but based on the observation of the numerous failed attempts of the past that are there for all to see, on the neutral reading of the technical data available. for many, on the commitment to interpret the near future, an effort which unfortunately the insiders at the Alitalia bedside never had a great desire to dedicate themselves to, not even this time in the face of the enormity of the predictable and ineluctable post-pandemic changes.

It is bitter to note that after three pseudo-bankruptcies (2008, 2014 and 2017) followed by as many phases of extraordinary administration managed, unfortunately, with "substantially ordinary" methods and a 2020 that saw the decimation of passenger air transport worldwide due to of the pandemic, the Italian government is trying to convince the European Union to give the green light to a project to transform what remains of the old Alitalia (still in AS), into a new "self-sustainable" reality with a fleet of 45 aircraft , 4,500 employees (from the current 11,000), a passenger share of around 7% of the Italian market and with the only explicitly stated goal of still flying the Italian flag.

This Alitalia / Ita for which the Government fights so much is a real amateur mess: a number of employees inconsistent, by excess, with the actual needs of the 45 aircraft envisaged. A size of the fleet that would place it in hundredth position in the world rankings. In fact, if we look at the latest pre-Covid statistics for traffic volumes of all airlines – private and public – of Iata (international airline association), our Ita would position itself, from the start, with a potential goodwill equal to 40% of the aircraft used in 2019, approximately 15 million RPKs and approximately 10-11 million passengers, in the company of Egyptair and the regional carrier SriLankan Airlines. Positioning inconsistent with Italy's membership of the G7 or G20. Rather a positioning "right to participate", within the group of flag carriers trying to survive in the hyper-competitive world air transport market thanks to public aid and by leveraging the old bilateral agreements where the States decide on the distribution of routes, flights and prices. Too bad that this strategy has no longer been applicable to European carriers for many years!

It is funny that the new leaders of Ita declare on several occasions that they can quickly recover, within two / three years, the fiftieth position of IATA by doubling the fleet. One of the two: either it is assumed that the main competitors, after having replaced Alitalia in 50% of the old 2019 connections, withdraw in good order in the face of the impressive deployment of the Italian flag, or Ita, in great secrecy, has access to a hitherto unknown and very powerful competitive weapon. The arrogant intent to deliberate, in 2022 or 2023, an increase in the capacity offered and new investments, with public money, in the presence of substantial losses in the first year / two years of activity, unfortunately for the Ita Board of Directors will be easily frustrated since this time, unlike the extraordinary administration, it will also have to present economic balance sheets and be subject to the aeronautical economic constraint of the going concern.

To achieve all this, we would like to endow Ita and its Board of Directors with a good 3 billion euros. With these premises, it almost seems that the Italian government wanted to come to the discussion table on "business discontinuity" with Commissioner Vestager to confirm to the latter what Brussels has always suspected, with the majority of Italian and European citizens, on the long-standing Alitalia crisis, namely that the Italian State has absolutely no vision or any entrepreneurial ability to profitably manage an airline and that this is nothing more than one of the many initiatives aimed at the useless waste of public money.

The cards with which our Ministers sat at the EU table are, in order:

1. a confused strategy and a size of the Ita company that is inconsistent with the vaunted Hub & Spoke role of a network carrier; a role that in the last 20 years has been used exclusively as an alibi, by trade unions and management, in order not to proceed with a serious "revolution" of the company organization that followed the evolutionary dynamics of the sector;

2. a prevailing positioning on Rome FCO, a market characterized by very low and declining unit revenues (mainly tourist traffic), not compatible with the high costs of Alitalia and with the airport costs of ADR;

3. a financial commitment (3 billion euros!) Equal to at least ten times the amount of the commitment that a private investor would take on (net of the outlay to take over the business complexes) for a similar value-added entrepreneurial initiative market;

4. no serious strategy and no internal cost and process control culture for a drastic reduction in Alitalia unit production costs which at the moment are approximately double the main competing carrier present in Italy and on FCO;

5. an "empty box" Ita – with a Board of Directors of nine people, 40 employees and many consultants – set up very early which, in addition to demonstrating from the outset the lack of sensitivity to cost reduction, would seem an excellent trailer for a new television series on Alitalia's industrial crises.

IATA places a return to pre-covid world traffic volumes in 2024. At that date, according to the plan of its Board of Directors, ITA should develop a volume of activity respectively equal to approximately 1/15 and 1/10 of the potential strategic partners Delta and Lufthansa and, in the intentions of the Plan, one of these companies will seek an “agreement that produces significant advantages in terms of traffic and economic margins”. Given the forces at play, the negotiation to obtain these results can only be unrealistic.

Once again, there is no memory of the strategic and management mistakes made in the last thirty years. Nor are the big names in global consultancy missing from the chorus which, in the wake of what was elaborated in the past in terms of Alitalia's restructuring plans aimed at recovering economic equilibrium, indeed never achieved, prescribe once more, even in the context of absolute novelty of the post-pandemic “reset”, the same usual, infamous recipe, based on the reduction of the fleet and the number of connections offered. Failing to include even a single project that aims to solve the primary problems of the "AZ_LAI_CAI_SAI_ITA": fleet, service, productivity and costs and certainly not alliances, networks and advertising. The consultants know that in contemporary air transport, those with the lowest seat costs and the highest traffic volumes always win and survive. For politicians and opinion leaders it would be better to get over it before starting any discussion in Europe and writing a few articles too many against Alitalia employees in the newspapers.

But what is the path that should be taken? First of all, the definition of a realistic and convincing competitive positioning. The new business plan, though full of colorful PowerPoint cards, makes no mention of the simple economic principle that oversees the planning and management of a civil air transport company that can be summarized in the organizational concept of the "exploitation of the physiological operating leverage through a continuous increase in production volumes and company productivity flanked by a contextual, continuous and obsessive reduction in costs ".

It is worth reminding planners that, except for those entities protected by local regulations or publicly subsidized, no company in the recent history of air transport has ever managed to improve results, reduce economic losses through a reduction in flight activities, while on the contrary, all the concentrations, carried out in the last 50 years in the sector thanks to the deregulation processes, have been successful precisely because of an expansion of the perimeter of activity with consequent exploitation of operating leverage, economies of scale, cost reduction fixed and increased productivity. These are the facts.

The old soup of the new plan re-proposes the story already seen, in a competitive post-covid context in Italy which will presumably maintain all the old critical issues relating to low rates of economic growth and the high incidence of extra-charges of the "Italian System", to which will be added the new criticalities deriving from a natural reduction in the number of business passengers by now accustomed to “virtual” relationship methods through videoconferencing. And the above will have a greater impact on traditional carriers or network carriers, which declares its intention to be Ita. They are mainly based on business traffic compared to low-cost ones, with a tourist vocation, now well established and constantly expanding in our country.

Precisely in relation to competitive positioning, the new ITA company, which has 90% of the aircraft capable of flying between Europe and the Mediterranean and which insists on a country with predominantly tourist traffic, must necessarily look at what European low-cost carriers do. Over 60% of the shares of the Italian market are in the hands of the latter and, in the current plan, the unit production costs of the new Ita will at best be double those of the first carrier in Italy called Ryanair while another LCC, WizzAir, an efficiency champion on the Ryanair model, is launching a sensational attack on the conquest of the Italian market. All this is disdainfully set aside in the new plan and the doubts that Commissioner Vestager's technicians express on the premises and analyzes presented by Ita are unfortunately not lacking in foundation.

The second thematic area to be addressed concerns national industrial policy and the role of an air carrier in this area. Considering the considerable public investment required, this issue is central: does Italy need Alitalia?

The issue should be at the center of the political debate which, in recent years, has instead focused on collateral and often misleading decisions such as the choices on System Charges, Alliances and the contributions of airports to low cost and the Flag. That is, failing to change the cultural and management paradigm of the former Alitalia, it was considered better policy to let air transport services be offered only by those who know how to manage the business and limit themselves, without great success, to defending the rights of Italian workers. at the service of foreign low cost.

Regarding the public or private nature of the Alitalia company, it is necessary to start from the awareness of the failure of all the private entrepreneurial initiatives of the past. This confirms, as widely experienced all over the world, of how an airline of a certain size expresses an underlying risk that is difficult to manage, at least in phases of exogenous crisis, by shareholders other than States, by major investment funds or by the undifferentiated public. of savers (listed companies). For Alitalia, however, the same entrepreneurial initiatives, sometimes only apparently private, then caused considerable suffering for the public purse, adding insult to injury.

Conscious of this, it is rather necessary to focus on which connections are intended to be made to make the company really useful for the country, a utility that is difficult to find in the Ita Plan if almost all the connections that will be made are in competition with other carriers which, even in absence of Ita, they would still continue to offer them. Nor can we fail to highlight Italy's vocation and therefore the need to have a public Ita that promotes the development of tourism outside the seasonal peaks and that facilitates business mobility to and from the less served areas of the country such as , for example, the islands or some Adriatic areas. And looking to the future instead of the past, a company capable of serving the commuting business inherent in the recent phenomenon of European south working, where Italy, at least for its geographical position, has many cards to play.

More generally, with respect to national industrial policies it must be observed that in France and Germany the presence of a company of significant size, with networks centered on large airports, is capable of generating significant direct and indirect economic development along six lines:

the development of incoming tourism;
incremental volumes of foreign passengers passing through the Hub;
sustainability of “thin” connections that would not be in economic equilibrium with the revenues of the so-called point to point passengers only;
development of aircraft maintenance activities;
development of airport handling activities;
negotiating lever towards the manufacturing industry for the localization of productions.

Without going into technical explanations, the minimum size that Alitalia / Ita should have, to become a real driver of GDP, cannot be less than at least 250/300 aircraft. This number is certainly compatible with the volumes of traffic in Italy in the near future and which would constitute the only company size consistent not only with the competitive scenario and economies of scale, but above all with the depth of intervention that is required of a State such as Italy.

Such a public enterprise would presuppose a vision, a strategy and a management radically different from what is currently on the tables where the industrial policy of our country is discussed. It is clear that an investment of 3 billion euros can support an airline of about 300 aircraft in its fleet. After all, it is enough to follow the criteria of the EEC regulation 1008/2008 and the related EAL 16 models to easily verify what would be a consistent investment with a fleet of 300 airplanes, also considering the resilience of fixed costs that certainly determine considerable savings from that size threshold. of scale and purpose.

The objection that such an expansive strategy would not reconcile with the public finances of a indebted country like ours is specious and unfounded. The 3 billion euros allocated for the new Ita – to which to add at least another billion for the management of the redundancies and pending of the old Alitalia in extraordinary administration (BadCo) – are certainly not a very different sum from what would be necessary for a expansive floor. Suffice it to consider that the giant Ryanair, with over 450 aircraft, which operates without patents and trade secrets, with a wealth of valuable airport slots lower than that of Alitalia, is one of the most capitalized airlines in the world and has a balance sheet between assets and liabilities of exactly around 3 billion euros!

( Gianni Rossi worked for over 20 years in the aviation sector, first in Alitalia, then in AirOne as CFO, finally in Meridiana and Eurofly of which he was CEO from 2005 to 2010. He was the last CEO of an Italian airline to have closed corporate balance sheets in profit. Currently works in the financial and insurance sector)

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/smartcity/alitalia-chiudere-o-raddoppiare-ecco-come/ on Tue, 06 Apr 2021 07:43:25 +0000.