Because Ita’s industrial plan will be a failure
What is wrong with Ita's business plan according to transport economist Ugo Arrigo
After examining the two decisions of the European Union, on Alitalia and ITA, and in two other interventions the regulatory stratification that was produced to guide the transition between the two companies, we now begin to analyze the industrial plan of ITA that very few know about.
During the long years of the Second World War, Prime Minister Winston Churchill had the need to report to Parliament only on very few occasions in secret session. It has therefore caused a sensation in those who follow the Italian air transport that the leaders of ITA, the new airline of the taxpayer, have in a few months already surpassed Churchill for the number of times in which they have asked for the secret session to the parliamentary committees at which they have go to report on their business plan. What are the reasons for this choice? It is excluded that it is for the fear that Michael O'Leary, the head of Ryanair, could copy the plans of ITA in favor of his company as well as the hypothesis that he could derive strategic information fundamental for its ability to compete on the Italian market. And we believe it is not even to prevent some independent analysts from reporting gross errors, inadvertently dropped by usually expensive consultants in the details of the complexity of these plans.
In the very few times that Churchill reported to the House of Commons in secret session a special police force guarded all accesses and only the members who had solemnly sworn could access them. At the end of the session all the copies of the report were destroyed and only one left to its author to be kept in his safe. We do not know if the same happened also in relation to the recent hearing in the ITA House of Leaders, but there is no doubt that the industrial plan is kept with secrecy equivalent to Churchill's secret war speeches. It is therefore problematic to try to highlight the criticalities of the ITA plan which, however, almost no one has seen, neither the plan and therefore not even its criticalities. Before talking about it we must therefore ask ourselves: who has seen it?
WHO HAS SEEN? (THE INDUSTRIAL PLAN)
The decree by which ITA was established, without initially indicating its name, no. 18 of 17 March 2020, under the Conte II government and in the dramatic weeks of the start of the pandemic, established that the newco would prepare "an industrial plan for the development and expansion of the offer" to be submitted to the approval of both the competent parliamentary committees and the 'European Union. When ITA was actually launched in the following autumn, it promptly prepared the plan and sent it on 21 December both to the two competent parliamentary committees, the Chamber and Senate, and to the Competition Directorate of the EU Commission.
Even if the plan was not exactly one of 'development and expansion' but one of contraction and downsizing, only partially justified by the pandemic, the two Commissions expressed themselves in favor between the end of February and the beginning of March of this year while the EU Directorate demonstrated already at the beginning of January a multiplicity of critical observations. Following these there was a complex negotiation that ended only on July 15 with the adaptation of the plan to the multiple stakes set by the Union. However, the new and definitive version of the plan was not sent to the parliamentary committees, which also should have expressed themselves again on it, and outside the Ministry of Economy it is not officially known to the institutions in charge, including even the Commissioners. overtime of Alitalia, which are required by the new laws introduced at the end of June to favor implementation.
However, between the first version of the plan of December 202o and the last of July 2021, it was not only modified to implement the European requests but also for the company's autonomous choices, subsequent to the parliamentary go-ahead. In essence, the plan was undone and remade as a sort of Penelope's canvas without, however, being able to distinguish between the demands of Europe (for some the suitors of Brussels ..) and the desires of Italy. We must therefore ask the question of what Europe actually asked of us and what it did not ask of us, given that in that case it is still possible to change if desired.
WHAT EUROPE DOES NOT ASK OF US
We know with certainty from what has emerged in recent months in the press that it was Europe:
1. To allow the direct passage from Alitalia to ITA of the aviation part only;
2. To prohibit the direct passage of the trademark, subject to tender;
3. To prohibit the acquisition of the Millemiglia loyalty program managed by the subsidiary Alitalia Loyalty;
4. To request the separate sale of Alitalia's handling and maintenance branches, allowing ITA to have a majority shareholding in the former and not a majority shareholding in the latter.
Furthermore, it does not appear that it was the European Commission that prevented the direct transfer of the personnel of the flight branch from Alitalia to ITA, which is expressly provided for by both Italian and EU regulations in the case of transfers of company branches. In the same way, hiring new personnel on the basis of a company regulation instead of the national collective bargaining agreement is a free initiative of the company which also appears not to comply with the regulations in force. But the most controversial aspect of all is given by the company size that the plan assigns to ITA, initially foreseen in a fleet of only 52 aircraft, of which only 7 are long-haul. Also in this case it cannot have been Europe that asked for it given that in this hypothesis it would not have simultaneously authorized ITA to grow again in the following years, according to the forecasts of the industrial plan of last December, until returning in 2025 to exactly the 110 aircraft that had the commissioners of Alitalia at the end of 2020.
WHAT HAS LEADED TO AN 'ACCORDION' INDUSTRIAL PLAN?
We know that Alitalia's fleet at the time of the extraordinary administration consisted of 118 aircraft, 92 of which were used on the short and medium range and 26 on the long haul. By the end of 2020 it had dropped to 110 aircraft. ITA intends to start with only 52, the most important number of the old business plan of December 2020 which has remained unchanged so far. Why such a small number, if it is not Europe that asks it and if it intends to return to 110? The only possibility to identify the answer is to read the business plan and identify the reasons contained therein, whether explicit or implicit. And if the last plan has been classified, as usual, the first has been available for some time on the Report website, the Rai investigative broadcast.
Since the first floor also started from a fleet of 52 aircraft, we look for the reasons among the 88 slides, but not before having remembered that an 'accordion' industrial plan (first the company is drastically reduced and immediately after it starts to grow again ) has never been seen in an air carrier. In fact, if competitors do not behave in the same way, the market shares that are freed up with this choice, and the slots and customers that are spontaneously renounced, once lost, cannot be recovered. There are therefore only three possible interpretations of this choice: in ITA, and in the consultancy companies they use, they are hyper-altruistic towards their competitors or completely irrational, but it is difficult to believe it; alternatively, the 'accordion' strategy is justified by the expected trend in demand on the market as a result of the pandemic, but in this case they are blatantly wrong. The strategy "We halve today because demand is halved and later we double again and go back to the levels of the old Alitalia because demand, doubling, will return to ante covid levels" works only if the demand is forecast correctly. Otherwise it goes off course.
The hypothesis that the dimensions chosen are proportional to the demand expected on the market seems to be confirmed by slide 76 of the December plan. It follows from this that the forecasting framework of ITA was built on the basic forecasting scenario of October 2020 of IATA, the global association of air carriers, applied to the routes operated by ITA. In this scenario (called baseline review) the expected traffic is given in the current year 2021 to 50% of the previous year 2019, in 2022 to 71%, in the following 2023 to 86%, to finally reach the full recovery of 100% in the 2024. Did these forecasts from a year ago turn out to be realistic, or overly pessimistic?
THE STATISTICAL CLOTHING THAT HAS ERRONOUSLY 'RESTRICTED' ITA
Before answering the question it is advisable to prevent the reader from a possible statistical error: the IATA forecasts are values on average for the year, including all the months from January to December. Instead, ITA's choice to leave with 52 aircraft is timely and refers to the date of its debut. Therefore the two data are not correctly comparable. The correct comparison is instead the one with the market trend at the specific moment, not with an average figure over 12 months extremely different for covid restrictions and effects of the pandemic. I'll give an initial example with completely hypothetical data, then let's see the actual ones: if in January, due to the lockdown, the demand is at 20% of the precovid levels and then grows linearly until it reaches 80% in December, the given on average for the year, it will be the 50% foreseen by IATA. But ITA, which is making its debut towards the end of the year, is it appropriate to start at 50% or 80% of the fleet of the old Alitalia antecovid? If it starts at 50% and the market is at 80%, it is giving almost 40% of its market share to competitors, the fearsome low cost ones who thank you and immediately take over.
Let's now look at the actual data. First we check through the Graf. 1 if the size of ITA envisaged in the December business plan actually follows IATA's demand forecasts. The answer is positive: the size of the ITA fleet over time is based on IATA demand forecasts, however formulated on annual average data.
In the previous graph, the dimensional choice of ITA, based on annual data, therefore seems correct, but if we pass instead to evaluate it on the monthly data of the current year it appears completely underestimated. We see in fact in the Graph. 2 the consistent recovery of traffic in the summer months: after having remained between a quarter and a third compared to 2019 in the first five months of the year, the flight offer quickly recovered to reach above 80% in the month in August; in the past weeks of September the reduction is only of a couple of points and in the coming months the forecast is that there will be no significant drops.
The graph shows the dimensional error relating to the debut fleet of the new ITA. The industrial plan presented in December 2020 and based on the IATA scenarios of the previous October provided for ITA to take off in early April, not in mid-October. And thanks to the Graf. 2 it is evident that in April a fleet of 52 aircraft (represented by the grenade histogram, present only from October) was adequate compared to the market. But in October it is no longer so: with the market that has more than doubled since the summer, ITA cannot leave with 52 planes but should have at least 75-80, otherwise in a few months it will make a great Christmas gift to its competitors.
If, on the other hand, he insists on leaving with only 52 aircraft, there will be important consequences on the Italian market that we will examine in the next contribution. It would be better then if its take-off were postponed to next spring, and the time thus gained was used to better organize the handover between the two companies and also to correct the obvious errors in the industrial plan, perhaps avoiding to secret the errors that should insist on staying there.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/smartcity/perche-il-piano-industriale-di-ita-sara-un-fallimento/ on Sun, 26 Sep 2021 07:14:52 +0000.