How to ruin an airline, Italian style

Legend has it that Alitalia stood for Always Late In Takeoff, Always Late In Arrival. That was about flying the planes. You should see how they run the business

Going down?
Tim Hedges
On 11 October 2013 10:47

The newspapers said that meetings were being held in the Palazzo Chigi, the Prime Minister’s office, to ensure the survival of Alitalia. That was the good news. The bad news was almost everything else, including the fact that ENI, the Italian energy company, was not going to keep it in fuel for more than a couple of days.

To be honest, it’s a bit late for meetings: Italy’s flag carrier faces being grounded .

Alitalia has had a fairly inglorious history. Originally it was a Rome airline. Everyone who worked for Alitalia had to live in Rome. So the ground and air crews in Milan or Venice had to be flown up there and put up in hotels while they worked their shifts, then flown back.

Never most people’s airline of choice, except for members of the governing class who travelled free, its name was said to be an acronym of Always Late In Takeoff, Always Late In Arrival, and indeed its punctuality record was and is appalling. Often – it seemed often – you would wait in your seat while nothing happened then a beautifully dressed Italian would stroll on board and the plane could leave. He hadn’t worked up a sweat: he knew they’d wait for him.

Of course it made a loss. By the time the company seemed to be going under in 2008 it had swallowed at least €3 billion in public funds. Many thought it ripe for takeover, but when it was confronted with a rumoured bid from Air France-KLM there was outrage in the newspapers that Italy might lose this national symbol.

This despite the fact that the Netherlands had (to Air France) as had Belgium, the Scandinavians and Spain (to British Airways). The then Prime Minister Silvio Berlusconi, always with an eagle eye on public opinion, announced that he would find a permanent solution to the Alitalia problem. He called around a few of the major industrialists and got them all to chip in. Air France came in with 25 percent, and there were major holdings by the Italian banks and the industrialists, known as ‘The Patriots’.

Meanwhile the loss making parts of Alitalia, including the appalling baggage handling, together with its debts of over €1 billion, were siphoned off into a state holding company. This cost the taxpayer another €2 billion, some think more. How did they manage it while the EU were examining state aid to major companies? Berlusconi had fought tooth and nail to get his friend Antonio Tajani into the transport portfolio in Brussels in May of that year. Tajani approved the plan.

But now Alitalia has run out of money again, five years after having its debts wiped off. This ‘national strategic asset’ has managed to run up another billion euros of debt and lost nearly €300 million in the first half of this year.

Commentators went into a frenzy of speculation while the meetings in the Palazzo Chigi conducted their unseemly, and rather belated, search for a white knight. The first idea was that the existing shareholders should kick in, but they all declined. Even the banks, who largely do as they are told, could not increase their 20 percent stake: all their funds are taken up with Italian State Debt, propping up the nation on the international markets.

All refused, that is, except Air France-KLM which, unthinkable 5 years before, had been invited to increase its stake. It made a half-hearted offer, but it was hedged round with conditions including employment levels and routes operated, and Alitalia’s unions refused it. Letta’s weak government would not be able to stand up to the unions.

You can see why the French carrier might not want it, having just emerged from a cycle of bad losses. In his rather optimistic statement to shareholders last week Jean-Cyril Spinetta, head of Air France-KLM, did not even mention Alitalia.

So word came out that the Palazzo Chigi meetings were looking for an Italian state entity to rescue Alitalia. The various holding companies and state banks were out because their statutes prevent them from investing in loss-making companies. The railways? No, Brussels would not permit that because the high speed lines are in competition with air travel.

And now the news is out. It’s the Post Office. This stuffiest of state entities has been turned around in recent years and is now profit making. Ripe for the plucking: exactly what it needs to add to the thousands of tiny FIAT vans is a loss-making airline on its books. Poste Italiane will inject around €75 million into Alitalia and on the back of that there will be more bank credit lines.

Will this be permitted by Brussels? It is manifestly state aid and British Airways and Virgin, with no access to state funds, will doubtless complain. And yet Italy can point to the French Government’s 15 percent stake in Air France, and, strangely enough, Deutsche Post’s small stake in Lufthansa.

But it is a bad deal for Italy. Alitalia is not of a critical mass to survive in today’s market and is grossly inefficient. Whatever deal is struck now it needs a larger partner soon. Meanwhile Letta has allowed the unions to interfere and prevent a market based solution; they will have scented blood. And now the Post Office cannot be privatised with this elephant in the room – that might have paid down a chunk of debt.

And finally it marks a return to the old Italy, of 1970s socialist economics and quick fixes made by the discreet cabal which runs Italy’s large companies. But what else could have happened? Under a different government Berlusconi would have arranged another fix, or the left would have backed down to the unions. Letta is powerless and Italy has taken a step backwards.

Italy needed someone with the courage to say the country didn’t need a national airline. Instead it has got the same old politicians espousing the same old politics.

Tim Hedges had a career in corporate finance before moving to Rome where he works as a freelance writer, novelist, and farmer

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