Alitalia plan fails to take off

Date: 13/03/1997

By Chris Johnstone

STRUGGLING Italian airline Alitalia is moving to fill the credibility gap over its restructuring plans - but appears to have a long way to travel.

European Commission transport officials are still waiting for details of Alitalia's more modest proposals for the airline's fleet and route expansion, and the cash injection that would need to accompany it.

However, even these revised plans are not expected to go far enough to convince the Commission to clear the package. Alitalia will have to spell out whether its new programme is likely to be accompanied by job cuts and if it intends to sell some of its assets to contribute to its cash needs, say Brussels sources.

The latter is seen as a minimum gesture if state-owned majority shareholder Istituto per la Ricostruzione Industriale (IRI) is to have any chance of convincing the Commission that its cash injection should be approved because it is acting as a normal private investor with market forces in mind.

IRI is still pushing the private investor argument, even though the Commission opened an inquiry last October into whether state aid was involved in the capital injection.

Alitalia has told its powerful unions - ahead of informing the Commission - that its original demand for a cash injection of 1.5 billion ecu will be trimmed slightly to 1.4 billion ecu, that it intends to send five Fokker 70s back to the bankrupt Dutch manufacturer together with a demand for damages, and that it will ground a further nine Airbus A300s. “I do not believe they [the Commission] can ask for anything more,” said an Alitalia spokesman.

The changes represent an about-turn from the previous wildly expansionist programme. That included the purchase of new aircraft, a fast cost-cutting plan offering savings of 310 million ecu, a mid-term improvement in market share and receipts, and the creation of a new cut-price long-haul carrier.

No large-scale offloading of assets was planned, although Alitalia arguably has some which are saleable, such as a 30&percent; minority stake in Hungarian carrier Malev and some real estate.

The airline's workforce would only have been lightly trimmed from 17,761 this year to 16,604 by the year 2000. Workers would have been offered up to a 10&percent; stake in the company and regional operations would have been shaken up, with new partners sought but no dilution of Alitalia's ownership envisaged.

Alitalia predicted these efforts would pay off with satisfactory operating results and a return to dividend payments by 1998.

Unions warned last week that they would not be able to support the proposed alterations to that programme since the changes threatened a cut in routes and staff.

The airline's eight unions called on Italy's political establishment to unite in defiance of the Brussels-inspired plan.

Alitalia management was careful to win union support for the original programme before it was even presented in Brussels. That initial haste may now come back to haunt it.

Unions and management were locked in a conflict for most of 1996 over attempts to reduce heavy personnel costs and boost productivity. That confrontation is expected to contribute to expected losses for the year of some 700 million ecu.

The new restructuring programme makes it extremely unlikely that the Commission will give its verdict on Alitalia's cash injection by the original end-of-March deadline.

That target was first fixed with an eye to the 1 April date for the full liberalisation of the EU's aviation market.

“That deadline cannot be expected to be met now,” said a source, adding that a “technical” meeting between Commission officials and Alitalia was expected to be held this week to go over the new details.

From 1 April, any EU airline will be able to launch new services anywhere within the trade block without the existing limits on the number of passengers it can pick up at non-domestic airports.

Alitalia is now facing the impact of this liberalisation.

Its aggressive new start-up rival Air One has already signed an alliance with Swissair and Austrian Airlines. This will allow it to siphon off even more passengers from Alitalia's biggest domestic route - Milan-Rome - by offering European connections and a link-up with an international loyalty scheme.