Cloud over Alitalia strategy

Date: 16/01/1997

By Chris Johnstone

NEIL Kinnock is putting pressure on ailing Italian airline Alitalia to make its restructuring plan more credible.

The Transport Commissioner was this week seeking an urgent meeting with the company's top management in order to urge changes in the proposed strategy before the Commission delivers a verdict on it in March at the earliest.

Brussels has made little secret of the fact that it is not convinced by the plan submitted by Alitalia in July, which was designed to win clearance for a 1.5 billion-ecu-injection by state holding company Istituto per la Ricostruzione Industriale (IRI).

The European Commission opened an inquiry into whether state aid was involved at the start of October.

A report by consultants Ernst and Young is understood to say as much, with a detailed attack on Alitalia's predictions of returns on investments, although Commission sources say the report might not be the consultants' last word on the subject.

Since October, Alitalia has been ignoring the signals from the Commission and sticking stubbornly to the line that no state aid is involved and the operation is the normal action of a private investor. It restated this view at the last meeting between the two sides in December.

Alitalia is refusing to comment on whether it is prepared to alter its line ahead of new talks with Commission transport officials.

“Let us get the meeting over first,” said an Alitalia spokesman, who added that airline President Fausto Cereti was likely to attend the fresh talks.

Alitalia's restructuring contains a fast cost-cutting programme worth 310 million ecu, forecasts of 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 is planned, although Alitalia arguably has some saleable holdings such as a minority stake in Hungarian carrier Malev.

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

In return, Alitalia is asking for half of its cash injection this year and the rest by the year 2000.

Alitalia says its efforts will pay off with satisfactory operating results and a return to dividend payments by 1998.

The airline is reluctant to move away from this plan because the carrier's trade unions have already been brought on board and renegotiation would be hazardous.

But Commission sources say that this argument does not stand up to scrutiny. They point out that Spanish airline Iberia had to win significant concessions from the unions (in particular the pilots) and sell off most of its Latin American empire to make its capital injection credible.

Alitalia's proposal to improve its poor productivity performance appears even more unambitious when compared with most other European airlines, including market leaders such as British Airways and Lufthansa, who have embarked on a fresh wave of cost cutting. The productivity gap would still remain even if the proposed restructuring went ahead.

Alitalia is the last in the series of European state-owned airlines to seek Commission approval of a government subsidy or cash injection, following in the footsteps of Sabena, Aer Lingus, TAP, Air France and Iberia.

As a latecomer, Alitalia is in the unfortunate position of facing Commission officials keen to take a tougher line on government help for public airlines since the initial subsidy cases of the early 1990s. Kinnock's Directorate-General for transport (DGVII) is anxious to curb excessive airline aid in the run-up to the April 1997 deadline for full liberalisation of the European air travel market.

From that date, the last constraints on EU airlines will be lifted and each company will be able, for the first time, to invade its rivals' domestic markets without any of the current curbs on the number of seats or routes offered.

Commission officials are also losing patience with Greece's Olympic Airways. A technical meeting between Commission, Greek government and airline officials was scheduled to take place this week as part of an on-going examination into whether all or part of a second slice of frozen aid could be cleared.

Without some movement from the Greek side, the Commission will have no choice but to make a negative decision.

The Commission froze payment of 76 million ecu the second of three subsidy payments worth a total 1.8 billion ecu last April, because the Greek government had paid out 36 million ecu to the airline without its clearance.