Alitalia on course for recovery

Date: 10/07/1997

By Chris Johnstone

A PLUSH Budapest hotel was filled with journalists flown in from all over the world, the conference room was decorated with the Hungarian and Italian flags (much being made of their apparent similarity) and the stage was set in December 1992 for flag-carrier Alitalia's finest hour.

Diminutive, cherub-faced chief executive and managing director Giovanni Bisignani, whose large entourage often had the perverse effect of hiding him from the audience he sought, took the stage to announce that the airline was spreading its wings with its first major overseas acquisition - a 30&percent; stake in Hungarian airline Malev.

The only irritation to mar the proceedings was a somewhat impertinent question about where the money was coming from for the purchase. Bisignani, a Christian Democrat-nominated company boss and friend of former long-time Italian Prime Minister Giulio Andreotti, dismissively replied that the price amounted to just a few days' turnover for Alitalia. It was a reply which missed the point: Alitalia's turnover in late 1992 was already being steadily translated into losses.

But Bisignani's response safeguarded the impression that the company was still flying high and the latter-day corporate emperor was still wearing his expensive clothes.

Alitalia was not alone in mistiming a spending spree on new acquisitions, aircraft and routes. Most of Europe's airlines had adopted the same strategy with little suspicion of the consequences of the Gulf War drop in passengers and the mid-1990s economic downturn.

Perhaps the only difference was that other airlines could react faster. As the clock started ticking towards European airline liberalisation in 1997, Alitalia was stuck in the past.

Political considerations vied with management decisions at the top and the unions saw the state's majority share, through an 89&percent; stake owned by holding company Istituto per la Ricostruzione Industriale (IRI), as a guarantee that their demands would be met.

Times have changed, with Bisignani long gone and the main foreign jewel in Alitalia's empire likely to be up for sale as part of a restructuring plan enforced by the European Commission. “Malev is one of the assets that we might have to get rid of,” confirmed an Alitalia spokesman.

Both the Commission and Alitalia hope this restructuring will draw a line under a past characterised by the use of subsidies to patch up European airlines' previous mistakes and to ready them for competition across borders.

In truth, Greece's flag-carrier Olympic Airways will frustrate that 'last time' aspiration. The final slices of its aid have been frozen until the government fulfils earlier promises to the Commission, and Athens is only inching slowly towards that target.

Alitalia's restructuring will, at Commission insistence, be accompanied by a smaller injection of cash than that originally requested by the airline and the Italian government.

Alitalia first asked in 1996 for 1.5 billion ecu, insisting this was not state aid but straightforward investment, but that sum was slimmed down to 1.4 billion ecu by early this year, with Rome finally accepting that the cash should be treated as a state subsidy.

However, Transport Commissioner Neil Kinnock's advisers consistently cautioned that the amount of aid could go up or down depending on the final form of the restructuring plan.

With that restructuring now more modest than first planned, the final allocation of cash will also be more limited than first expected.

Kinnock's negotiators always warned that Alitalia would pay for its lateness in joining the queue for aid and would face tougher conditions than its cap-in-hand predecessors given that Europe's airlines have, since April, been cleared to compete in each other's backyards.

The keystone of Alitalia's restructuring will be finally to tame its employee overheads, which have been way out of step with its rivals - especially the likes of British

Airways, which long since took the privatisation path.

The Italian airline plans to transfer all its staff gradually to a new company, Alitalia Team, with the process to be completed by the end of 2000. That, Alitalia claims, will result in a 40&percent; cut in its cabin crew costs, with slightly lower gains from pilots resulting from an agreement to increase the number of hours flown for the same monthly pay packet.

At one time, such a deal would have been unthinkable for the strike-torn airline.

Industrial disputes effectively unseated one recent Alitalia chief executive, Roberto Schisano, the former Texas Instruments executive and an outsider to Alitalia and IRI. He was reckoned to have gone too far, too fast, for the company's - and eventually the government's - tastes.

Now, however, the workers appear to be on board and the airline is being piloted by one of its own.

Trade union representatives have taken up places on the management board and workers will be offered shares in the company as part of the restructuring. The last 14 months under the latest Alitalia boss, Domenico Cempella, have been strike-free.

Cempella, who started as a check-in assistant at Rome airport before ranging upward through most of IRI's extensive empire, is now promising that Alitalia will end a nine-year series of losses and return to profit by the end of this year. That claim might beg the question as to why any aid should be given at all.

Privatisation and partnership, although not necessarily in that order, will follow the Commission's clearance for Alitalia's restructuring. They have not been written into the conditions but, like the Italian government's hands-off approach to the airline's future management, form part of a tacit understanding between Brussels and Rome about where the company should go.

Italian law has already been changed to allow foreign shareholders to take a majority stake in Alitalia, although a date has still to be set for the airline to be included in the state's ongoing auction of its biggest assets.

Alitalia has a two-pronged partnership strategy: to find a strong US partner (it already has a commercial agreement with Continental) and an appropriate (not necessarily too strong) European ally.

On the second point, Alitalia says it is talking to everyone but the language is more friendly with some than others.

British Airways and Lufthansa are perceived as too big for Alitalia. Some might say more unkindly that they have long ago left the likes of the Italian airline far behind in their pursuit of efficiency and profit.

“For different reasons, Air France is very close to our feeling. It is a Mediterranean airline,” said an Alitalia spokesman.

The Scandinavian company SAS is also described as an appropriate fit.