Alitalia. Flights of fantasy

Date: 22/10/05

State-funded parachutes for Italy's national airline

IT IS laudable to have high ambitions. But when Alitalia, Italy's troubled national airline, says that it aims to be a "highly efficient network carrier", it risks being greeted with a hollow laugh. Yet, approving a revised corporate plan for 2005-08 on October 14th, Alitalia's board confirmed that this is just how it sees the airline.

The reality is that Alitalia has posted operating losses for every year between 1999 and 2004, and has accumulated net losses of about €2.4 billion ($2.4 billion) in those six years. It lost a further €122m during the first half of this year. The airline had debts of €1.7 billion at the end of August and now probably has only enough cash to carry on flying until the end of the year. Alitalia has kept airborne over the last year, largely thanks to a state-guaranteed bridging loan of €400m provided by Dresdner Kleinwort Wasserstein (DKW), a German bank. But that loan must be repaid by March next year. The financial position at the end of August showed a further €168m of debt falling due over the next year.

Like its competitors, Alitalia is feeling the effects of high fuel prices which, it expects, will add €320m to its costs next year. And low-cost carriers are carving out large slices of the Italian market; Ryanair operates 20 routes from Rome and 18 from Milan while Easyjet announced on October 12th that it will soon open a hub in Milan. So Alitalia's bankers have little to smile about, and they may wonder if the board's assurance that the airline will reach economic equilibrium next year is worth much.

Even so, Alitalia may pull through. If it does it will owe its survival, as it has in the past, to the helping hand of the Italian government, which owns 62.3% of the airline, and the tolerance of the European Commission, which is meant to crack down on state aid to loss-making businesses. Alitalia's trick this time seems to turn partly on spinning off non-flight operations, such as ground handling and maintenance, into a separate company called Alitalia Servizi. At the end of May, Alitalia's board approved an arrangement under which Fintecna, a company wholly-owned by the state, will become a shareholder in Alitalia Servizi. Fintecna will acquire all Alitalia Servizi's preference stock and 49% of its ordinary shares.

The European Commission's attitude to all this will be vital. Last month it ordered Olympic Airlines of Greece to repay millions in illegal state aid. But Alitalia says that the commission accepts that Fintecna's stake makes genuine commercial sense and is, therefore, not illegal state aid. All the same, some industry experts are sceptical that genuine private investors would be willing to put money into Alitalia and, unsurprisingly, leading European airlines have expressed their concerns to the authorities in Brussels.

In November 2004 Alitalia said that it would launch a rights issue of €1.2 billion by the first months of 2005, but cash is running out while talk on this continues. Twisting and turning to get off the hook on which years of over-manning, weak management, poor service and political interference have impaled it, Alitalia now plans to raise up to $485m of new debt, pledging part of its elderly fleet in guarantee. Financial pyrotechnics may keep Italy's national airline flying for a while longer. But a sustainable long-term strategy still seems a long way off.

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