Scepticism over Alitalia survival plan

Date: 12/09/1996

By Chris Johnstone

ALITALIA, the struggling state-owned Italian airline, is facing the prospect of a full in- depth European Commission investigation into its proposed capital injection.

“We are 90&percent; certain to open an investigation,” revealed a Commission source this week, adding that Alitalia's proposed restructuring plan did not appear convincing.

Alitalia submitted its plan to the Commission in July, arguing that the 1.5-billion-ecu cash injection from its majority shareholder, the state holding company Istituto per la Ricostruzione Industriale (IRI), should be cleared as the action of a normal investor rather than as a state subsidy.

Commission officials are, however, clearly sceptical of this argument and point out that Alitalia is not offering a convincing proposal for job cuts or the sale of significant assets.

After a series of top-level shake-ups, strikes and discussions with the government and the IRI, Alitalia is the last European state-owned airline to approach the Commission for 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 faces a Commission keener to take a tough line on government help for public airlines than it was when the initial subsidy plans came before it in the early 1990s.

Neil Kinnock's transport directorate-general is anxious to curb excessive airline aid in the run up to the April 1997 deadline for the full liberalisation of the European airline market.

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

Commission officials say the Italian government appears to be working on the basis of 1990 and 1991 aid schemes which were treated more leniently.

Alitalia is following the same route as Spain's Iberia in arguing that its capital injection is the action of a 'normal investor'. After a bruising encounter with the Commission, Iberia was made to sell off large parts of its Latin American airline empire, having already inflicted heavy job and wages cuts on its workforce.

The Alitalia plan includes a fast cost-cutting programme worth 310 million ecu, a mid-term improvement in market share and receipts, and the creation of a new cut-price long haul carrier.

Under the plan, the airline's workforce will only be lightly trimmed, from 17,761 this year to 16,604 by the year 2000. Workers will be offered up to a 10&percent; stake 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 2000. It says that with satisfactory operating results its efforts will bring a return to dividend payments by 1998.

The Italian airline's cash claim is half as big as that made by Air France, whose 3-billion-ecu aid package has already been cleared by the Commission with the exception of 770 million ecu which is still being monitored.

But the whole package appears long on optimism and short on realism, according to Commission sources.

Italy's Transport Minister Claudio Burlando said this week that he was still expecting a trouble-free clearance from the Commission this autumn for the airline's cash injection.

Alitalia is already facing fresh competition from the newly launched Italian airlines, such as Air One, on some of its most lucrative routes including Rome-Milan. Some industry observers say Alitalia is already technically bankrupt under the weight of its heavy debt burden.