The Worst Airline Prediction of the Past 15 Years

Skift Airline Weekly was never in the business of making predictions. But as you can see from this 2008 feature story, we were pretty sure Alitalia was headed toward the graveyard.

More than a decade later, guess what? Alitalia is still flying. Lesson learned: Never underestimate the ability of weak airlines—especially those with supportive governments—to survive.

Here’s our story from September 22, 2008.

Life After Alitalia

Carrier unlikely to escape its latest near-death experience; who will fill the void?

While Italy’s politicians just can’t seem to let go, options for saving Alitalia are running out. It may be time, finally, to say goodbye.

Last week, the consortium of Italian investors behind the latest attempt to save the world’s most dysfunctional airline walked away. Some of Alitalia’s nine unions— counting on political support and perhaps emboldened by years of empty threats and ultimatums—refused to accept pay and productivity terms necessary to ensure the longterm health of a newly reconstructed airline.

Still, as of this writing, politicians were scrambling to do something. There’s the possibility of yet another government infusion of cash, though the legal implications make that unlikely—Alitalia is already running on subsidies that violate European Union law. Politicians could browbeat one of Italy’s top banks to provide another round of short-term funding, though that wouldn’t solve anything beyond a few months at best. Finding a foreign savior is another remote possibility, but none will be willing to help as long as unions remain uncooperative.

Air France/KLM, in fact, said recently that its offer to buy Alitalia—a lucrative one that politicians and unions recklessly sabotaged last spring—is off the table now that fuel prices are higher and the economy much weaker. There’s still a glimmer of hope, meanwhile, for the latest plan to recreate a new Alitalia by fusing it with Air One and shedding its debt. Investors may have walked away, but they could be called back if unions—notably pilots and flight attendants—change their minds. Time, though, is running out. Suppliers want cash up front and some, like fuel suppliers, are already threatening to stop doing business with the carrier. Travelers with any sense are no longer booking flights on Alitalia, depriving it of necessary cash. Already, some flights are canceling.

The likelihood of a complete shutdown, therefore, is greater than ever. If that happens, it would constitute the largest casualty of the current industry turmoil, one that’s claimed the lives of at least 25 airlines worldwide, but all of them relatively small would have a much bigger impact, including the disappearance of roughly 175 airplanes and about 500,000 seats per week. Even when Swissair collapsed shortly after 9/11, the impact wasn’t as dramatic because a new airline (Swiss International) was formed to take its place. Same for Belgium’s Sabena when the creation of SN Brussels followed its collapsed.

Naturally, rival airlines will be eager to fill the Alitalia vacuum. Italy’s domestic air transport market is the third largest in the European Union, behind only Spain and France, and the country is the fourth most visited in the world. Its economy, moreover, is larger than all but six other countries and is heavily dependent on international trade. In 2007, the Italian airline market generated 76m passengers, including nearly 5m each to and from the Americas, Asia and Africa. Eight Italian airports handled more than 5m travelers last year—three facilities in Milan, two in Rome and one each in Venice, Sicily and Naples. Growth was healthy last year as well, with total traffic up 8% versus 2006.

The spoils of this rich Italian market, in the wake of Alitalia’s demise, could go to Air One. But that’s not inevitable. Though perhaps arm-twisted by politicians to participate in the latest Alitalia restructuring, Air One might have improved its strategic position had the merger come to pass. The plan would have created a largely debt-free and cost-efficient airline with new planes and a tight grip on lucrative markets like the one between Rome and Milan. Left on its own, however, Air One is a mid-sized carrier with $1.2b in annual revenue (compared to $33b for Lufthansa and Air France/KLM) and presumably a lot of debt, though it hasn’t published any recent balance sheets. In 2007, when industry conditions were relatively favorable, it managed a net profit margin of less than 1%.

Fortunately, Air One does have aircraft on order, including 45 more A320s, ten A330-200s and—looking far ahead—12 A350s. Provided it can finance these deliveries despite tight credit conditions, Air One may be able to jump on Alitalia’s abandoned routes relatively quickly. It may decide to buy some of Alitalia’s planes and hire some of its workers as well. Already, Air One is starting to fill the Alitalia vacuum left at Milan Malpensa by launching flights to Boston and Chicago. It has also expanded aggressively within Italy and Europe during the past few years, contributing to Alitalia’s woes. But such aggressive expansion entails considerable risk. In the meantime, other Italian carriers like Sardinia-based Meridiana (and its partner Eurofly) and WindJet, an LCC whose traffic jumped 20% y/y in August, will also be trying to fill the void.

Non-Italian low-cost carriers like Ryanair and easyJet will find big expansion opportunities as well. Ryanair will be Italy’s largest airline by passenger count if Alitalia disappears, and airports around the country are asking it for more service. It already has bases in Milan Bergamo, Rome Ciampino and Pisa and nearly entered Milan Malpensa earlier this year before failing to reach an agreement with the airport on fees and charges. easyJet, also growing rapidly in Italy, does operate a base at Malpensa, one of its top strategic priorities. Capacity this winter will be nearly double last year’s levels. It’s already the busiest carrier at the airport, and load factors are running about 20 points higher than Alitalia on routes where they compete. Other major LCCs serving Italy include Air Berlin, Vueling/Clickair, Wizzair and SkyEurope.

An Alitalia collapse would also have major implications for SkyTeam, which depended on it for access to Italy’s smaller markets. This was one reason why Air France/KLM offered to buy Alitalia earlier this year, and why it may now decide to expand in Italy on its own. Lufthansa, which makes no secret of its desire to capture lucrative Italian business traffic through its German and Swiss hubs, is already doing just that. With the help of its wholly owned Italian regional subsidiary Air Dolomiti, the German carrier will base six A319s at Malpensa this winter. The slower growing and less aggressive British Airways may have some Italian maneuvers up its sleeve as well. Perhaps the biggest uncertainty centers on Alitalia’s longhaul routes, now flown mostly from Rome. Will Air France/KLM, Lufthansa or BA try to fly to the U.S., for example, from Italy now that open skies allows that?

Speaking of which, OpenSkies the airline, BA’s new premium longhaul unit, has mentioned Milan as a possible base for New York flights. Other busy longhaul markets to and from Italy include Brazil, Japan and China, which are all currently served by Alitalia. Its collapse, therefore, may open some opportunities for airlines like TAM, LAN, JAL, ANA, Air China and Korean Air. Medium-haul international routes to Turkey, Egypt, Russia, Israel, Tunisia and the UAE, all high-volume markets from Italy, will also be up for grabs. Nevertheless, Italy stands to lose a significant amount of international capacity in the short term, which could have a negative economic effect. Then again, subsidizing Alitalia to operate those flights has an adverse economic effect as well.

Throughout the past decade, Italian air travelers received more shorthaul service for lower fares thanks to the entrance of airlines infinitely more efficient than Alitalia. The impact has been less profound, however, on intercontinental flights because rival carriers didn’t have the resources, appetite for risk, airport assets or even the legal right to establish the large hub networks necessary to profit. Unlike Ryanair’s flights between Rome and London, for example— which can operate without connecting traffic—flights between Rome and the Americas or East Asia require a substantial feeder network. With Alitalia out of the way, one of two things will happen: Either another carrier like Air One or Lufthansa will recreate hubs in Rome and Milan, or Rome and (more likely) Milan will go the way of shuttered midsized U.S. hubs like Pittsburgh.

Whatever happens, the death of Alitalia would prove beneficial to industry yields in the short run. Average fares on routes to and from Italy would surely increase, and aircraft prices might even fall as more planes get dumped on the market. All of that lucrative Italian premium traffic coveted by Europe’s Big Three—especially from wealthy northern industrial regions—would be diverted through hubs like Paris, Frankfurt and even Helsinki. If markets calm a bit, entrepreneurs may even step in. The scenario looks quite good for Europe’s survivors. Even if Alitalia is salvaged, it won’t be as big as it was before. But opportunists should keep a few things in mind. For one, Italy’s economy is in recession, which may limit the ability to profit from Alitalia’s routes.

Markets like Rome and especially Milan are divided into multiple airports, making it hard to concentrate and amass connecting traffic for longhaul flights. And Italy has bad geography for key Asian markets and few of the overseas ex-colonial links so critical to the fortunes of other European air markets. Finally, and perhaps most importantly, Italy has politicians that just can’t seem to let go of Alitalia. Though its prospects look dimmer by the hour, the story is not over until the planes stop flying.

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