Journey to excellence: Alitalia halfway through route back to profitability

The three-year strategy that Alitalia embarked upon in 2015 to turnaround years of heavy losses is now halfway through. So what has been achieved thus far?

Etihad Group chief executive James Hogan, left, and Alitalia president Luca Cordero di Montezemolo during the Italian airline's unveiling of its new livery and new brand design. Andreas Solaro / AFP

When Alitalia gathered the world’s media to an event in Rome this month aimed at highlighting the efforts that have been made to turn Italy’s legacy carrier around, its chairman, Luca Cordero di Montezemolo, drove home the point of how bad things had been.

Prior to a deal that was finalised in December 2014, when Abu Dhabi’s Etihad paid €560 million (Dh2.28 billion) for a 49 per cent stake in the business, Mr di Montezemolo said that Alitalia was “in real trouble”.

“The agreement with Etihad was fundamental for the survival of Alitalia,” he said.

Although it had once been one of Europe’s best-known airlines, it had also become something of a standing joke in the industry — a financial basket-case that had last made a profit in 1998 — its only profitable year in decades, in fact. Previous attempts to restructure it had failed, including a formal bankruptcy procedure in 2008, and a partnership with Air France-KLM withered following cash calls by the Italian airline which the Franco-Dutch group did not want to participate in.

“Alitalia was a wonderful airline brand. But it was seen, unfortunately, to have become tired and become politicised,” said James Hogan, the group chief executive of Etihad Airways Partners and the vice-chairman of Alitalia.

With the agreement of several different parties and the banks Unicredit and Intesa forgiving hundreds of millions of euros in debt in return for equity and provided new funding, the deal between Etihad and Alitalia totalled €1.76bn. Suppliers also converted loans into equity, unions signed up to back a programme that involved job losses and the Italian government agreed to provide funding to promote tourism in markets into which the airline flies. Etihad, for its part, promised heavy investment into the airline under a three-year turnaround plan, which would end with the carrier finally breaking event by the end of 2017.

With the plan now halfway through, the recent event in Rome, billed “Journey To Excellence”, was aimed at showing the world how much had changed. The company still declared a loss of €199.1m on revenue of €3.3bn for 2015, but this was a €381m reduction on the €580m loss declared in 2014. A new brand and livery was unveiled, which gave greater prominence to the airline’s Italian roots, and the executive management has been changed, following the appointment of Cramer Ball as the chief executive in March.

Mr Ball’s previous two roles have been at other recent Etihad investments — most recently India’s Jet Airways and previously Air Seychelles.

Mr Hogan described him as “not only a good friend, but a proven turnaround CEO who has a great track record”. Mr Hogan added: “He has the skills, he has the energy … he has the benefit of having an Italian wife. But he knows this business inside out.”

Mr Ball said the business remained “on track” for its break even target by the end of next year but argued that his target for the same period is for it to become profitable. He praised the efforts of airline staff who had managed to refit the interiors of all of Alitalia’s 122 planes in just five months and said this was part of a package of €400m worth of planned investment into the airline this year, focusing on product and service.

New airport lounges, branded Casa Italia and featuring live pizza and pasta stations, are being introduced at Rome Fiumicino and at Milan Malpensa airports over the next few weeks and at New York’s JFK airport by the end of the year. Existing lounges at Milan Linate, Naples, Venice and Catania are also being upgraded. A new chauffeur service is being introduced for business-class passengers and Wi-Fi is being introduced to all wide-bodied aircraft.

Mr Ball has said his three main goals are to drive revenue — “fight for every single dollar, euro and peso” — to charge staff to go out and sell its product and to keep a keen eye on cost.

“When I came in, we spent pretty much 16 to 18 hours a day working through every single route. A plan does exist to either make the route profitable or redeploy. Two examples of that are Perugia and Pescara. They were two important routes for the region but, for us, they were losing money.”

These were cut and replaced by feeder buses to Rome.

Investment has also gone into improving its food and a series of partnerships with Italian brands has formed the focus of a new “Made in Italy” brand campaign, into which the airline has invested a further €20m.

Mr Hogan argues that the involvement of Etihad and its partner airlines has brought benefits to both parties. Etihad and Alitalia shared more than 470,000 passengers last year and more than 1.2 million with other partner airlines. Abu Dhabi has served as a hub for Italian expats in Australia, and it has offered other routes across South East Asia, India and China. Codeshares with airberlin should also help both to operate more efficiently in the busy corridor between Italy and Germany.

Mr Hogan also stressed that being part of Etihad’s network gives Alitalia advantages in negotiating with suppliers, pointing to a group turnover of US$25bn, 72,360 employees and 716 aircraft flying 111 million passengers to 349 destinations.

“This is all about scale,” he said. “Already, we’re negotiating as one with procurement. Over 700 aircraft means we’re able to have very strong conversations with Boeing, with Airbus, Rolls-Royce, Honeywell and GE.”

Targets for Alitalia’s growth include better segmentation of passengers, improved technology allowing more flexible fare structures and growing its long-haul route network. Currently, about 51 per cent of its traffic is domestic, and on international routes, 64 per cent of traffic is within Europe. Of its existing fleet, 98 aircraft are short haul and 24 long haul.

New routes to Mexico City, Santiago de Chile and to Beijing start over the next three months and others are being mulled in the United States, South America and Asia. Mr Hogan believes Alitalia could eventually sustain up to 40 long-haul aircraft — some of which could be redeployed from partner airlines.

Mr di Montezemolo said Alitalia wants to fly to new markets where it can help Italian exporters but added that it needs the Italian government to keep up its end of the bargain.

“When we go to Seoul, to Beijing, we need Italy to invest in promoting the country in those destinations. Alitalia needs [to ensure] that the commitments made by the Italian government in August 2014 are kept — in terms of promotion and money. Not money to Alitalia but money to be invested in countries to promote Italy, so that our aircraft are full of people coming from those destinations to our country,” he said.

Closer to home, Alitalia also needs to regain prominence in a domestic market where low-cost carriers took advantage of its weakness in recent years. “The people that have to love Alitalia again, quite frankly, are the Italians,” said Mr Hogan.

This could take some time. One consultant, who did not wish to be named as his firm has worked with Etihad group airlines, said the biggest challenges it faces are in its home market, where it is still dealing with entrenched unions and a market that lacks centralised demand.

“It’s not like the Czech Republic, where everybody wants to go to and from Prague. Structurally, it’s very difficult to run an airline in [Italy], and it’s very difficult to run a network carrier. Alitalia needs a hub to work,” he said.

The consultant also argued that Alitalia’s potential bid for Air Malta, for which it is currently in a due diligence process, is a bad idea. He described the Maltese carrier as a basket case, which has spent three years in a state-sponsored restructuring that was meant to end in March either with the airline returning to profit or being liquidated, as no more state aid would be allowed through European rules.

At the event in Rome, Mr di Montezemolo said that if a deal were to be done for Air Malta, it “will have zero risk, or below zero risk, for Alitalia”.

He added: “When I say zero risk, I mean not even an investment of one euro.” He also argued Alitalia’s management would not be convened to restructure Air Malta, and that it “must be totally focused” on its own turnaround. A decision on a potential bid is likely to be made next month.

Jonathan Wober, an analyst with the London-based Centre for Aviation, said Alitalia has benefited from Etihad’s investment in terms of its long-haul routes, as well as helping to move its brand and product upmarket. However, he said it still faced fierce competition from low-cost carriers in its domestic market.

“Alitalia continues to be loss-making,” he said. “This is a hard, continuing habit to kick, even if the airline still insists that it will break the habit in 2017. The rest of the industry is collectively experiencing record profitability in 2016; an airline that cannot be profitable in such conditions still has much work to do.”

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