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Money-losing Alitalia to shrink further, split in two

by Gianni Dragoni

Alitalia will downsize and split in half. There will be an Alitalia 1 for short national and European flights with smaller planes (narrow-body, with only one route) and a model similar to a low-cost airline. Drinks and snacks, a service that's already been drastically reduced in recent years, won't be free. Passengers will have to pay for them, like they do on Ryanair or easyJet and, most recently, on British Airways, in a “buy on board” program the carrier started last year.

Alitalia 2, meanwhile, the second half, will remain a traditional “full-service” airline with larger jets for intercontinental flights. It's not clear which entity will become a new company or a split-off from the original.

This is the key takeaway from Alitalia's evolving 2017-2020 strategic plan approved by the board of directors on December 22. In reality, the board approved a generic document with many details still to be filled in.

Only the guiding principles, or pillars, are included in the plan that CEO Cramer Ball will present at a meeting with government representatives at the Ministry of Economic Development. So there is no actual plan yet.

Alitalia is fighting for survival even as airlines around the world posted record profits totaling $35.6 billion in 2016, according to Iata estimates.

A plan dating back to August of 2014—when Emirates' airline Etihad entered as a core shareholder with 49% of the “new” Alitalia—anticipates profitability in year three, or 2017.
This year, the airline is expected to lose €500 million. In 2016, it lost €450 million, even including a one-time gain from selling Etihad slots in London's Heathrow.

Just before Christmas, the airline ran out of money and couldn't pay for fuel or salaries. UniCredit and Intesa Sanpaolo released previously approved credits lines for a total of €180 million, of which the airline has already burned through €60 million. The funds will only last through mid-March when a new cash injection will be needed. Italian shareholders, led by UniCredit and Intesa, which own 51% of Alitalia, don't want to pour any more money into it.

And they don't have faith in CEO Ball, the Australian manager chosen by Etihad, who took the reins in March of last year. They've asked for his head. For now, Etihad chief James Hogan is defending Ball but the chief executive could be the first casualty of the new restructuring plan, which is officially calling for 1,640 layoffs. Sources familiar with the situation say as many as 4,000 jobs could be at risk.

What's the government got to do with Alitalia? Many have been asking that. The state is no longer a shareholder in the company. The last public investment of €75 million done through Poste Italiane (then fully controlled by the government before the company entered a privatization process)  was back in 2013 under former Prime Minister Enrico Letta - money that was flushed away with the company's red ink. But the government is extremely attentive both to the impact that a collapse of the airline would have on Italy's air travel, as well as to the potential social consequences if it failed.

There will be cuts among pilots and flight attendants. The plan, in the still undefined version, calls for grounding some short-range aircraft, including up to 23 Airbus 320s or 319s.

The government basically wants a clear picture of how things stand. Carlo Calenda, Graziano Delrio and Pier Carlo Padoan—respectively Ministers of Economic Development, Transportation and Economy—will all be present at today's meeting, along with shareholder and creditor banks UniCredit and Intesa, and insurer Generali, which underwrote a €300 million Alitalia corporate bond issue in 2015 and is opposing a request to convert it into shares.

One of the problems is that the strategic plan for the side of the business dealing with short-range flights, the one that's meant to resemble a low-cost airline, doesn't yet exist. Laura Cavatorta, an Alitalia executive who rose to prominence under Giancarlo Cimoli a decade ago, has been charged with developing the plan. Alitalia's chairman Luca Cordero di Montezemolo brought Cavatorta on board last year as director of transport, accommodation and tourism for the Organizing Committee bidding of the 2024 Olympics in Rome. She only returned to Alitalia a few days ago to begin laying out the nerve center of the new group. Many have wondered if she is the best person to do it.

Alitalia's long-term goal is to boost the long-haul fleet from 24 planes currently (14 Airbus 330 and 10 Boeing 777): by 2020, the fleet should be up by at least eight planes and maybe by as many as 16—if the airline is able to expand its flights to North America by renegotiating transatlantic joint venture agreements with Delta and Air France-Klm, another major challenge.

The real question is if this cure, beyond its feasibility, will be able to ensure the survival of an Alitalia that's shrinking in a world of airlines that are growing ever bigger.
It's hard to image we'll see the “five star” Alitalia promised by Hogan and Montezemolo anytime soon.