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Alitalia’s liquidity is running out, the airline must find €1 billion to have a future

by Gianni Dragoni

There’s only a month left before their liquidity runs dry at the end of March. At that point, Alitalia will no longer be able to afford to fuel their airplanes, or to pay the salaries of 12,000 employees, the airports’ fees, the leasing payments on the airplanes and their other suppliers.

They nearly halted activities just before Christmas, when the ailing company - which is 49% owned by the UAE’s Etihad Airways - already had a negative balance. They avoided the collapse on December 22nd when the shareholder banks on the board, UniCredit and Intesa Sanpaolo, released the lines of credit that were already granted, worth €180 million. Facing strong pressing by Paolo Gentiloni’s government, the banks turned a blind eye to the fact that there’s no business plan to indicate how the company intends to turn things around and stop hemorrhaging losses.

It’s appropriate to take a step back, in order to understand how severe the crisis is in this little Italian company, which is still a very visible brand, in spite of its somewhat reduced market share. For a few years now, Ryanair has been transporting more passengers in Italy than Alitalia: 2015’s figures show 29.7 million passengers, versus 22.987 million. And it won’t be long before easyJet could also surpass them, with 14.36 million passengers in 2015.

This year, Alitalia predicts more than €600 million in operating losses. It’s almost reached an average of €2 million in losses per day. 2017 should have been the year for them to break even in terms of operating and net profits, according to the plan launched in August 2014 by their new, strong partner Etihad. In the first two years since Etihad joined (2015 and 2016), the “new” company had over €1 billion in operating losses.

According to projections made by CEO Cramer Ball, a net profit of €3 million could be reached in 2019. But this prediction is based on a very tenuous foundation, namely a €1.187 billion increase in revenue (compared to €2.806 billion in 2016) and only €570 million in increased costs (compared to €2.876 billion last year). These are very aggressive suppositions for a company that failed to achieve any of the recovery goals that they’d set for themselves.

Their weak point is revenue, which is constantly shrinking. It’s hard to imagine that turnover will increase by 42% in three years. The risk is that, with the low-cost airlines pressuring ticket prices, revenue will shrink even further. The company’s documents have therefore indicated the “risks” for not meeting their objectives, which would put all of their yearly balances through 2021 in the red: between 2017 and 2021, they would accumulate €1.3 billion in further financial burdens.

The company foresees grounding around 20 Airbus 320 short- and medium-range airplanes, thus operating fewer flights. Of their entire fleet of 122 airplanes, there are currently 20 Embraer regional jets and 78 A320-family Airbuses, as well as 24 long-range A330 and B777 jets.

For the long haul, in which Etihad had promised investments and the development of new Italian routes, it isn’t clear what will be done. So far they have only added two long-range airplanes, two Etihad-owned Airbus 330s, which Alitalia is leasing. The long-range fleet is too weak to be able to cover a vast network of intercontinental flights.

“Within three weeks,” Alitalia will have a plan that’s “strong and brave”, stated President Luca Cordero di Montezemolo on January 12th. More than six weeks have passed, but the plan still hasn’t shown up. Independent advisor Roland Berger gave a negative first evaluation of CEO Cramer Ball’s business plan draft. There were also failed results for the savings that the December 22nd board had asked Ball to launch within 60 days. They’ve only saved (for certain) €1.2 million, in maintenance, in comparison with their goal of reaching at least €160 million this year among all suppliers (from airplane leasing to handling), excluding employee costs.

Speaking of employees, there’s currently a tug of war with the unions. The government doesn’t want to hear about redundancies, yet the company had predicted at least 1,500—not including all of the pilots and flight attendants who would be made redundant with the planned airplane groundings. The announced salary reductions were halted, as was the increase in productivity (the company had asked for the flight crews to take 24 fewer days off, annually). On Friday, they signed a deal with the unions that puts off the deadline for agreeing upon a new deal by three months (until May 31st).

However, the hardest hit is yet to come. In order to combat losses in short- and medium-haul flights, namely domestic and European routes, the company wants to switch to low-cost activities. There’s the “Narrow Body” project, which calls for the creation of an internal low-cost structure; Roland Berger claims that this is unfeasible. Alternatively, they are weighing up transferring these activities to a real low-cost company (like Ryanair or easyJet, a solution favored by Etihad), or else they could make a deal with Lufthansa (where President Montezemolo works).

Lufthansa is interested in a business deal, there could be code-sharing European flights run by their subsidiary Eurowings or Air Berlin. Montezemolo would also like to get Lufthansa involved as a future shareholder, a European partner instead of the banks, as a way of supporting Etihad (who cannot own more than 49% due to EU regulations). The Germans are listening for now, but they have been clear: “first, reduce your costs and get your accounts in order, then we will talk,” they stated.

Now Alitalia has to find at least €1 billion in order to have a future. It’s still unknown who will provide this funding.