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Does Alitialia have a terminal sickness?

Three years shy of its 50th birthday, Alitalia is in a bad way coughing, spluttering, shivering with fever and getting worse by the day. The national airline has been in poor health for some time, ending ten out of the last 11 years in the red. But things have got to the stage where Italys flag carrier is now losing around 50,000 an hour, prompting some to suggest its illness may be terminal.

Along with the rest of the air-transport industry, the carrier is feeling the effects of a number of recent crises. The 11 September 2001 terrorist attacks in the United States, the wars in Afghanistan and Iraq, terrorism, SARS and avian flu have all scared away passengers and the income they bring.

However, the writing was on the hanger even before 9/11. What has really clobbered Alitalia is the chill wind of competition. The European Unions gradual deregulation of the sector over the last two decades has enabled leaner new airlines, such as EasyJet and Ryanair, to barge in on routes previously monopolised by the likes of Alitalia and British Airways.

The low-cost revolution came as a shock to many in the industry. Flag-carriers were no longer able to dump the costs of their inefficiency on passengers, via high ticket prices. But Italys standard-bearer was particularly ill-equipped for the arrival of the no-frills operators.

First there is the problem of overstaffing. With tighter profit-margins meaning some routes are no longer worth running, Alitalia has more employees than it needs. While other airlines could lay people off, shedding excess capacity and cutting costs, the strength of Italys aviation trade unions makes this difficult. Many would claim the unions are right to protect established contract conditions, salaries and levels of employment. Whatever the merits of this argument, Alitalia was suddenly up against competitors with much lower running costs, either because they had slimmed down, or because they were among the bunch of lithe new carriers.

Then there is the issue of bad management, something experts put down to the fact that, unlike other privatised flag carriers, Alitalia is still controlled by the state: the Italian governments stake in the firm is 62 per cent. According to employees, the airlines bureaucratic decision-making mechanisms make adapting to the needs of a cut-throat market doubly difficult. Alitalia was slow to build strategic alliances and formulate fresh marketing initiatives such as frequent-flier schemes. At the end of the 1990s it tried to form an partnership with KLM, but the Dutch firm was turned off by Alitalias internal turmoil and dumped it. In November 2001 it finally joined the Sky Team alliance, made up of Air France, Delta and three other carriers.

Management ineffectiveness can also be seen from a closer look at the problem of overstaffing. Alitalia employs some 22,000 people, of which only around 30 per cent are cabin staff or crew. Most of the rest work in management or administration. This led to the paradox that Alitalia was hiring new people to fill on-board vacancies, while it was overstaffed on the ground. The employee ratios should be the other way around. For example, Italys only completely private carrier, Blue Panorama Airlines, which flies charter and long-haul scheduled routes, employs around 500 people, 70 per cent of whom are flight staff, with only 150 (30 per cent) on the ground.

Another consequence of Alitalias semi-public status is that strategic planning decisions have sometimes been based on political rather than business criteria. For example, analysts have suggested that the decision to make Milans revamped Malpensa airport Alitalias main international flight hub was influenced by a politically-motivated desire to shift parts of Italys infrastructure from Rome to the north. Malpensa is 48 km outside Milan and connections to the city are not great. So the move has proved unpopular, and the beefed-up Malpensa hasnt generated anything like the 30 million passengers a year it was designed to cater for.

So what should the government do with its ailing asset? Some economists argue Alitalia needs putting to sleep. They cite the example of Swiss Air, which, when it ran into trouble, the Swiss government simply allowed to go broke. Within weeks a new airline, Swiss International Airlines, was up and running in its place. Why not do the same with Alitalia, they ask. This would enable a new slender version of the airline to emerge, with a more market-orientated corporate culture and a viable long-term future. Alitalias staff would receive redundancy payments, and those who were needed would be rehired under new, undoubtedly less generous, contracts. Sound economics maybe. But its not a solution politicians can easily sell to voters.

Others, like former managing director Francesco Mengozzi, believe that with major surgery the airline could survive. Mengozzi wanted to cut some 2,700 jobs and impose a wage freeze with an eye to getting Alitalia fit for privatisation and a future merger with Air France. But his plan triggered a wave of union unrest, which cowed the government into withdrawing its support for Mengozzi who resigned in February and shelving plans for privatisation.

The unions, on the other hand, believe Alitalia needs a large-scale investment package, financed by the taxpayer, to enable it to reinvent itself. Its improbable that such a scheme will ever take off. Apart from the danger of throwing good money after bad, the governments room for manoeuvre is limited by EU competition rules, which forbid state aid to individual companies.

So the crisis deepens but, with European and local elections coming up in June, Italys politicians are unlikely to touch such a delicate issue in the near future. Not knowing what to do, the government appears set, for the time being, to do nothing.

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Orchestra dell’Accademia Nazionale di Santa Cecilia
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