ATW Editor's Blog

Alitalia, the airline that broke the camel’s back?


Can Alitalia ever be a good-news story? It appears not for Etihad Airways, the Abu Dhabi-based airline that has become the latest in a line of companies to see potential in the Italian flag carrier but for whom good news seems an increasingly distant prospect.

The announcement that Etihad Aviation Group president CEO James Hogan and CFO James Rigney will step down later this year isn’t all about Alitalia, but Rome has a lot to do with what appears to be a major rethinking of Etihad’s future.

The Etihad equity partnership strategy focused on smaller airlines such as Air Seychelles, Air Serbia, airberlin, Virgin Australia and India’s Jet Airways (now India’s second largest carrier after Indigo) that could provide feed to Etihad and allow it to grow more rapidly and compete against its much larger UAE neighbor, Dubai-based Emirates.

Equity investments in the partner airlines are all minority stakes, although some are substantial: 40% in Air Seychelles and 49% in Air Serbia.

But Alitalia was different for significant reasons. Etihad took a 49% stake – worth some $470 million – in December 2014 in what was a major flag carrier brand, but one with a long history of loss making, labor disputes, bailouts and bankruptcies. Indeed, just a year before the deal was finalized, Alitalia was teetering once more on the edge of bankruptcy and was bailed out – only to be close to running out of cash again just six months later.

The Etihad deal, which was a complex transaction worth €1.75 billion ($2.35 billion) across its various facets, was yet another rescue of an airline infamous for its dying swan acts. There had been “Old Alitalia” and “New Alitalia” but never more than a fleetingly profitable Alitalia.  This time, however, there was a plan. Etihad would invest in, restructure and turn around Alitalia so that it would be profitable by 2017. And Etihad and Hogan’s team has invested significant money, effort, resources and passion in that turnaround. This was probably the best chance Alitalia ever had.

But 2017 is here and, financially, Alitalia looks very much like the airline it has always been  – a disaster. In early January senior executives—including Alitalia CEO Cramer Ball, Hogan and representatives of three Italian banks who are shareholders or backers of the airline—met with senior economic development and transport ministers as the Italian government demanded a detailed business plan.

Ball himself described the situation as critical, saying it was “vitally important that the airline’s workforce and major stakeholders, such as corporate partners, suppliers and unions, embrace and accept the radical changes we need in order to gain the next round of significant funding from our shareholders, which will be crucial for our future.”

Worse for Etihad, however, was that Alitalia’s troubles were not the only ones in the Gulf airline’s partnership galaxy. Airberlin is losing money also, prompting a codeshare and wet-lease deal to be struck with former rival Lufthansa Group.

And, back home in the UAE, these are also challenging times for the Gulf carriers. Lower oil prices, economic uncertainties and terrorist attacks have all weakened demand for tickets on the Middle East’s “big three” airlines even as they take deliveries of new aircraft. Competition between Etihad, Emirates and Qatar is cutthroat. That alone is enough of a challenge for any airline CEO – Hogan and his top team are also managing the crises that Alitalia and airberlin have become.

Last year Hogan was given the new title of group president and CEO, allowing the installation of Peter Baumgartner as Etihad Airways CEO. That freed Hogan to address the broader partnership airline businesses while Etihad gained a dedicated CEO. Next week, it is widely expected that Hogan and Lufthansa Group CEO Carsten Spohr will announce a closer relationship between the two companies. These are fixes that help reassure Etihad’s UAE government owners.

But in the end, Etihad’s owners want more change. “We must ensure that the airline is the right size and the right shape,” Etihad Aviation Group chairman Mohamed Mubarak Fadhel Al Mazrouei said in a statement Tuesday. “We must progress and adjust our airline equity partnerships even as we remain committed to the strategy.”

How that “adjustment” will play out will be interesting but it’s my bet there will be much more focus on the home carrier. For Alitalia, it’s hard to see how anyone will again risk their back for what has to be the world’s most frustratingly, stubbornly, unfixable airline.

Karen Walker

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