Alitalia Loses A Lotta Less: €381 Million Less, To Be Exact

Alitalia has been undergoing a makeover since Etihad acquired a controlling share, revamped the business, and put Etihad people in house to monitor the evolving situation. In fact, Alitalia has reduced its loses in 2015 by a respectable €381 million.

But it’s still losing money.

The airline indicates it is: “on track for profitability by 2017..[with] strong 2015 performance.”

Less Loss By The Numbers 

• Significant reduction in losses from €580 million in 2014 to €199,1 million for 2015
• Ongoing focus on cost control and efficiencies
• Investment of €400 million in 2016 will deliver significant benefit to business and customers between 2016 and 2020

All According to Plan

“This performance is in line with the targets set in its Industrial Plan,” the company states in the announcement.

Alitalia reports market share growth on routes to and from Italy of four percentage points, to 30%, during 2015.

The airline says that it carried a total of 22.1 million passengers with a load factor of 76.2%. For reference, IATA reported average break-even load factors at 61.7% and average load factors of 80.6% in 2015 (both world averages).

Codeshare partnerships earned Alitalia € 235.4 million, with Etihad Airways contributing the lion share.

“Since January 2015, Alitalia and Etihad Airways have shared more than 450,000 passengers between their networks, while more than 1.2 million passengers have been shared between Alitalia and Etihad Airways Partner airlines,” the airline states.

“Reducing our losses is a first important step, together with the relentless commitment to improve our services, our fleet and our network with the opening of new strategic intercontinental routes,” says Luca Cordero di Montezemolo, Chairman of Alitalia.

Well, yes, obviously.

“This has been made possible due to the determination and passion of Alitalia’s men and women to whom I want to extend my heartfelt thanks. Return to profitability in 2017 remains our goal. Today’s results show that Alitalia has become more efficient in controlling costs and is on track for profitability by 2017.  All our efforts are focused on reaching that target. Few airlines have undergone such radical change as the new Alitalia.  We are delivering on our promise to create a world class airline.” Cordero di Montezemolo adds.

Partners Key

As part of Etihad’s portfolio of partners, Alitalia says it will “deepen” collaboration with  airberlin “to strengthen further air connections between Italy, and Germany, Austria, and Switzerland.” The benefit to passengers, the airline argues, is 25% more weekly non-stop flights from Italy.

“The deeper cooperation with airberlin paves the way for enhanced competitiveness, and our common passengers are already benefitting from greater travel comfort, improved connections and a much more attractive route network,” Alitalia states.

Partners Make Strange Bed Fellows

Alitalia’s relationship with SkyTeam creates a unique situation in which one of the Big 3 US carriers and one of the Big 3 Gulf carriers, engaged in a prolonged and frankly exhausting acrid war of words and lobbies, find themselves indirectly playing nice together.

Delta Air Lines makes use of its SkyTeam partnership to extend its network reach in Italy, ensuring passengers can “enjoy a seamless and consistent travel experience to its extended network in America.”

It is a mutually beneficial relationship and someone less awkward than American and Qatar Airways both being in the oneworld alliance while sitting on opposite sides of the great Gulf divide.

Improved Efficiency

Alitalia states that it has also “achieved significant synergies, operational efficiencies and cost reduction across all areas of the business as a result of increased scalability, systems integration, joint procurement, and the implementation of best practice with its partners.”

Which you would expect when partners is a euphemism for the separate flag divisions of a central airline company. But it must be said that even before the skies opened up to Joint Ventures and foreign investments, alliances already capitalised on collaboration for joint bids and beneficial contracts.

All of this is good business, and I’m not knocking it, though it does sometimes place problematic price and delivery pressure on suppliers.

Brand Reboot

With Etihad’s cash investment, loan backings, guidance and direction, Alitalia has managed a brand relaunch and harmonisation with Etihad which is frankly very difficult to pull off.

The airline upgraded its fleet, debuted new interiors through a conservative and effective new image campaign, and is rolling out inflight Wi-Fi on all its 122 aircraft.

The airline also announced  it will invest in lounges extending the new “Casa Alitalia” concept introduced in Rome and Milan Malpensa, with refurbishments on track in Rome, Milan Linate, Naples, Venice, Catania and New York. Add to that a new alitalia.com mobile app, and the new Ulisse inflight magazine.

Empowered Staff

Alitalia also put 6,000 cabin crew and airport staff, and 600 Senior Cabin and Airport Managers through a new “Customer Excellence training programme.” The airline also created a new Guest Response Team to provide faster and more efficient customer service.

Alitalia attributes an average 80.2% on time performance in 2015, a 50% reduction in mishandled bags, and technical reliability at 99.5% to these staff initiatives.

Alitalia reported an improvement in overall guest satisfaction during April 2016, at 87%, the highest satisfaction rating since the company launched its on-board survey in 2012.

Is Alitalia Bringing Sexy Back?

While these improvements are commendable, at the end of the day the figures still show a loss. It’s perhaps unfair to take merit away from an organization that has done so much to get back on its feet again, but Alitalia has an enduring habit of operating as a loss-making entity. It is a flaw even Etihad CEO James Hogan pointed to in 2015 when he referred to Alitalia as a very “sexy” company with a “public utility mentality.”

I suppose in Italy even the public utilities are sexy.

Alitalia’s CEO, Cramer Ball, says the airline is only getting started on its improvement programs.

“There is still much to do to reach our long-term goals, but this year has seen our team achieve many significant milestones. The next phase of our investment strategy will see €400 million being committed to fleet, cabins, technology and infrastructure in 2016. Our most important investment to date, and the one bearing most fruit, has been the investment in our people. It is the people of Alitalia who are bringing this brand to life and creating a new force in European aviation. I thank each and every one of the Alitalia employees for their hard work and dedication,” he says.

Hogan had set conservative expectations of a return to profitability by 2017, and there’s still some time to go, but as CAPA states the airline needs to break its “dependency culture.”

All this talk of strong partners also reflects a recognition that it is through the direct intervention from Etihad management that Alitalia has made progress so far.

How much of the company culture has changed significantly enough for the airline to hold its own is yet to be seen, and whether it has the wherewithal to handle continued competition in domestic markets from Ryanair and other ambitious aims is questionable.

Look at the Yellow Birdie

You could argue that no flagship airline in Europe could comfortably tackle Ryanair on its own in the domestic market, though the IAG companies have done a good job of reinforcing themselves against that competition–again, as partners.

I believe talk of competing against Ryanair is more a useful distraction from dealing with fundamentals for Europe’s legacy flagship airlines, rather than a realistic priority.

Ryanair is a behemoth, and it’s not shrinking. The airline has earned its market share by effectively tapping into a segment of the market with low-fares priorities which legacy models find difficult to sustain.

IAG didn’t just dress up its companies. It made significant and difficult structural changes to the airlines which allowed the group to compete far more effectively for the upper crust of that frugal customer base.

Ryanair has responded to that IAG strategy with its Always Getting Better program, but it’s not forfeiting its profitable fundamentals in the process.

But dressed up or dressed down–as in the case of Wizz Air’s growth–fundamentals matter most: low cost airlines are just successful because of low fares and bold marketing strategies.

They profit from lean, rational, low-cost operating models.

You can paint a duck yellow, but it’s still won’t sing–or fly–like a canary.

Don’t Run a Marathon with the Flu

Alitalia may be recovering, and perhaps it could stand on its own two feet by next year and show a historically rare profit, but news on Friday that it might acquire Air Malta is a worrying sign.

For Etihad, it makes perfect sense. It can just keep adding to its catalogue of boutique troubled European carriers and expand routes. But that Alitalia would officially be making the transaction makes me wonder whether this is all just a set-up.

In fact, two years ago, it was Etihad which set up the codeshare with Air Malta, with minority equity in Air Malta. As part of a small, boutique national collective–which Etihad is putting together through all these partnerships–Etihad’s continued investment in Air Malta fits. But, like Alitalia, Air Malta has issues it has long been working to address.

Alitalia’s CEO says this acquisition would not interfere with its planned return to profit.

But if he’s wrong, and the acquisition turned out to be a financial set-back, Alitalia is used to that.

In other words, Alitalia becomes an easy vehicle for Etihad to experiment with this further European expansion, without compromising Etihad’s books.

Italian Resilience

Alitalia points out that these “strong results were achieved despite some significant challenges.”

Among these challenges, disruptions from the fire at Rome Fiumicino airport on 7 May 2015, which cost the airline around €80 million. The Venezuelan government’s captive currency policy (holding dollars hostage) also prompted Alitalia to suspended its Rome-Caracas route. Then there were the Paris attacks, which affected everyone.

But there are also strikes, and taxes, and labor issues to contend with. It’s a heavy load.

Given unpredictability in the aviation business, it’s not a good idea to overcomplicate things if you’re already vulnerable.

Cramer Ball is optimistic, saying:

“As an airline, we face many macro-economic challenges.  However, the Alitalia of today is ready to face the challenges, moving forward as a commercially successful business. While investment is a key part of our strategy, our management will continue its forensic focus on cost and leverage every opportunity to achieve further efficiencies on our journey to profitability.”

But it’s his job to say these things. It’s also his job to accomplish them.

We can expect he’ll be very busy juggling priorities from now to 2018.

On an only tangentially related note, Lufthansa wants to buy Brussels Airlines to fix Eurowings–because Ryanair.

Seriously, share your thoughts on this development in the comments. I’m still wrapping my head around it.