Alitalia fights back

In Roman times, the life expectancy of a gladiator was not surprisingly only 30 years with the rigours of mortal combat taking their toll on those press-ganged into this peculiar form of ancient Italian entertainment. In modern times, another form of cruel Italian entertainment in our industry has been popular: predicting the demise of the country's flag carrier Alitalia. But much like the bloodied gladiator that gains his freedom if he wins five fights, this battered airline has refused to go quietly.

Unlike Sabena and Swissair, which said arrivederci in the last downturn, against all odds Alitalia survives. And the prize of Italy's large domestic market meant there were those prepared to take it on. A year ago Air France-KLM was entering exclusive talks to buy Alitalia. Within two months it had walked away after failing to get Italian unions on-side as fuel prices started to rocket. By the end of the summer Alitalia had filed for special administration and brinksmanship from all sides saw a fight for the perennially struggling ­carrier's survival.

Now things appear to have come full circle. Air France-KLM is once again to invest in Alitalia. And in a further piece of symmetry, the deal restores an alliance link between Dutch carrier KLM and Alitalia - first attempted a decade ago only to end in recriminations a year later.

Much has changed since Air France-KLM first entered talks to buy Alitalia. This time its selection as strategic partner has come from Alitalia's new Italian investors, Compagnia Aerea Italiana, and the airline is a very different animal. The new Alitalia, established out of the assets of the debt-ridden flag carrier and Italy's second largest airline Air One, formally began operations in January. It is privately-owned starts life on a sounder financial footing with a target for breakeven by 2010 has a modernised fleet courtesy of Air One and crucially restores its domestic market share to over 50%.

Undoubtedly Air France-KLM appears to have wanted Alitalia more than anyone else. Any British Airways interest was always restricted to the confines of a commerical hook-up within oneworld, and ultimately Lufthansa stopped short of a formal offer to invest. Given the consolidation activity of the German acquirer in Europe, arguably Air France-KLM could not afford to let Alitalia, which was already its commercial partner, slip into the Star Alliance camp.

The €323 million ($425 million) price Air France-KLM is paying looks relatively cheap for a decent chunk of the Italian domestic market. While it marks a premium on the amount paid by Italian investors for Alitalia's assets, it compares favourably with its earlier offer to buy the airline. Especially as much of the dirty work has been done in terms of cuts to the airline, de-politicising the carrier and crucially striking a framework deal with the unions.

Certainly big challenges remain, not least around Alitalia's militant labour force. Then there are the details of integrating the different organisation and cultures of Alitalia and Air One, even before factoring the cultural fit with Air France-KLM. As one industry watcher puts it, the political solution is there, it must now deliver the economic solution.

So if anyone can do it, surely Air France-KLM chairman, and in our words Europe's "merger mastro", Jean-Cyril Spinetta, can. His track record in bringing Air France and KLM together has won many admirers and his thoughtful approach will be tough-minded but sympathetic to Italian political and labour sensibilities.

By all economic measures Alitalia should be dead. It has not made a profit in this century. Its losses at the operating level total €2.6 billion since 2000, and it has only made money in a couple of years in the past two decades. The carrier has also received state aid to the tune of nearly $4 billion.

There has hardly ever been a business case to rescue Alitalia. The rescue rationale has always been about whether the Italian government was prepared to lose its airline and the kudos and jobs that went with it? That question is answered. So for now, we hail the new Alitalia, and begrudgingly admire its gladatorial capabilities.

Like the gladiator who wins his freedom if he wins five fights, this battered airline will not go quietly.

© Reed Business Information 2009

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