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Alitalia Needs to Downsize Before Lufthansa Is Ready To Invest
After the November 21 deadline, the eighth deadline during the past two and a half years of special administration, went by without any offer being presented to the bankruptcy administrators, it is back to the drawing board for Alitalia, the struggling Italian flag carrier looking for a way out of its deepening crisis.
The market has spoken: Alitalia in its current shape and size is unable to attract suitable investors and needs some profound, and most likely painful, changes before it can be put on the market again. The Italian government had to acknowledge the situation and decided to remove the three special administrators who have been running the company since May 2017. The new plan is now to put a new administrator in charge with the assistance of an expert in the airline business, and the pair will need to downsize the company and make all the necessary changes to transform Alitalia into a business worthy of significant capital investment.
The new administrator is Mr. Giuseppe Leogrande, a lawyer, and he will most likely be assisted by Giancarlo Zeni, presently CEO of Blue Panorama, a small Italian carrier operating scheduled and charter flights he personally led through a difficult restructuring in 2014 to 2016 and is now being rebranded as Luke Air. They are faced with the challenging task to reduce the fleet and the workforce at Alitalia without triggering the reaction of the political parties, always ready to defend the jobs of the 12,000 flag carrier employees, and their very turbulent unions.
The consortium that for the past few months has tried to put together a salvage and relaunch plan seems to have lost interest, even if the would-be majority stakeholders Ferrovie dello Stato and Atlantia publicly state they are still intentioned to invest in Alitalia “at the right conditions.”
The position of the industrial partner Delta Air Lines, however, seems to be fading in the background as their intention to invest not more than 100-120 million euros is not considered sufficient for a relaunch plan of the carrier. The attention has therefore now moved towards Lufthansa: the German flag carrier still maintains an interest in forming a commercial partnership with Alitalia, welcoming the Italian airline into Star Alliance as an intermediate step towards an equity investment, but is not ready to do so before the company goes through a deep restructuring.
Lufthansa’s requests included 5,000 to 6,000 layoffs, a reduction from 118 to 78 aircraft and the spin-off of the ground handling and maintenance units. According to Italian newspaper Il Messaggero, Leogrande and Zeni are now targeting 2,500 layoffs, the spin-off of the Rome Fiumicino ground handling unit and a reduction of the fleet to 85 aircraft.
The airline is already losing some units before the end of the year due to some aircraft reaching the natural end of their leasing contracts, and in 2020 all nine Airbus A321s should leave the fleet as well. Some longer routes will be under heavy scrutiny as well (e.g. flights from Fiumicino to Johannesburg, South Africa and Santiago, Chile) and all supply contracts will need to be reviewed.
The new leading duo has been given until May 31, 2020, to complete the operation and make Alitalia an attractive company in which someone would want to invest, with that “someone” being German flag carrier Lufthansa. The Italian Government has approved a “bridge loan” of 400 million euros to keep Alitalia flying until the end of this process, bringing the total of public money injected in this project to 1.3 billion euros. The European Union is evaluating the operation to understand whether this is a state aid and, as such, not compatible with EU laws.
But cash seems to be the biggest problem facing Alitalia in the medium term: the carrier is believed to be losing between 700,000 and 900,000 euros a day, and Lufthansa has already confirmed it does not foresee to be in a position to make an equity investment before at least 18 months, since Alitalia will have to complete its restructuring process. This means Alitalia could run out of cash before it can raise fresh capital on the market and may need a new round of Government financing.
It has been calculated that, since its creation almost 45 years ago, the Italian taxpayers have already subsidized Alitalia to the tune of 9.2 billion euros.
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