Air France/KLM Rejects an Alitalia Acquisition While the Vultures Circle

I’ll admit that the last couple of years have been rough for me. Alitalia, which I long ago dubbed the worst airline ever, has been very quiet. It was under new leadership, working on combining with AirOne, and it wasn’t making headlines. Those were dark times, but there is a light at the end of the tunnel. It turns out that Alitalia was being very quiet for one reason… it was too busy burning through a silly amount of cash. This means the airline is back where it belongs: at the bottom.

Alitalia Worst Airline Ever

My last update was back in February, and a lot has happened since then. The short version of the story? Alitalia is a mess and came close to running out of cash (again). The competitive situation now looks even worse with low cost carriers circling, adding large new bases in Italy. Meanwhile, Alitalia has basically put all its hopes on the French and the Dutch. The response from the anointed savior? Um, no.

Air France/KLM is not only a SkyTeam and Transatlantic joint venture partner, but it’s also a 25 percent owner of Alitalia. The assumption has long been that eventually Air France/KLM would take over Alitalia and then keep the brand flying. There’s only one problem with that. Air France/KLM isn’t going for it.

Alitalia decided it needed 300 million euros, so it went out looking for existing shareholders to chip in so that their stakes weren’t diluted. Air France/KLM responded by writing off its stake in Alitalia. Oh, and it won’t be participating in the cash call unless there is drastic change.

Alitalia has promised just that with cost cuts, capacity cuts on shorter flights, and an increase in long haul flying. Air France/KLM saw the plan and told Alitalia to suck it. To get their Franco-Dutch overlords onboard, Alitalia would have had to get creditors to restructure a lot of the crushing debt saddling the company. The creditors aren’t interested.

The result is that the already-delayed deadline to raise the 300 million euros has come and gone with only 173 million euros raised. Air France/KLM has offered nothing because the plan is too weak. So is this the end of Alitalia? Of course not.

The Italian government decided to get creative. Since it couldn’t give aid directly to the airline, it could strong arm others into playing the game and created a back-up plan if existing investors didn’t want to play ball. So now, the Italian postal service will put money into Alitalia. Why? Oh who the heck knows. I’m guessing either political favors or not-so-veiled threats forced them to the table. By December 10, Alitalia should have the 300 million euros it wants. But then it’ll just burn through that and be in trouble again.

Wait. Maybe this new plan will save the airline. Ha, no, that’s a good one. Let’s get real. Alitalia is a dinosaur that would have gone out of business years ago if the government wasn’t so hell-bent on keeping it flying.

On short haul routes, it’s about to get a lot worse. Alitalia used to live on government gifts like a monopoly on the most important route in the country, Milan/Linate to Rome/Fiumicino. Now easyJet is on the route, but that’s just the tip of the iceberg.

A couple weeks ago, Vueling announced it would turn Rome/Fiumicino into the next Barcelona. It will base 8 airplanes there and will fly to 33 destinations next summer. Seven of those new routes are domestic.

Not to be outdone, Ryanair jumped in and announced its own expansion in Rome. It has a sizeable operation at Rome/Ciampino today but it will put 6 airplanes at the main Fiumicino airport starting next summer. Ryanair is making a push into more popular airports lately (a topic for another post), so you’ll see Rome to Brussels (the real airport, not Charleroi) and to Barcelona (not Reus or Girona).

The best part of this? Ryanair has decided to throw Alitalia a lifeline. (So what if it’s attached to a rope surrounded by barbed wire?)

Ryanair also confirmed that it will increase these daily frequencies if Alitalia cuts back. Ryanair has also offered to use its low fare flights to feed into Alitalia’s international network to/from Rome Fiumicino. Ryanair has for example offered to carry Alitalia passengers at one-way fares from just €50 which will enable Alitalia to significantly reduce the costs of its feed traffic on these domestic routes to Rome Fiumicino. Ryanair has also requested a meeting with Alitalia to examine any other opportunities which may exist for co-operating with and assisting Alitalia in its current restructuring.

Of course, Alitalia rejected this outright (as Ryanair knew it would), deciding instead that it would rather keep trying to swim on its own with that anchor tied to its feet.

But what about long haul? Alitalia wants to expand its long haul flying, but can that be its saving grace? It’s probably better than short haul, but not by much. Anywhere that has enough demand to support flights to Italy can be served by leaner, more efficient airlines. That includes American carriers, Asian airlines, and even African companies. It also includes the likes of Emirates, an airline that is already flying Milan to New York today. It could also mean the birth of a new, well-run Italian carrier if the opportunity is there. These airlines will not only serve Italy at a lower cost but most will do it with better, more reliable service. I’d imagine it would have already happened if those airlines didn’t have to compete with a bloated, government-backed airline.

The bottom line is this: Alitalia remaining alive robs Italians of better options. But that’s not going to prevent the Italian government from keeping the airline afloat. Just don’t be surprised if you have to sit next to a bunch of packages from the post office on your next flight.

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