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.


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

  1. David says:

    Worth mentioning that Italian railways opened the last leg of a high speed rail line. There are now 2 trains every hour between the centre of Milan and the centre of Rome, taking just 3 hours.
    http://www.trenitalia.com/

  2. David says:

    Alitalia isn’t pinning its hopes on *just* the French/Dutch – they’ve also passed the begging bowl to Aeroflot and Etihad as well, although nothing seems to have come of it.

  3. David says:

    Also worth noting that Easyjet fly to 26 destinations from Rome Fiumicino – not just Milan Linate. And that’s 26 proper airports, not 26 sheds in the middle of farmland.

  4. Hermann says:

    Well, here would be Etihad´s chance to pick up another ailing airline. Says a lot that even they don´t try it, considering they seem to buy anything if it is just located in the right market region.

    • William D says:

      They’d just be buying the brand (and even that is probably toxic and worthless!) and a few landing slots

    • MathFox says:

      The big problem with buying Alitalia is that unions and government are part of the buy… Italian government in particular is something you don’t want to “help” in running an operation.

  5. William D says:

    Great post.

    As somebody who lives in Brussels going to Rome doesn’t require Alitalia at all now – Brussels airlines, Easyjet, soon Ryanair as you point out .. All operating lowcost (with b-lite on SN). The point is that Alitalia have driven themselves into the ground as why would I book with them when they’re more expensive, forever on strike etc..

    As for the Italian postal service pumping the money – the answer is simple – it’s owned by the Italian state and it’s the only way they can pump money into the airline without breaking eu state aid rules. That said I think the European Commission are investigating that one too…..

  6. Michael says:

    You’re being a bit of – no, correction, a huge – a**hole about this. Gloating about other people’s misery? How nice.

    • Michael, Its a CF tradition at this point. Alitalia has been limping along for a long long long time. Eventually it gets to the point there is little good to say..

  7. How does the mail get carried around in Italy? Would that be a factor in the postal service deal?

    • William D says:

      Would involve a lot of mail though to make up for that bailout.. But that a a good point – it’s in the postal services interest to maintain a network. But at what cost ?

  8. Maybe the Italian government should just let AZ die and back a new Italian carrier to represent their country.

  9. Hmmm. I’m old enough to remember when the Italian postal service was a joke in itself. Heard of St Paul’s Second Letter to the Romans? No of course you haven’t – it hasn’t arrived yet.

    So particularly “amusing” that the postal service is bailing out Al Italia – maybe now the flights will be late as well as staffed by overpaid, rude, ignorant crew.

    • William says:

      LOL. love the joke!!

      Of course I am sorry for those at the bottom of the employment ladder at that airline as they may lose their jobs – it seems total incompetence at management and executive level that has killed it.

      • Arcanum says:

        No doubt inept management and political interference were major factors, but I suspect you’ll also find the Alitalia rank and file are fairly inefficient and unproductive compared to their peers.

  10. RMF325 says:

    I have been booked to fly Alitalia several times (I wasn’t the one who booked the flights; it was for group travel), but have never actually flown on it. Every single trip, Alitalia was on strike and I was put on different, and much better, airlines.

  11. Carl says:

    AF/KL made the only rational decision they could. They should have never bought the minority interest. Put Alitalia out of its misery. It’s even late in that.

  12. Cedaglen says:

    They should as out Postal Service, USPS, for a major contribution. USPS seems willing to invest in almost anything – except delivering our mail.

  13. How is Ryanair’s suggestion of cooperation not a violation of anti-trust? I know it would be if they were in the US. (Yes, I know they’re not subject to US anti-trust law, but there is EU anti-trust law..)

    • David says:

      Everyone with knowledge of aviation in Europe knows that there is zero chance of Alitalia and Ryanair cooperating. Very much doubt that Ryanair have the IT systems to manage a credible form of codeshare and baggage onward check. It’s being viewed purely for the comedy value.

      • David says:

        If you studied classics at school, think of the senators crowding around Caesar to congratulate him while also stabbing him to death with a knife. There is no love lost here

    • CF says:

      Nick – Yeah, you would think that might be considered collusion since Ryanair has publicly told Alitalia to cut back and it will pick up the slack. Not sure how the laws work over there, but you would think Ryanair wouldn’t have said anything if it were a real problem.

    • Oliver says:

      Code and revenue share agreements (with regulators’ approval) are not that uncommon, so why would this (in theory) be a legal problem?

      (that said, I think it falls in the same category as O’Leary’s other stunts like charging for lavs, offering b-job inflight entertainment on longhaul flights and equipping its fleet with standing-room-only sections)

      • Oliver, Its a potential legal problem because it is against anti-trust law to offer to split markets. (e.g. I’ll take the international flying from this airport, you can take the domestic flying form this market.)

        Even a statement such as this isn’t legal, because it means that Ryanair and Alitalia could coordinate without actually talking to each other about coordinating.

  14. Jared says:

    It’s funny because whenever I have flown to Europe from LAX, Alitalia is always by far the most expensive (LAX-FCO-destination). It is always cheaper to fly through other gateways on BA/AA, AF/KL or LH/UA.

    Even when I went to Italy a few years back, the direct flight from LAX-FCO was nearly $2000 when it was like $1100 on BA with one stop in London.

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  16. David says:

    Etihad now considering taking a 49% stake in Alitalia…

  17. Axelsarkis says:

    Classic FR. I love it.

  18. Andrew says:

    Hey I don’t know of what you all are tolking about: I have flown in Alitalia a lot of times and enjoyed the flight, I ate good the plane was early the crew was good and can’t understand why it’s sopposed to be THE WORST AIRLINER EVER…
    it’s my favorite airline, for a few reasons…

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