Since January, Alitalia, the worst airline ever, has been hard at work on restructuring plan #1,403 so it can save itself from doom. This took longer than expected, but the plan has now been approved by the Board of Directors. It does indeed sound a lot like the plan I wrote about in January. Chance of success? Not good.
In short, Alitalia will slash costs and then magically increase revenue by 30 percent. Seems totally likely, right? Just reading through the press release brings up so many obvious problems. Let’s walk through three big ones.
Gigantic Problem #1 – Unions Won’t Like This
In the second paragraph of the release, it becomes very clear what the first major issue will be.
The plan’s funding by the company’s shareholders is subject to Alitalia’s trade unions agreeing to a new collective works agreement and headcount-related measures.
Hahahahahaha. Right, so Alitalia is now going to take the plan to the government. After that, it’ll go to the unions and try to come to an agreement. Alitalia’s unions already agreed to some changes back when Etihad first bought in to the airline. That plan was touted as saving Alitalia, but obviously it didn’t work since now the airline needs another plan. If you think the unions will just gladly step aside, I’ve got a bridge to sell you.
Gigantic Problem #2 – Alitalia Can’t Compete with Low Cost Carriers
The release points out that low cost carriers fly 47 percent of air traffic in the Italian market. To combat this, Alitalia is going to try to turn its short haul operation into a low cost carrier. Look for buy-on-board food, more seats on aircraft, higher aircraft utilization, more ancillaries for sale, and “more attractive airfares.” Oh, and it’s going to cut its Airbus narrowbody fleet from 78 down to 58.
Some of this is obvious and should have been done long ago, but no matter what Alitalia does, there’s no way it’s going to be cost-competitive with a Ryanair or Wizz Air. It can try to drive out cost, but it won’t win. And by cutting the product down to match the low cost carriers, it’s hurting its ability to try to generate a revenue premium (if there’s one to be had at all).
The release says this is “a concerted drive towards increasing revenue while stripping out existing costs,” but really it looks like an attempt to strip out costs without much of a revenue plan at all.
Gigantic Problem #3 – This is a Terrible Time for Long Haul Growth
We’ve been talking here regularly about how the Transatlantic market is brutal right now. Low cost carriers are using new low cost airplanes to flood the market with capacity. The legacies aren’t stepping back, using their own new lower-cost brands as well. So it’s disconcerting, to say the least, that Alitalia’s plan for profit is to grow in this market.
The airline will re-evaluate its transatlantic options to try and fly more often on existing routes and to add new cities in the Americas.
Forget about the fact that for Alitalia to really ramp up its Transatlantic flying, there’s a good chance the joint venture with Delta/KLM/Air France will die. That’s a problem in its own right. There’s also the issue of hugely seasonal demand between Italy and the Americas. Europe to the Americas is always seasonal, but Italy is even more so since it has such a strong reliance on tourism.
All of these factors add up to mean bad news for Alitalia’s prospects.
With 20 fewer short haul airplanes, even increased utilization is going to result in fewer flights than today. For Alitalia to reach its goal of increasing revenue by 30 percent, it must be thinking about a ton of long haul capacity. It’s hard to imagine how this will be profitable long haul capacity, but it could get Alitalia to its goal of increasing revenues. That goal is, of course, useless if it’s not profitable.
The reality is that Alitalia is stuck. Low cost carriers are killing it on short haul flights. And on long haul flights, there’s too much capacity anyway, especially from Europe to the Americas. There’s no viable out for Alitalia, but instead of admitting that, it just keeps rearranging the deck chairs. The good news for Alitalia is that it’ll just keep chugging along. There’s too much national pride in Italy to let this airline die. And that is naturally good news for me and the blog.
You call Alitalia the worst airline ever. How on earth can you say that? Have you ever flown with a really lousy airline? I have flown AZ across the Atlantic several times in the past six months. Their Premium Economy and Business products match any other European airline and are better and cheaper than most. AZ staff take pride in their airline and go out of their way to be helpful, both on the ground and in the air. Like an example? I was in Rome without small change for a luggage trolley and it was too early toi check in. The AZ check in supervisor took money from her purse to help me out. Tell me when any ground crew member was that helpful to you. The AZ lounge at JFK is an oasis of quiet and good taste and the food and drink offerings are imaginative and high quality. And no, I am neither Italian nor do I have shares in the company!
See Cranky’s article from June 8, 2015. Second paragraph explains why he calls it the worst airline.
Brett calls it “the worst airline ever” from a business management perspective, not from a customer’s perspective. That’s a bit of hyperbole when you consider some of the start-ups over the years (Skybus, or many of the start-ups shortly after deregulation – anyone remember Air South, a/k/a “Bubbaflot”?), but among the major carriers in the post-state-ownership era, Alitalia’s incompetence is in a league of its own.
In a few weeks time I am flying JFK – Rome with Air Berlin and Alitalia, two airlines close to extinction.
Outbound I am connecting in Dusseldorf, and on the return I am connecting in Berlin. I am thus flying 4 flights and touching 3 airports using 2 airlines all prone to financial and/or union disruption. It is a shame that I have not been able to throw a bit of France in this trip just for good measure.
I have however enlisted the services of Cranky Concierge. I think it could be interesting to start a betting option as to which scenario might disrupt me first. Place your bets, ladies and gentlemen, place your bets!
BA and LH have worse recent labor disruption records than either AZ or AB. The AB DUS-JFK service in C is not bad. The staff try hard to both help and impress.
You make a lot of good points but one of the biggest is that the Italian government has made some major mistakes regarding air transportation strategy that hamstring AZ’ ability to compete, including regarding Milan’s airports. Other European countries are more favorably located and have stronger ties to Africa and the Middle East so AZ is fighting an uphill battle to try to be a relevant player in the transatlantic market which relies on connecting traffic.
The AZ-AF/KL agreement is already weakening but that does not include the transatlantic part of the DL-AF/KL/AZ joint venture which I believe by contract extends for another 5 years or so. There is little incentive for DL or AZ to terminate earlyt
> Other European countries are more favorably located and have stronger ties to Africa
Good point. It certainly doesn’t help that Italy’s former colonies in Africa (Libya and Ethiopia) are relatively poor and underdeveloped even by Africa’s standards.
Ethiopian Airlines has a sizeable hub at Addis airport and a fleet of 85 aircraft (including 787s and A350s) – they’re in Star Alliance and are actually really rather good, with plenty of short and long haul destinations. Poverty has not proven a problem to plentiful airline traffic
Libya on the other hand historically has not been particularly poo by Africa standard – it’s just that post Gaddafi they’ve been in civil war which is fairly offputting to most airlines…
poor, not poo !
Fair points and appreciate the corrections. I imagine Ethopian Airlines benefits from its geographical positioning, similar to the gulf airlines.
Ethiopia was never colonized by Italy. Whip out your history books.
In any case ET is now the largest and most profitable carrier in Africa and has quite a robust network in the continent. It is AZ’s unimaginative management and business model that is holding it back.
Mussolini invaded Ethiopia in 1935, completing the conquest in 1936, and remained until kicked out by British led forces in 1941.
Not exactly colonised but definitely conquered. Period was too brief to develop any meaningful ties.
Alitalia may be a great airline to fly (I never have, so not for me to comment) but its a poor business which is literally the living dead. Wasted Italian taxpayers money could have been put to far better use over the last few decades and Italy may even have a decent aviation industry now if Alitalia had been put to sleep.
Its continued ‘existence’ has prevented other local carriers from developing which in turn has allowed Ryanair and Easyjet to enter the market and thrive.
You can argue the semantics about “colonized” vs “annexed” vs “occupied”, but Ethiopia WAS invaded and controlled by Italy at one point. Britain and France even recognized Italy’s sovereignty over Ethiopia, back when they still played nice with Mussolini.
Unimaginative plans leads to unimaginative posts (at least a lot less funny than the ones you did in the past) ! Not sure this painful to watch slow bleeding is such a fantastic news for your blog…
Back to the topic, Italy is still the 8th country in the world in terms of GDP (not sure Cosa Nostra’s activities are included in the statistics), and its economy relies more on Industry than tourism. With a geography similar to California (similar length from North to South), a population of roughly 60M people, I don’t see why a locally based airline couldn’t be profitable combining short and long haul. Sure, the existence of 2 possible hubs in both Milano and Roma is probably not helping (but isn’t Germany more or less the same with Frankfurt, Munich and Berlin ?).
So we’re down to the 2 main problems : unions and politicians (not convinced it is not one and the same), but I believe they’re similar to what you’ll find in Spain or France, and a management that is probably too close to problem one to tackle it !
While I can buy the fact that Italy and California are somewhat alike I’m not aware of any major international carrier that is mainly reliant on California as a market for O/D. All the airlines heavily rely on feed to & from other states and countries. Similarly BA, AF, KLM and LH all operate european gateway airports where they are huge global connecting points. A number of times I’ve been through AMS or CDG to connect onto points further, usually not in their home country. FCO and MXP are not anything like a that in relation and that hurts the local airline no doubt.
If I want to go to some random Italian city I’ll likely fly through a hub up north and fly down on a major European airline. Another major difference is if I did fly into FCO I could take a relatively good rail system to my final destination. California doesn’t have that so I’d be forced to take a plane to wherever I’d need to be.
Well, California is less than 40M people, hence the need for feed from neighbouring states !
I think a big part of AZ’s problem is that yields out of FCO is atrocious. Global carriers can swallow a few money losing long haul flights into FCO as they may be deemed necessary for their network, but when FCO is your network that’s another problem.
Also, I suspect by dehubbing MXP, their few high value customers defected to LH, for a better product, reliability and overall network.
Their restructuring will continue to be a biannual event.
CF – were you aware that Alitalia has pretty much divorced itself from co-operation with Air France / KLM ? The codeshares have pretty much all been terminated, including on routes like Rome-Paris and Rome-Amsterdam
David – Yes of course. They have only ended the intra-Europe cooperation, however. The Transatlantic deal with Air France/KLM/Delta remains in place for now and still has years left on the deal.
And don’t forget Alitalia is getting a single 777-300ER and deploying it just in time for fall!
As one of few European countries Italy has a bunch of ICE / TGV like highspeed railways.
Just adding my five cents, that everything there is worse then anywhere else. Not by definition bad news for the customer, but to make profit as an airline … Actually, maybe the bigger airways hope Easy something bites in the dust, trying to squish profit out, what cannot be done.