Don’t Waste the Effort, Let Air Italy Fail On Its Own

The big three US airlines (American, Delta, and United) have been hammering on the big three Middle East carriers (Emirates, Etihad, and Qatar) for illegal subsidies for many years now. I’ve written about this several times, and I’ve been semi-sympathetic to at least a part of the argument. But recently, the fight has shifted. It now seems to have centered on Qatar’s investment in Air Italy, and that hardly seems worth a fight at this point. The hard part is knowing when that changes.

The overall fight calmed down after some weak and substance-free agreements were signed between the US and the both the UAE and Qatar. The deals made it look like the US was doing something when, in reality, weak economic conditions did more to impact the ability of Emirates and Etihad to grow than anything else. Even heavily-subsidized airlines eventually have to face reality, or a version of it.

Now, the fight has pivoted and the spotlight is shining brightly on Qatar Airways and its investment in Air Italy. Air Italy was Meridiana, a niche carrier based in Sardinia with an aging fleet and not much of a plan. Last year, Qatar bought a 49 percent stake in the company and decided to transform it into Air Italy.

At the time, this felt a lot like Etihad’s investment in Alitalia. It was an attempt to push the brand more upscale, give it some kind of strategy and then magically succeed. As we know, Etihad failed miserably with that plan and lost pretty much everything in Alitalia. I just assume Qatar is on the same path with Air Italy. The airline has already pivoted multiple times. It has gone in and out of routes like they’re going out of style, and it has now decided it won’t take Qatar’s cast-off 787s and will instead stick with Qatar’s cast-off A330s.

That, however, isn’t stopping the big three under the guise of their lobbying organization Partnership for Open & Fair Skies from going guns-blazing on this arrangement. The Partnership has put out a cringe-worthy ad that is being broadcast in DC stroking the President’s ego and trying to get further action to be taken. Watch for yourself if you have a strong enough stomach:

The message is summed up succinctly in this press release:

… Qatar Airways used its government subsidy-backed investment in Air Italy, previously a struggling regional carrier, as a proxy to continue its expansion into the U.S. market. Without Qatar’s subsidized backing, Air Italy’s new U.S. routes wouldn’t be feasible.

Or there’s this statement in response to Air Italy’s announcement that it would add a couple of new routes to the US next summer.

Simply put, the only reason a failing airline like Air Italy can continue to launch new routes without consumer demand is because of Qatari government dollars designed to fuel unchecked growth.

In the past, the only part of the US carrier argument that has really resonated with me is the argument that these Middle East carriers would use subsidies to fund fifth freedom flights that don’t even touch their home countries. You see Emirates doing this in a limited way today with Newark to Athens and JFK to Milan, but that’s really about it so far. Still, that is where I think real peril lies. But if that’s the case, why am I against going after Qatar’s investment in Air Italy? I’ll try to explain.

As the argument goes, Qatar is funneling money through Air Italy to fly between Italy and the US as a proxy. It can use its airplanes to expand its reach around the globe. That sounds pretty sinister, but it just doesn’t look that way right now.

Air Italy is an Italian airline (49 percent owned by Qatar) with Italian costs (mostly, we think) that is failing just like any good Italian airline would. The reality is that Qatar usually invests in successful airlines like British Airways parent IAG. This isn’t the same as the Etihad strategy of throwing money at garbage.

Air Italy previously was a failing regional airline, but that’s irrelevant. Qatar saw the ability to invest in a platform to create a Milan-based hub and have it grow quickly. Alitalia was struggling and had effectively abandoned Milan as a hub. While I don’t think this strategy is going to work, it is a real business plan. If Qatar wants to invest in that like it has invested in others, so be it.

Where it gets fuzzy is in what Qatar is doing beyond the initial investment that saw the airline take 49 percent of the new company. We haven’t seen 2018 financials for the airline, so it’s hard to know what actually happened, but as I understand it, there was a loan that has been at least partially forgiven. And there were loan guarantees for the airline to raise more money from third parties as well. Then there’s the question of how much Air Italy is actually paying Qatar for the airplanes it’s using. It’s all quite murky, but to me, the biggest issue is around how Air Italy is using this money and if it really is distorting the market. So far it looks like an airline that had an initial strategy that hasn’t worked, and it is rapidly hunting for anything that will before it runs out of money.

What is that strategy? Well, there was talk of massive expansion including 30 787s, but that has already fallen apart. Now it will take an unspecified number of A330s instead. Air Italy has gone in and out of many markets and continues to hunt for routes that might work just like any other airline would. So far, I just see an ill-advised investment on the part of Qatar and not much else. This looks like an airline that is actually trying to succeed even though its efforts will probably be in vain.

The obvious question then is… at what point does Qatar’s involvement create a distorted market that requires action? That is honestly something I can’t answer, and I realize that’s completely unsatisfying. It feels like a “I’ll know it when I see it” type of situation. If we see Qatar pump additional funds into the airline after it’s clear that it won’t succeed, or if we find out about below-market questionable lease deals, then there’s a problem. It’s just not as black and white as one might hope… or need if you’re a regulator trying to be consistent.

If Air Italy continues to lose money and ends up flying 30 widebodies, then that is pure insanity. But I highly doubt we’ll get there. Instead, I imagine we’ll see Qatar take a bath on this whole adventure. Those may have been illegal subsidies that they lose, or they may not have been. But at least at this point, it feels like the market is going to guide this one. The day it starts to feel different is when I change my mind.

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17 Responses to Don’t Waste the Effort, Let Air Italy Fail On Its Own

  1. shoeguy says:

    Air Italy may have a “hub” in Milan, but it essentially has no feed. The short haul fleet of Max 8s are grounded like the rest. Malpensa is an inconvenient airport, far from Milan (it’s actually closer to Turin) and Air Italy offers a product that is actually bested by Alitalia, if you can believe it. It will fail. Alitalia on the other hand, will live on subsidies into the next millennium.

    • dfw88 says:

      So, no one doubts that MXP is a horribly-situated airport and very inconvenient, but a simple Google Maps search is enough to show that it’s not closer to Turin.

      Duomo of Milan (center of the city) to MXP: 53km, 56 minutes by car
      Torino Porta Nuova (main train station in Turin) to MXP: 137km, 97 minutes by car

      • Elsie says:

        Malpensa is a suburb of Turin. The airport itself is actually closer to Rome than it is to Milan. Pilots frequently land at MXP thinking that it is FCO.

  2. SEAN says:

    Put simply, the ME III have oil money to burn & need to do something with it. High end shopping malls & skyscrapers in the desert as investments will only go so far.

  3. Jason says:

    Given how large the ME3 got in only a few years, it makes sense for the US4 to push back early before they explode in size. Qatar is shady and cannot be trusted

  4. Matt D says:

    What is the distinction you draw between fair competition versus predatory/dumping/subsidized? Sometimes the immediate objective isn’t about making money in the short term so much as keeping a competitor out. Or killing them entirely. There’s been no shortage of this here in the US. Think Southwest and Muse Air. Or Northwest/Reno Air. Perhaps the most egregious one being American/Legend.

    No one ever had any problems with that.

    The irony is not lost on me: The US Domestics/Majors sure have no problem being bullies while hiding behind buzzwords like “Free Market” and “Competition”.

    That is until they find themselves up against a BIGGER and STRONGER bully….like the ME3.

    NOW they want to play the victim card.

    Gimme a break.

    Let’s see Emirates offer LAX-LAS service and watch Southwest go absolutely bananas.

    • CF says:

      Matt D – Well that’s another problem here – there is no set definition.
      The US3 have leaned on this arbitrary definition that it’s huge in the Middle East and elsewhere it’s not. There is no easy answer when everyone is at least a little bit guilty.

  5. spanna says:

    With just 49% of the shares Qatar do not control AIr Italy who is controlled by Alisarda with 51%, which also mean that Qatar is also putting less money than Alisarda, unless you think that Qatar are doing charity to Alisarda. Nobody in Europe is complaining about Air Italy because they would be ashamed to spread lies like their US counterparts. The more noise the US3 make about Air Italy and the more lies they spread, the more I think their plan to make a hub in Milan has chances to succeed. Milan was let down by Alitalia because Rome’s politicians want to keep workplaces in the capital despite FCO hub is not suited as proven by years and years of failures (they withdrew from MXP in april 2008), while Milan is still by far the main business city in Italy, and the only possible successful hub in Italy. We will see in a few years if Air Italy will succeed or not. In the meanwhile Alitalia will shrink even further.

  6. tvmccabe says:

    I will never forget a BA executive saying to me, ” We will never again let a new competitor get out of hand which we allowed Virgin Atlantic to do years ago. We were far too complacent, and not aggressive.” Sounds like the Big 3 US carriers are following his advice.

  7. JAXBA says:

    I wish AA would switch sides and start partnering with QR (more) and IG, and play them against DL/AZ.

    There could be a nice strong AA/IAG/QR/IG alliance if AA would wake up and use their existing partners (and partners’ partners) to their AAdvantage…

    Let DL/UA whine.

    • Chris says:

      That’s how AA should play it. Unfortunately, AA’s posturing seems to be pushing Qatar out of OW. Al Baker even hinted last year that they may try to join Star Alliance which would be fantastic for me personally but who knows if it’ll actually happen.

  8. Doug Swalen says:

    I would feel a hell of a lot more sympathy for the US3 if they actually flew to the destinations in these 5th freedom routes they ostensibly have their knickers in a twist about. Most of them don’t. I have a hard time seeing harm when no actual harm has been committed. Does anyone think these airlines would suddenly swoop in and start flying to Dubai, Qatar, and Abu Dhabi or deep into Africa and India if those 5th freedom routes suddenly disappeared? Or if the ME3 disappeared?

    And then there’s the selective amnesia the US3 regularly displays about what subsidies are okay and what subsidies are bad and which airline partners that have been heavily subsizized are kosher and which non-partners who have been heavily subsidized are not kosher.

    It’s do as I say, not as I do with the US3

    • Tim Dunn says:

      You do realize that all of those airlines have revenue sharing joint ventures with European carriers that do have extensive operations in those parts of the world?

      The free market is increasingly becoming more powerful than the power of governments to subsidize losing airlines anyway. Air Italy will fail – but it costs much less to not give it any air to breathe than to ignore them just as the US airlines ignored the ME3 because their initial focus was on shuttling workers from S. Asia to the Gulf states which affected no one in the west.

      The death of the A380 is the force that will wound the ME3 and those wounds might be life-threatening for some airlines including the satellite carriers such as Air Italy that can’t be subsidized because the health of the parent, in this case of Qatar itself, is increasingly grave.

      • tvmccabe says:

        Well said, Mr Dunn

      • F. requent Flyer says:

        While all 3 US carriers have JVs across the Atlanctic, most of emirates 5th freedom flights are not flown by their partners.

        Take EWR-ATH. None of the 3 US carriers flies that route all year. While UA is in a JV with LX/LH/OS/AC none of those carriers fly that route nonstop. Similarly AA doesn’t fly JFK-ATH year around and neither does BA. same goes for DL.

        The same is true for the New York Milan route (except now Emirates and Air Italy fly that one, but neither is in a JV with a US carrier).

    • SEAN says:

      It’s do as I say, not as I do with the US3.

      Such as life in US business & government today.

  9. SFOBob says:

    I this week, I returned from a two week trip to Italy via Air Italy from San Francisco. Our round trip fare, for two, was just shy of $1,600 (which allowed two bags, seat selection and early boarding). The flights operated within schedule, the seats comfortable, the service was good, and the food slightly better than typical. IFE monitors sucked and were slow to respond to touch i put (but my iPad was loaded with movies, so I did not care). The real issue was there 125 passengers out bound to Milan and only 76 on the return flight. Plenty of room to stretch out, but not good for business. I fly to Italy a lot and enjoy flying non-stop to Milan, but I am not sure this service will be around next year (even if the airline some how survives).

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