After years of delays and failures, the Worst Airline Ever, Alitalia, has a shiny new reorganization plan which will thrust it into the pantheon of the world’s great airlines. I almost wrote that without laughing.
Perhaps I’m overstating things. There is no actual “plan,” or at least none that has been released. Instead, what we have is the line-up of entites that are going to put money into the new, new, new Alitalia in exchange for an ownership stake. I’m sure there will eventually be an actual commercial plan to fix the airline, but that won’t matter. As long as the government continues to prop this airline up and avoid a real, full reorganization, it will never succeed.
You’ll recall this latest attempt at reorganizing started after the last effort led by Etihad went south. Etihad’s strategy to invest in failing carriers would have bankrupted any other airline. But when you’re backed by the government, you don’t have that problem. The thing is, even the Abu Dhabi government has its limits. Alitalia was going to get a divorce from Etihad, but it just couldn’t find a way to live on its own without those deep pockets. It needed to find another beau to survive.
The government funded the airline while it worked on finding a good — ok, “somewhat acceptable” should suffice — option. Late last year, the government finally made a move, sort of. Ferrovie dello Stato Italiane, the national rail company, was tasked with taking over the airline, but it wouldn’t do it alone. It had to put together a group of investors. This process was delayed time and time again, but we now have a path forward financially.
The biggest partner — reportedly with the same 35 percent stake as Ferrovie dello Stato Italiane — is Atlantia, an Italian firm that primarily builds and operates roads and bridges. Depending upon who you ask, Atlantia doesn’t appear to be particularly good at this. Remember the bridge that collapsed in Genoa killing more than three dozen? That was Atlantia’s.
In fact, Atlantia was in hot water after the bridge collapse, and there was discussion about it losing its rights to continue operating much of its holdings in Italy. CBS News noted:
Premier Giuseppe Conte and key ministers said they are launching the process to revoke the concession, citing inadequate maintenance. Prosecutors are investigating both the maintenance and design of the bridge as a cause of the deadly collapse.
Now, let’s say you’re the government. You have a company that has allegedly run a poor operation and put people in danger with inadequate maintenance. How would you punish the company? Oh right, make it invest in Alitalia. That is punishment, though the optics of having a large equity investment from a company that the government recently accused of performing inadequate maintenance is just…. I suppose I have inadequate words to describe this.
So, you have the state-owned railway leading the charge by presumably pushing Atlantia — which I think we can all agree is far too similar in name to Alitalia — to join the coalition. If it doesn’t, well, who knows what repercussions there might be. The government itself will also maintain a smaller stake on its own. It sounds like we have a new “coalition of the willing” in our midst.
But wait, there’s actually one more investor, and this one participated all on its own accord. Delta — an airline that loves stakes in airlines but usually not ones that are likely to fail — is going to put a little money in.
Before you wonder if Delta has gone completely mad, there is a rationale for this. Alitalia is a part of the Delta/Air France/KLM joint venture today, and Delta likes having the feed in Italy, a big and important market in Europe. So that traffic and relationship is worth something right off the bat. It’s worth even more when you consider that if Delta doesn’t step up, that traffic could align with United or American (or one of their partners) and shift it all away from Delta.
We don’t yet know how much of a stake Delta is taking — unconfirmed reports say 15 percent — nor how much they had to put in to acquire that, but presumably they did the math and assumed it was worth a gamble. Now Delta has to just hope that the investment can be recouped before Alitalia goes bankrupt again.
This is far from a done deal, but the pieces are coming together. Once it’s done, then we will presumably hear more grandiose plans about how Alitalia will turn itself around. At this point, however, the troublesome meddling of the Italian government all but ensures whatever the plan is, it won’t work. As if that’s not bad enough, there’s still Air Italy flooding capacity in the market as well as the low cost carriers from easyJet and Ryanair to Ernest.
Alitalia hasn’t really mattered for a long time. If it disappeared, its capacity would just be replaced by others quickly. But pride is a funny thing, and the Italian government can’t admit defeat. The madness continues.
42 comments on “Delta and Others Try to Fix Alitalia, But They’ll Fail”
It sounds like other than Delta, it is not in the best interests of any of the ownership entities to see Alitalia truly succeed, which is part of why it won’t… Why would the RR company really want to see an airline get stronger? Not sure if Atlantia owns/operates airports, but it seems like they would be more focused on collected tolls/fees from roads, bridges, and/or airports than on seeing Alitalia do really well (and thus potentially draw away passenger toll revenue). The government… Well, I’m going to step out on a limb here and say that the government is going to be more concerned about job preservation than about getting the best return on its money, so enough said.
As a fun fact, more Italians than Spaniards emigrated to Argentina. Aerolineas Argentinas seems to perennially be in the running for Cranky’s second “worst airline ever”. Coincidence?
Seems like a pretty easy answer to me. The focus is getting more people flying into Italy, which means more people to transport via rail when they get into the country. Get revenues on the whole travel journey. Win-win.
Could see DL using this as a means to get the Alitalia transatlantic flights into the JV and get DL flight numbers onto them. It can then let the domestic operation be cut back other than where it offers (i) feed for the transatlantic JV, (ii) feed for KLM/AF/VS long-haul.
my understanding was that the JV decided to swap in Virgin and remove Alitalia. Not sure what actually drove that decision. Some speculation:
– Regulatory: we want Virgin so bad, we will lose Alitalia for regulatory approval (no evidence of this)
– Customer preference: Alitalia’s share of the JV was pretty small. Might not “earn” their keep to be part of the JV vs. just an alliance partner if they have limited unique and valuable routes or capacity for IRROPS.
– Skyteam: the ability to interline / codeshare still exists, but a metal neutral coordination of schedules, and sharing of revenue and costs may not be worth it with Alitalia’s potential demise and risk of financial loss to other carriers in the venture.
I think DL would be angling for your point 2 — use them to feed Skyteam partners and cut back on overlapping routes. DL has done well helping Virgin seek premium traffic and adjust schedules and destinations accordingly. It may not be sexy to fly to MSP over St. Thomas, but it makes money without job and capacity cuts.
Noah – I thought I read that there is an opportunity for AZ to rejoin the JV once it restructures. I think there was too much uncertainty about where it was going before, so they left it out. I’d imagine if this restructuring completes as planned, then it likely would rejoin.
From the initial JV re-filing app (footnote page 3) “Alitalia Compagnia Aerea Italiana S.P.A. (“Alitalia”) is not a party to the Amended JVA, which will not be implemented until the preexisting SkyTeam JV to which Alitalia is a party is terminated according to the terms of that agreement. Although the Parties hope to implement metal-neutral cooperation with Alitalia in the future, Alitalia is currently undergoing restructuring through the Italian bankruptcy process, and its future ownership structure is uncertain.”
Wasn’t LH sniffing around the time this JV was applied for? Wasn’t Etihad also thinking about a larger/different stake? Remember, this was filed in July 2018.
The new agreement was given tentative approval last week, and once the final order is issued, the ATI with AZ has to be terminated within 6 months.
If this new AZ ownership structure is approved within the next 6 months, I wouldn’t be shocked to see AZ added back.
https://www.regulations.gov/docket?D=DOT-OST-2013-0068
Alitalia was already in the DL-AF-KL JV, and is now being kicked out as part of the DOT’s conditions for approving adding VS. Which makes the timing of this investment a little confusing. I guess maybe Delta has a plan to get AZ back in? Or maybe they plan to set up a standalone JV with AZ similar to what they previously had with VS, on the premise that commingling VS with AF/KL has more value than AZ had. (I imagine the JV may decide that KL and AF give some LHR slots to VS, so if that’s the plan, that premise could well be true.)
It’s hard to imagine how this could be worthwhile without a DL-AZ JV, unless Delta is just putting in so little money that they figured, might as well.
DOT didn’t request AZ be removed. They weren’t included last July due to the uncertainty of the company. I seem to recall LH was sniffing around as well.
AZ was mentioned in a footnote.
You write as if the pride of operating an airline has been grounded in economic success – until Alitalia came along. There are MANY airlines around the world that are economic failures, subsidized, and can’t make money on large portions of their network.
When United and American can’t even make money flying the Pacific year after year, no American has any right to be pointing the fingers at Alitalia or any other airline. Unless you think it’s ok for investors in the US to bankroll American and United’s “pride” but not the Italian people.
US airlines had the opportunity to reorganize under bankruptcy – something unavailable in most parts of the world – and yet many of those same airlines continue to make the same mistakes that other subsidized airlines make.
Do you realize that Alitalia’s entire workforce is less than the difference in number of employees between American and Delta – and yet American takes in less revenue than Delta? American Airlines right now is one huge jobs program that is subsidized by investors.
Even with the MAX grounding which has forced LUV to cut capacity – one of the very few US airlines in a capacity negative position – LUV is still posting profits at the top of the US airline industry. LUV does a far better job of using other people’s money to create wealth – the definition of capitalism – while AAL has destroyed more shareholder value over the past five years than Alitalia will go through in many, many years.
And, of course, the real issue w/ aviation in Europe – not just Italy – is that the Europeans were hoodwinked into opening their markets to 3 Middle East airlines that have had tens of billions of dollars/euros of investment poured into them by their governments which will never be repaid. And the Europeans were stupid enough to – wait, wait, out of pride – build the world’s largest commercial airplane for those Middle East airlines at the cost of tens of billions of dollars to European taxpayers even while Boeing shovels in tens of billions of dollars of tax breaks from US states- and the A380 program is terminated and the 737MAX is grounded for what will be longer than for any other aircraft program grounding in the history of western commercial jet aviation.
Let the Italians have Alitalia as their point of pride. The aviation industry is full of arrogance and commercial failures. The EU is hardly in a position to cut Italy off when the whole Common Market is fighting off displeasure from Budapest to The City.
No American should be pointing the finger at Alitalia when they have so many perfectly good examples of prideful economic failure right in their own backyard.
How is comparing one portion of an Airline’s profitability, but not overall profitability, in any way relevant to an airline that has been completely unprofitable everywhere for decades?
For the sake of any investor, I hope they didn’t own AAL, but that doesn’t make the company unprofitable. Alitalia was and is unprofitable for a very long time.
Frank,
AAL’s market cap was near $40 billion just after emerging from bankruptcy and is less than $13 billion now.
that is wholesale destruction of investor wealth on a scale well beyond anything AZ has done in that amount of time.
At least one of the losers in AZ’s restructuring will be Etihad which has made a number of bad investments in other airlines, only to have that equity wiped out.
There’s a big difference between private investors footing the bill of US airlines (who are still profitable overall—the stocks of United and American are not just based on their transpacific operations) and a government entity spending taxpayer money to prop up a failing airline. Fingers can surely be pointed at the Italian government for pouring money into the endless pit that is Alitalia.
Airlines have lower capitalization now because investors are wary of the sector as a whole. Every major US airline (except SWA) has declared bankruptcy and wiped out shareholder equity. But it was private shareholders that took the hit for the most part (I think taxpayers are on the hook for some of the pension losses that the employees suffered through the PBGC).
All US airline pensions that have been terminated were guaranteed by the PBGC which is a government backed insurer but which has so far been able to cover its pension losses w/o government assistance.
LUV never offered defined benefit pension plans which was one of the primary drivers of legacy carrier bankruptcies. The stock market crash post 9/11 required massive injections of cash to fund the pension plans.
Alaska and Hawaiian are both legacy airlines – pre-deregulation – which have not filed for bankruptcy although there have been bankruptcies by airlines that directly competed with them in their regions of the US.
Airline valuations are below normal even for LUV, ALK and HA so the bankruptcy history argument doesn’t work. Airlines are considered consumers or industrials (depending on the analyst/ investment company) but airlines are still seen as much more cyclical than American industry as a whole. It has yet to be shown if the restructured US airline industry can be profitable even in a recession
Just a correction – HA has filed for bankruptcy twice, both in 1993 and 2003. Alaska really stands alone.
Saying those pensions are “guaranteed” is a bit of a misnomer. The amount that people receive in cancelled pension plans, depending on the situation, can be substantially less than they were entitled to. For high earning professions such as airline pilots, the max that PGBC can pay out is often significantly below what they would have gotten if the airlines were not allowed to discharge them. It is one of the main reasons why ALPA has contemplated the idea of potentially reopening them in future negotiations. Historically I think a private DB plan has only ever been re-opened once, though it is technically and legally doable.
Sean
the terminated pension plans are guaranteed in the sense that the plans themselves continue under PBGC rules even if the company ceases to exist.
The PBGC never guaranteed the value of any person’s pension at the same levels as the company paid. That is not just an airline thing.
It is precisely because there will always be differences between the terms of any DB pension plan that a company offers and any insurer that they really are not a good idea for high value workers, let alone people that choose to deviate from PBGC’s standard rules.
Any union – esp. pilot union – that chose to pursue a DB pension plan needs to seriously think twice.
Profitability or lack thereof is not what sunk legacy carrier DB plans but rather because the stock market tanked post 9/11 and airlines had to spend billions funding their pension plans (which had done very well in the late 90s) or terminate them. Giving the cash crunch post 9/11, most airlines that filed for bankruptcy terminated them; DL/NW and later AA froze nearly all of theirs because legislation was passed to help them and protect the PBGC from another round of terminations. AA, DL, and NW pensions are managed by the companies under their rules, even though no further contributions have been made.
JetBlue hasn’t filed BK either.
JetBlue didn’t exist before deregulation either and doesn’t have defined benefit pension plans.
But jetBlue is not a legacy, it only started flying in February 2000.
once again, the Atlanta idiot confuses verbosity with actually making a point. Get to the damn point – no one has time to counter point-by-point from $42k losers.
henry LAX – This is the last warning. You are welcome to disagree with others and you can do so with strong language. But personal attacks — such as calling someone an idiot — will not be tolerated. If this continues, I will block you from leaving comments.
Cranky,
I’m struggling to see the difference between Alitalia and Air Italy as far as the US3 and their campaign against the ME3 are concerned. Is there one?
Alitalia: Subsidized by Etihad for years but they already had the planes so the money went toward keeping the planes in the air. Also kept afloat by the Italian government for years
Air Italy: Subsidized by Qatar but Didn’t have the planes so the money is arguably spent getting the planes up and ready to go vs keeping the planes in the air.
Alitalia: Part of the DL JV. My timing may be off on this but does that mean that Etihad was, in effect, putting money into the Delta TATL JV indirectly by keeping Alitalia alive?
Air Italy: not a part of anything, not even Oneworld.
Ed Bastian skips the meeting with President Trump and the entire Delta-led mission against the ME3 falls apart per most articles. Delta continues its plan to invest in AZ.
I guess it all just seems a bit strange. Is there any real difference in the past subsidies AZ received from Etihad vs what Qatar provides Air Italy today?
I guess Delta would argue their saving of AZ is different because it doesn’t involve 5th freedom flying but… they’re saving a carrier that’s arguably only alive today because of the investment of a ME3 carrier in that same 5th freedom flying that Delta so passionately argues against today with QR and Air Italy… It’s no wonder Ed Bastian skipped the meeting at the White House. It’s hard to really tell any real difference in the two big international Italian carriers as it pertains to the ME3. Seems a bit hypocritical for Delta to invest in AZ given all that.
You forgot to mention that QR is the largest shareholder in British Airways which has a joint venture with American Airlines. QR must be indirectly subsidizing AA.
AA did tell QR that it wants no direct investment from QR which elicited nasty QR comments about AA’s flight attendants.
oh, and QR was a tenant of Trump Tower for years and Trump had ownership stakes in a number of Qatari companies before ascending to the American Throne.
Qatar still remains a major military partner in the US’ complicated strategy of picking friends and enemies in the Middle East – not unlike what the British did.
At least the French take anyone’s money and leave politics out of economic discussions.
So, yeah, it’s all weird.
“At least the French take anyone’s money and leave politics out of economic discussions.” Well, as a French citizen, I certainly agree with the first part, but the second part of your statement is patently false. Everything done in France has political implications, particularly international finance. It may be less obvious than in the US, but it certainly is present.
Jeff – I’m sure there is a difference, but to me, the big points are the same. You had a middle east carrier investing in and throwing money away into an Italian carrier in both cases. I haven’t supported the effort to stop Air Italy. It’ll fail on its own just like Alitalia did under Etihad.
As always, it’s all about the unions and that ain’t gonna change. Good luck
No, it’s about national pride. There are plenty of union carriers that are economic propositions. Southwest has made a lot of money during its history, and it’s basically always been union.
If the Italian govt let Alitalia fail, the peninsula might finally get decent and stable air service.
I expect that to happen about the same time as the Catholic Church eliminates celibacy as a condition of the priesthood.
Italy has so much to be proud of – to be proud of Alitalia is just bizarre. It’s like seeing George Costanza as a hero…
The Italian labor unions have been the biggest hurdle to Alitalia’s success for over 50 years. They bear no relationship to any of the labor unions that we are familiar with in the USA. In an unrelated issue, you’d probably be interested to know that Fiat/Chrysler hasn’t made any significant capital investments in Italy for over 8 years solely to escape the Italian unions. 99% of their investments have been made in Eastern Europe and in the USA. Italian unions are lethal
I flew Alitalia last year on a connection from Delta in Amsterdam. My first time and boy have you been correct. Planes were dirty, flight attendants were there but couldn’t care less. But we got to Rome and back to Amsterdam on Alitalia. So I guess that’s something.
I don’t think I agree to your statement that Alitalia is the ‘Worst Airline Ever’, but they are probably the top on the list of carriers most frequently in a mess. I agree with your analysis that the DL investment will bring in no difference. As you rightfully pointed out, DL’s only intention is to keep it off the hands of UA/LH and AA/BA. I see the following issues overall.
(1) Alitalia is clearly one of the airlines in the wrong alliance. Despite a DL investment, I do not see AZ benefitting from DTW/MSP/SLC/ATL in any way. After all, they fly to MIA, ORD, JFK, BOS, LAX (AA!)- Combine it with NRT + LATAM -> They should be trying for a way to sneek into oneworld! They will be the only airline in central europe within oneworld = benefit both ways. AZ needs strong partnerships that are mutually beneficial for it to succeed long term.
(2) Hubs: FCO is not a premium market whereas Milan is. But the split airport situation (LIN/MXP) makes it difficult to hub out of MXP. Although I feel that is the way to go for AZ. They need to get into the premium Milan market and not just fly a handful of routes out of LIN (at least they can claim a higher premium). And leave FCO to a low cost subsidiary (Of course imagine the Italian govt even allowing AZ to consider this!)
Anyway, interesting times ahead!
Maybe there’s not enough familiarity with Aeroflot to rank them as the world’s worst. Customer service, at least at the airport a volunteer at, is essentially non-existent.
Dear Cranky Flier,
Let’s not be harsh. The Italian government wants to maintain a national airline because it generates jobs and offers opportunities for commercial transactions. Both of those can be easily monetized in the context of Italian politics. Having Italian State Railways take over the airline is a nifty bit of sleight of hand – I mean, who ultimately owns them? Atlantia badly screwed up in Venice, and they’re effectively being massively fined through the forced investment in Alitalia. Delta completes the party by buying in to protect its flank.
Nobody thinks they’re going to make a profit. Alitalia’s going to go bust once more, hopefully after a couple of years so the partners can get a little back on their investment. But in the end, that’s not the point. The point is jobs to be distributed by the unions and the government, and large contracts that can provide generous kickbacks to the powerful. And in a couple of years, they’ll announce yet another bankruptcy, find or invent new partners, announce a new plan, and go back to the party.
Wheeee!
Alitalia has used someone else’s money for a long time. The problem condemning it from an American viewpoint is that we do plenty of our own subsidizing and justify it. If American or United lose money flying the Pacific yet make money someplace else, they definitionally are subsidizing their Pacific network w/ someone else’s money. Since I recently flew on them in Latin America – which they still report to the DOT as profitable, could my money have been used to subsidize their losses from LAX to China – which actually subsidize the vacations of some Chinese tourists coming to the US?
Airbus and Boeing have traded charges of subsidies as long as Airbus has been in existence. To pretend it doesn’t happen or not realize that what it is called or classified changes is naïve.
The US decided 40 years ago to deregulate the domestic airline industry which was controlled by the government as a utility and the expectation was that airlines should serve the greater good of the community, however widely that was defined.
The EU and most other democratic governments came to the same conclusion to cut off subsidies and open their airline industry to global competition – but that has hardly been universally done and no one can argue that Middle East 3 airlines weren’t developed as instruments of their countries’ economic policies and were funded generously by those governments as disrupters in the global airline industry. We would be having a lot fewer discussions about loss-making western airlines if Middle East airlines hadn’t repackaged the same mindset that existed decades ago in the boardrooms of many western airlines.
Alitalia’s home is a socialist country where the government spends money on a lot of things that Americans have consistently said they don’t want to pay for on a government basis. Alitalia might very well be ranked as one of the most poorly run airlines from a capitalistic, western business perspective – but that is clearly not the way the Italian government sees it, and even as a democracy, Italy has been unwilling or unable to break some of the long-standing broken economic realities of Italy. As part of the EU, they have to pretend to agree w/ the EU’s free market policies but some of Italy’s leadership has told the EU that the EU needs to stay away from AZ. German citizens are the ones that have subsidized other countries and they have expressed their displeasure at the ballot box for having to support other’s bad decisions. Ultimately it is those that have foot the bill for AZ’ lack of financial success from a free market perspective that have the right to condemn it.
As for what Delta sees in Alitalia and what they can do, it isn’t a huge surprise that many of the airlines in which DL has invested equity were in weak financial shape before DL invested in them. In many cases, Delta got equity for very low cost relative to the strategic potential of the airline; their 49% of VS cost them about the value of the underlying slots at LHR. VS like other DL equity partners may not be consistently profitable on the same standards as DL, but they aren’t burning cash – as some were not that long ago – and they do provide real value to Delta. DL might have decided that they can put in a enough cash to keep Italy and south central Europe in its camp but the promise of adding AZ back to the joint venture might also be a means of forcing some of the changes which Delta knows need to take place.
There is no doubt that DL sees strategic value in AZ whether it becomes profitable or not but the financial performance of many of its equity partners has improved; as the most profitable global airline in the world right now, Delta’s tips of the trade are welcomed by even the most independent minded airlines.
I think it is premature to say that nothing will change at AZ; some of the potential investors run good businesses. We might be surprised that AZ and the Italian government has finally pulled together a team of investors that can lead Alitalia to a higher level. If nothing else, they definitely should get the award as the airline that has successfully stared down death better than anyone else.
Tim – I don’t understand the effort to equivocate government subsidies with internal subsidies. I would bet there is no network carrier out there that is fully profitable on every route. It’s all about building a network that makes sense, and it’s only the overall profitability of the company that ultimately matters. Things will ebb and flow between different routes and geographies. You build the network that makes sense for the long term.
If, for example, you’re American, then you realize that Chicago to the Pacific will never work for you, so you pull out.
Government subsidies are completely different. I won’t get into the debate over the Middle East carriers, because I find it pretty boring at this point. Sure, there are external government subsidies that all airlines take in one way or another. But that is different than using your own capital to optimize the network for the long run.
CF,
the reason why the regional losses which legacy carriers sustain is worth talking about is because the US DOT still requires a level of reporting that includes that data and makes it available to the public.
Given that the US3 airlines are parties to joint ventures across their networks, it is relevant to the public and to regulators to know how airline profitability works. It might be valid that airlines can move numbers around to affect profitability by region but the notion that it is a one-sided attempt to show something unfavorably is just false. There is a lot more standardization to accounting than a lot of people want to admit and if you apply one standard to revenue, you can likely use the same standard for costs.
If American loses money flying the Pacific, then someone pays for that and there really is no moral difference in arguing that it is a private investor in the US vs. an Italian taxpayer (which presumably is not me or you) which does have the right to vote out politicians that misuse taxpayer money. Italy is a democracy just as buying and selling stock on the NASDAQ is process of the free market.
The argument about allowing “internal subsidies” doesn’t hold water if you don’t cut off government subsidies; the US3 could care less if the ME3 subsidize their carriers as long as it doesn’t involve markets the US3 also want to serve. As huge global carriers, the ME3 has benefitted from massive government subsidies even if they aren’t doing so now. You can’t argue that it is ok to fly Athens to Newark because you aren’t subsidized now when you have received subsidies in the past.
I also would guess part of the reason why Delta doesn’t want Alitalia in the JV until it is restructured is because they don’t want to be as tightly associated w/ a company that is losing so much money and has overdue government loans.
I know the difference between private investors and government subsidies but in the airline business, the line is not entirely black and white. And many governments including the ME3 have charged that the US3 are or have been subsidized – in part because they don’t fully understand US bankruptcy laws.
At this point in my life, I don’t see anything is going to change from charges of subsidy in the global airline industry. I also still am not convinced that Italy ever really agreed to some of the core free market principles of the EU accords – because those accords are counter to the way Italian business has been done for centuries. Just because Italy is in the EU doesn’t mean they or their airlines are going to beacons of the free enterprise system. And Italy is certainly not going to extinguish those airlines’ light as long as there is some economic benefit to the country.
If Trump doesn’t want to deal w/ the US3’s complaints against the ME3 and the EU says it won’t deal w/ the ME3 despite losing tens of billions at their feet – including for the failed A380 which was really built for the ME3, then it is doubtful that there is any resolve to fix the broken economics of the global airline industry.
Ultimately that means that pure free market economics will decide the issue because the US3 and even the European 3 are big enough and have learned enough to deal w/ weak and marginal players. The US3 are enormously profitable in the context of global airlines’ historical profitability.
And, ultimately, DL’s willingness to invest in AZ might be because they know the Italian government won’t let AZ fail which means that the “admission fee” DL can pay not only wipes out Etihad’s equity as part of AZ’ restructuring but also locks up a region for DL for years to come – by which time the ME3 might be on the downside of their business model and looking for their own bankruptcy reorganization.
“Ultimately that means that pure free market economics will decide the issue…”
Internal finances are a free market issue, where a company judges what the best use of its resources are within a company, Internal finances also doesn’t measure what other revenue would be lost if they stopped serving somewhere, which is incredibly important for a network carrier.
External subsidies and trade wars are by definition messing with the free market. There’s no way to rationalize that they are the same thing.
The US DOJ absolutely challenges the abililty of companies to transfer price when it is market distorting including resulting in predatory activity. IN reality the DOJ has provided very strong limits to airlines to reach monopolistic size in markets and the FAA has backed that up w/ airport access requirements. International markets are highly competitive.
Internal cost and revenue manipulation certainly can manipulate the market and those that have done it have to egregious degrees have been penalized.
Airlines often claim that they have to serve a market based on “network value” but the whole reason why predatory and abusive pricing is easy to prosecute in the airline industry compared to other industries is because airlines are required to report to the government enormously detailed amounts of information that other industries do not.
And, again, in all of this discussion about Alitalia, someone really needs to provide evidence of how much government assistance the Italian government has provided.
And, AZ’ average fares are in many cases higher than other carriers’ so the notion that the market is being distorted by AZ’ subsidies is incorrect.
AZ’ subsidies simply go to fund a bloated, overpaid workforce – which isn’t much different than AA right now – the difference is that the lower earnings which AA is recording relative to its peers is being born by investors and justified as being a badly run business; in other countries, marquee companies are subsidized for jobs and national pride. Until the ME3, there really aren’t that many cases of international airlines that were subsidized and could be predatory in the marketplace.
And, specific to the US3-ME3 debate, the DOT has said that they can only take on a case that involves damages that have occurred, not those that might occur because of subsidies. The US3 have avoided markets that the ME3 operate that they believe are impacted by subsidies.
Each of the US3 compete in markets directly competitive with AZ and Air Italy so it is hard to argue that they are being harmed since they continue to remain in the market.
And the notion that airlines should not be subsidized but rail transport can be and often is in Europe highlights the hypocrisy and acceptance of subsidies in one place but not the other.
It also may well be that with the national rail company and the toll road company (which also clearly has received subsidies) is because the Italian government will be able to do enough creative accounting that Delta, a private company that does operate in the free enterprise system, will be able to give the technical support while the Italian infrastructure companies will shoulder some of the costs.
Who knows what will all shake out but Alitalia had no value if it were to be offered solely in the free marketplace and so the Italian government is going to have to do some creative accounting while letting Delta do what it does very well in running and reforming beat up airlines.
They aren’t willing to throw in the towel and, in contrast to the US airlines, there is likely not enough transparency to know really what will take place behind the scenes.
Even with Air France/KLM which is much less profitable than Delta, there are limits to the losses that Delta will incur.
Whether it is the best network fit or not, AZ and DL have worked together for years and DL is as confident as any investor can be about what has to be done to turn AZ around. I’m not sure there has ever been another airline that is as profitable as Delta to have been asked to help turnaround AZ around.
I keep hearing reports that ME3 airlines are propped up by their governments but I’ve yet to see anyone providing evidence of it. Can someone please share?
review this and the overall site Open and Fair Skies
http://www.openandfairskies.com/wp-content/uploads/2015/04/Gulf-Carriers-Financials.pdf
Tim, you’re really sharing that propaganda? It’s the equivalent of MSNBC/ Fox News/ RT. After Ed Bastian dipped into the Islamophobic pool by eluding to links between 9/11 bombers and the ME3, I will trust nothing he says. He is amoral. full stop. Aside from regulatory compliance, all airline CEOs are responsible for one thing -meeting the ROI expectations of their investors. US3 have their institutional investors, ME3 need to diversify their home economies for the post-oil world, Alitalia needs to keep a voting bloc in the hands of the ruling parties.
dorights,
the site I linked is the US3 case and they did put it in writing.
You may choose to disagree w/ it but it also reflects the views of their labor unions.
It is also worth noting that the US3 also was against Norwegian and they are cutting back, esp. in the winter. They also cancelled much of their narrowbody flying.
The US3 also led a campaign against Virgin America’s formation and the DOT did extensive scrutiny around its formation. Virgin America’s business model ultimately failed and AS has been pulling back transcon capacity at a fairly high rate.
Ultimately, I agree that economics, not politics, will sort out these issues.
The loss of the A380 over the next few years will tremendously change the economics of the ME3’s networks and remove a lot of low fare connecting traffic off of the ME3.
Qatar (the airline) will likely be the confrontational, loud mouth but it will be facing increased competition from Turkish and Emirates and Etihad.
And ultimately, Etihad was weakened by its failed investments in other airlines and Qatar is not stupid enough to do the same thing. The fact that Air Italy has pulled back a lot of capacity shows there are limits to what even they will do.
Again, I think the whole US3-ME3 issue will not be discussed because nothing is going to happen w/ the current administration but I answered the question
I personally wonder if Etihad is going to last. Emirates has been so successful that EY is quite frankly small compared to them. If that low fare traffic drops off, they could be facing a merger where Etihad takes the local traffic, Emirates takes their widebodies and handles international flying, and flyDubai heads for the pastures (although the opposite could happen). Meanwhile, Turkish is going to continue to take on flights to economically growing South and East Asia from their massive new hub. They don’t have the subsidies argument either.