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Future of Alitalia Bleak


Written by Luca

While financial markets around the world abound in uncertainty, the airline industry braces for the possible collapse of a mid-sized airline, Italy’s Alitalia. Losing nearly three million dollars a day, Alitalia faces almost certain bankruptcy. Back in April, Alitalia received a loan amounting to $475 million, which at the time appeared to be an exorbitant amount, but the recent financial instability in the United States has shown us that half a billion dollars amounts to nothing with respect to the billions the United States government has granted to embattled federal mortgage giants and other financial institutions.

Possible Investors

A group of investors joined forces in early April, forming the Compagnia Aerea Italiana (CAI) group, intending to buy the struggling airline. Italy’s prime minister, billionaire Silvio Berlusconi, based his election bid in April of this year on the saving of Alitalia form bankruptcy, rejecting the existing plan of an Air France take over. Having already secured an agreement with Air France, Alitalia would have been reintegrated in the world class airline that Air France represents. What, then, was the problem in selling Alitalia to Air France, according to Berlusconi and his supporters? Berlusconi is known for his nationalistic fervor, and therefore selling Italy’s flagship airline to the French, deeply despised by most Italians, would be equivalent to treason.

Problems Behind Investors

Making an appealing offer for Alitalia during the summer, the CAI group appeared well on track to win over Alitalia. The airline’s management has supported the deal since early summer, but Alitalia employees have mounted a stubborn resistance against any bid for the company. Pilots and flight crews criticize proposed plans to cut staffing and pay. The CAI group, headed by Mr. Colaninno, includes several Italian industrialists, commercial banks, and a rival Italian airline, Air One. Unknown to most, the involvement of Air One represents a fundamental flaw. The acquisition of Alitalia by CAI would inadvertently create a mega-airline in Italy, as Alitalia and Air One would merge. This would create a problematic monopoly on flights within Italy, as competition would be inexistent.

Causes of Financial Trouble

Alitalia’s financial problems stem primarily from its cargo and ground operations, and not from its passenger service. The origin of Alitalia’s weakness lies not only in its ground operations, but also in its poor logistics of employee management. Alitalia’s employees are based primarily in Rome, although the airline’s hub resides at Milan’s Malpensa airport. Therefore, the airline’s employees were flied into Milan every morning and back to Rome every evening, all at the cost of the airline. Another drawback to this logistical blunder is that half the plane’s seats were occupied by the Airline’s staff in the morning and in the evening, therefore losing a considerable margin for profit.

Consequences of Bankruptcy

The possibility of a bankruptcy for Alitalia poses a serious problem to Italy’s economy, because thousands of workers will lose their jobs. More importantly however, Alitalia’s bankruptcy would represent severe problems for the Italian economy, as Italy would be deprived of an essential infrastructure, as Alitalia controls most of Italy’s airline industry. Therefore flight connections between cities within Italy will be severely limited. Given the inelastic nature of flight route planning on the short term, Italy would remain paralyzed, as transport between major cities would stall. Although travel by rail would be feasible between Rome and Milan, it would not work for longer haul flights within Italy, such as a Milan to Palermo flight.

Solutions for Alitalia

No clear solutions exist to resolve Alitalia’s financial difficulty, as the problems stem from multiple sources including the ineffective ground services and the stubbornness of the employees to new compensation packages. One clear answer to the financial difficulty plaguing Alitalia lies in the sale of its ground services unit, as this would eliminate a substantial loss making enterprise. With the money earned from eventual sale of its ground services unit, Alitalia could pay back its staggering debt, which now stands at over a billion dollars. A restructuring plan for the allocation of its employees would be critical to Alitalia’s survival, in order to eliminate inefficiencies. Another path for Alitalia points towards an acquisition by a foreign airline, such as Air France or Lufthansa. Air France’s inclusion in the list of possible buyers surprises many, since Air France was rejected only a couple of months ago.

Alitalia’s Future

Alitalia’s future remains bleak, as reports have warned that the airline could fail within days. Analysts caution that Alitalia could lose its flight slots if the situation doesn’t improve in the next couple of days. Alitalia would certainly have to fix their financial problems by October 25th when the winter flight schedule starts, because the airline’s failure soon after that date could prove fatal to Italy, as flight connections within Italy and to other European destinations would disappear until the spring flight schedule takes effect in late March. The next couple of days will determine the future of Alitalia, as postponing its failure wouldn’t be beneficial to anyone.


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