Talks inch forward, while the clock on Alitalia’s lifeline ticks away

15 Sep 2008

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Reports have indicated that the Italian government has made some progress over the weekend in brokering a deal that could avert an impending bankruptcy at the national flag carrier, Alitalia

It was earlier reported that Alitalia had only a few more operational days ahead of it as its cash dried up and that the airline may have to ground flights since suppliers would cut off its supplies of jet fuel.

Sources say that some signs of flexibility have come forth on the part of Alitalia's pilots, indicating the possibility of a deal that would avoid the government appointed administrator Augusto Fantozzi from proceeding to liquidate its assets. Sources say that the pilot's union seems to be more open to some vital concessions that it was before, during the earlier round of talks with investor group CAI.

Sources with knowledge of the talks say that there has been some headway from the situation that prevailed on Saturday, though a lot of ground needed to be covered. The mood is one of cautious optimism, given the sensitivities involved, and a long set of negotiations are to follow before any definitive conclusions would be in sight.

The widespread fear on both sides was that surfaced would halt refuelling of Alitalia jets, as was the case with Swissair in 2001, when its cash dried up and the airline had no option but to suspend fight operations. In a statement at the start of the weekend, Fantozzi had said that there were some difficulties deriving from the provision of jet fuel that could ''put some flights at risk''.  That statement brought forth a warning from the Italian civil aviation authority, ENAC that Alitalia could lose its operating license "if a solution is not found soon that guarantees the continuing of the carrier's operations."

Sources say that the state oil company ENI had withdrawn its threat to halt supplies to the airline, saying that the government had asked not to do so.

A report by the Centre for Asia Pacific Aviation (CAPA) said that suppliers are stepping back from advancing credit terms and the airline's forward sales, a critical part of the daily cash flow, are rapidly drying up. It warned that in such as scenario, the end could come suddenly.

The report also suggests that the situation between investor group CAI and the various Alitalia unions has shown that the Berlusconi government was largely powerless to intervene once again to prop up Alitalia, however willing, some hints of compromise and partial concessions did begin to appear. It said that the reality gap still appears to be too large to permit a viable solution.

CAPA says that though the current meltdown might be portrayed as a result of high fuel costs, that factor cannot be used to explain why Alitalia has not made a profit in ten years, despite having just passed through three years of the best operating conditions in the history of the airline business, along with a strong Italian economy.

In its 62 years of operation, Alitalia made a profit on one year only, 1998, but compensated for that aberration by losing almost $4 billion since then. Italian taxpayers have generously contributed some €5 billion over time to subsidise the carrier's high life.

High pay levels, excessive staffing numbers and restrictive work practices made Alitalia uncompetitive in a world that changed rapidly since European skies were opened over a decade ago.

In promising a solution to the Alitalia problem, Berlusconi has inadvertently made the cause more difficult, since unions appear to have taken this as a signal that government support would be forthcoming. CAPA says that whatever happens over the next few days, there is little hope of long term survival for Alitalia in anything like its existing form - if at all. Moreover, mere ''survival' of the airline may not be enough. Simply perpetuating a compromise operation will not achieve anything useful.

Political fallout of the potential collapse
The chaos caused by collapse of an airline that holds a dominant position in the country's air travel market will be politically uncomfortable for the government and for national economic activity. But it will be short term.

A compromise airline, with disaffected unions and a still-inefficient operation, will only lead to more losses and continued market distortion, preventing overall recovery and efficiencies.

CAPA also says that there is a high probability that the attempted solution put together by Berlusconi and Fantozzi would breach EU competition law, so leading to a further sequence of dispute and uncertainty, even if it did get up.

In the interim, Alitalia loses market traction, and other airlines move in to mop up much of Italy's lucrative traffic flows, especially in the north, a region which embraces Switzerland's affluent southern canton of Ticino.

Each step in this direction is another lost market for the Italian airline, making recovery more difficult. Lufthansa for example last week announced it will launch service from Milan's Malpensa Airport in the first quarter of 2009, to an array of cities, including Barcelona, Brussels, Budapest, Bucharest, Madrid and Paris. London and Lisbon will be added for the summer.

Immediacy needed in a solution
If a solution is not engineered today, which still seems unlikely, the next step is likely to be liquidation of the various parts of the airline.

Under current conditions and with the government prevented by EU law from subsidising the airline, Alitalia is unlikely to be able to pay its direct operating costs, such as fuel and airport charges.

This would precipitate suspension of the carrier's licence.

Fantozzi has indicated that termination advices are likely to be issued quickly, for at least some of the 20,000 staff.

He had previously announced plans to terminate a number of collective agreements. Transport Minister Aletro Matteoli has attempted to intervene to find a compromise, but without success. Prime Minister Berlusconi himself is making a last minute attempt to seek compromise.

But the nature of his tone has changed, shifting the blame onto ''left wing'' unions, as the prospects slimmed.

Certainly, seeking to get nine unions singing from the same page at a time like this is a big task. The effect of Alitalia collapsing is near-unthinkable, particularly for many staff. But the impact on Italy, as it loses a major employer and travel provider, will be more than economic. Alitalia is a national icon, for better or worse.

Alitalia's nine unions have resisted a spectre of job cuts and salary reductions, which reports indicate to be in the range of 40 per cent. Sources say that initially, CAI had proposed salary cuts of 25 per cent, and were willing to come down to 20 per cent as a sign of flexibility, but that refused to cut the ice, and the talks stalled.

Fantozzi can wait before liquidating Alitalia only so long as a rescue plan remains pending. The airline is still alive because of a €300 million capital infusion by Rome. That infusion has already been challenged by European Union regulators as possibly illegal state aid.

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