ANALYSIS: Creaking Italian market shows signs of crisis

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Back in February Italian civil aviation regulator ENAC launched a probe - a verifica straordinaria, as it puts it - into the financial well-being of the nation's airlines.

There was nothing at that point to indicate a looming crisis, certainly its carriers appeared no weaker than those of any other European nation. But since then, events, as they tend to do in Italy, have rather accelerated.

Now Italy's airline sector is showing worrying similarities with that of its cash-strapped southern European counterpart, Spain.

Already this year both countries have seen the closure of one airline - Spanair in Spain and Wind Jet in Italy. And Rome Fiumicino-based Blue Panorama - burdened by debts and a charter market that it says has dropped 20% this year - has also sought protection from its creditors via a Chapter 11-style restructuring.

Both airlines had been part of a suggested three-way tie-up with Alitalia that slowly unravelled as first Blue Panorama, and then Wind Jet, failed to agree terms with the flag carrier.

Alitalia has troubles of its own, however. Management plans to shed jobs across the workforce, and although the airline declines to put a number on the exact number of redundancies in the offing, trade unions indicate a figure of about 700 lay-offs.

But on 9 November ENAC's board was presented with the initial findings of its probe. Clearly troubled by what they saw, that inquiry has now been deepened and extended. Italian airline chiefs will attend a series of hearings where they will attempt to reassure the regulator about their financial health.

Alitalia's own near-death experience and subsequent restructure in 2009 enabled it to shed a great deal of its flab. It has since embarked on a vigorous refleeting exercise that saw the last of its elderly fuel-guzzling Boeing MD-80s retired on 27 October. In all, 31 aircraft have left its fleet since the start of the year. The average age of its fleet now stands at 6.4 years, according to Flightglobal's Ascend Online database.

That is not to say that everything is rosy at the SkyTeam carrier. While its third-quarter results were positive - it generated an EBIT of €50 million ($63 million) on revenues 4% higher - this was down on the €90 million recorded in the same period last year. And this was with an additional uplift from the collapse of Wind Jet in peak holiday season. Alitalia's passenger numbers were swelled by an additional 40,000 travellers as a result.

The net loss for the year to date and the nine-month operating loss did is improved at €173 million and €119 million from losses of €201 million and €169 million respectively. However, Alitalia is still some way from its target of profitability on an operating basis by the end of 2013.

Roberto Colaninno, the SkyTeam carrier's president, says 2012 has continued to be "exceptionally challenging and demanding" for the airline, noting the affects of the recession in Italy and the rest of southern Europe. "It is a year of great sacrifice, but I am convinced that Alitalia can and will make it," he says.

Andrea Ragnetti, only appointed chief executive in February, says the airline's swift reaction to the financial crisis has put it in a strong position and it has "gained more strength to cope with the last three months of 2012".

But, there are further sacrifices to be borne. Its "industrial plan" for the 2013-15 period suggests a "corporate reorganisation project and the re-engineering of the group's processes and business model". It provides no details on what this entails but the language is not dissimilar to that of its legacy peers when announcing job losses and cost-cutting measures.

It is aiming for a "record result" in the fourth quarter "with the ultimate aim of closing the year with a trend reversal [versus] the first-half of 2012". However, even among the positivity elsewhere in the press release, the carrier chooses to inject an element of caution here, noting that it has never closed the latter stages of the year with anything other than a loss. Its best fourth-quarter EBIT of the last 20 years was a loss of €5 million, it says.

The plan is not confined to cost-cutting though, there are efficiency improvements planned too. It hopes to expand its route network while keeping its fleet capped at around 130 aircraft. That feat will be achieved by sweating the assets "specifically in winter, in the middle of the day and at night-time in summer". It plans to launch 17 new routes next year, it says.

It will also focus on the key Italian business route of Milan to Rome, linking the nation's capital city with its main industrial and financial centre. The one fly in the ointment, however, is renewed competition on that route. On 26 October Italy's competition authority announced it had granted EasyJet rights to operate between Rome Fiumicino and Milan Linate, bringing an end to Alitalia's monopoly on the route which has existed since its merger with the only previous competitor, Air One. It will have to give up seven slots in order to allow EasyJet to launch the service.

And therein lies the problem for all Italy's airlines. Market penetration by the low-cost carriers - particularly EasyJet and Ryanair - continues to grow. ENAC figures for 2011 showed that budget airlines carried 39% of all passengers in Italy, a rise of three percentage points on the previous year.

The low-cost carriers grew traffic by 24% during the period, far outstripping the 8% of their legacy peers. Between them, Ryanair and EasyJet carried 32.6 million passengers in Italy in 2011, against 25.9 million at Alitalia.

Italy's number two carrier has also been quick to blame the budget airlines for its troubles. Meridiana Fly, which acquired Air Italy in 2011, axed two routes from Bari in August, citing competition from Ryanair as one of the reasons behind the move. It endured a mixed first six months of the year. Turnover plunged by a quarter to €287.2 million, partly on the back of capacity slashed by a third as nine aircraft were removed from the combined fleet. However load factor improved, rising two percentage points to 59%. Combined EBIT also nudged up by €8 million cutting operational losses to €57.6 million.

It is, by its own admission, a vital year of "transformation" for Meridiana Fly as it attempts to implement the restructuring necessitated by the absorption of Air Italy. However, it offers a similar warning to Alitalia over the state of its home market. In its six month accounts it points to a predicted 2% fall in Italy's GDP in 2012 which, combined with high fuel costs, have created "difficult market conditions". Even with higher ticket prices it has been unable to absorb the effects of rising outlay on jet fuel, it says.

Although the directors remain confident that cost-saving and restructuring efforts can stem the bleeding and return the operation to profit, a crucial moment comes in February 2013 when it has to refinance a number of loans with its banks.

Alitalia too faces a stern test next year, when shareholders locked in by restrictions imposed in the aftermath of its 2009 restructure are able to divest themselves of their interest. Air France-KLM, which holds a 25% stake in the carrier has indicated it has no intention of selling-up, but other institutional investors may not feel the same way.

ENAC has yet to release a timetable for its hearings or a deadline for the publication of its final report. But if recent events are anything to go by, the regulator will need to come up with a speedy conclusion before it is overtaken by events.