ANALYSIS: Why would Etihad want to invest in Alitalia?

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As Etihad Airways draws closer to investing in Alitalia, much of the attention is on why the Gulf carrier might want to buy into an airline that has continued to lose money despite numerous interventions in the past.

Since moving into private ownership in 2009, the Italian carrier has found itself in familiar territory: heading for another year of losses and urgently needing to raise capital.

Operating losses had reached €162 million ($219 million) at the nine-month stage of 2013, as Alitalia made little headway in cutting the €120 million operating loss incurred in 2012. A further net loss this year will take Alitalia's collective losses to over €1 billion since its revamp with Air One five years ago.

This comes on top of a history of heavy losses and failed restructurings during its time under government ownership. Alitalia has been profitable in just three of the 22 years for which it has released figures – no result was released during its administration in 2008 – incurring losses of $6.7 billion over the period.

Not that investing in a loss-making carrier has put Etihad off before. For example, it acquired its 29% Air Berlin stake in early 2012 after the German carrier racked up a loss of €420 million in 2011 – its fourth consecutive loss-making year. Etihad's most recent investment, Indian carrier Jet Airways, has been loss-making in all but one of its last six financial years.

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That most of the airlines that Etihad has invested in were losing money prior to its investment perhaps is not surprising. After all, those airlines actively seeking investors – and in many cases Etihad has been courted – are more likely to be doing so to help turn around their fortunes.

While it is too early to judge the subsequent financial success of these carriers, Etihad can point to some initial positive results at the airlines in which it has invested. Air Seychelles, where Etihad has a management contract, returned to net profit in its first year. Air Berlin was also profitable at a net level in 2012 after Etihad lifted its stake to 29% – albeit helped by a one-off gain through the sale of a 70% stake in its frequent-flyer programme to Etihad.

That Air Berlin is set to post an operating loss for 2013 shows a well-resourced shareholder is not in itself a panacea for profitability. Neither is it carte blanche for these carriers to ignore necessary restructuring. Air Berlin, for example, is continuing with its cost-cutting programme Turbine, under which its fleet, network and around 900 jobs are being cut. The airline cut capacity 5% in 2013.

One of the reasons existing Alitalia shareholder and partner Air France-KLM baulked at taking part in the Italian carrier's recent €300 million capital increase was concern that restructuring plans at the Italian carrier did not go far enough.

Notably, in the joint statement saying talks between Alitalia and Etihad were in the "final phase" the airlines stress that "any issues that may prevent the establishment of an appropriate business plan will have to be resolved to ensure the plan can be implemented to move Alitalia to sustainable profitability".

In January, the Italian carrier said it was now looking to cut its 15,000-strong staff by 1,900 under a new industrial plan it says will save €128 million over two-and-a-half years.

ITALIAN MARKET APPEAL

Etihad chief executive James Hogan splits the carrier's airline investments into two categories – "the ones where there is a management contract: Air Serbia [previously Jat Airways] and Air Seychelles; and the pure strategic investments: Virgin Australia, Aer Lingus, Air Berlin and Jet Airways", he told Airline Business last year.

An investment in Alitalia certainly fits the latter category. Alitalia brings with it the attractive Italian market, in the same way as Air Berlin opened up its access to Germany and Jet Airways strengthens its connections to the crucial Indian market.

Though Europe's low-cost carriers have taken great strides in the Italian market and Alitalia has seen its own progress checked by its various restructurings – European regulators made cutting the combined network of Air One and Alitalia a condition of approving the merger – the airline is one of the few Italian carriers left standing. Passenger numbers of around 25 million dwarf those of the next biggest Italian operator, Meridianafly.

The Italian market potential has proved a tempting enough prospect in the past for Air France-KLM to invest in buying 25% of Alitalia in 2009. The potential has also tempted other network carriers to look at ways to get in the Italian market. Efforts to launch their own Italian brands – be it British Airways franchise operation National Jet Italia or the more recent Milan Malpensa-based Lufthansa Italia – both came to nothing.

A partnership with Alitalia also fits with Etihad's existing partnership with Air France-KLM. Etihad last year launched an extensive codeshare with the Franco-Dutch group, which also embraces Air Berlin. Air France meanwhile has its own long-standing joint venture with SkyTeam partner Alitalia on Franco-Italian routes.

One of the key drivers for Etihad in its equity partnership strategy has been to help feed its Abu Dhabi network and to bring scale to its operation. It is for this reason that Ryanair – an airline which, with a dozen bases in Italy, is among those to have benefited the most from Alitalia's troubles – believes long-haul markets will be most impacted by any deal.

“If we look at what’s happened at Air Berlin, there has been a significant reduction in domestic traffic," says Ryanair's outgoing deputy chief executive Michael Cawley. "One would have to surmise that the end motivation here is to secure transfer traffic on a long-haul basis through Abu Dhabi.

“Turkish [Airlines] I understand takes most of that traffic at the moment. I understand there are currently 100 weekly flights from Turkish Airlines from Italian airports to Istanbul. Now that’s a remarkable amount of activity and, if it’s indicative of what Turkish does generally, a very high proportion – almost 50% – is transfer traffic, which is lost to long-haul carriers, particularly Middle East carriers.

“But they would have no interest, I would have thought, again mirroring what they've done in Germany, in domestic traffic – so Air Berlin doesn't fly from Dusseldorf to Munich. Similarly, Catania to Rome, Palemero to Rome or to Milan would seem to be of less interest, particularly if it's losing money. I don’t know the details, but overall they lose huge amounts of money," adds Cawley.

If Ryanair appears relaxed about Etihad's involvement, it has not been so about state support for Alitalia – which it has challenged, largely unsuccessfully, in the courts. Here, it shares common ground with British Airways and Iberia parent IAG, a vocal critic of last year's capital increase at Alitalia.

Now Lufthansa has weighed in with its concerns at the prospect of a deal between Etihad and Alitalia. While the carrier stresses that its view is not specifically against Alitalia or Etihad, it says: "We oppose recurring subsidies and the partial nationalisation of European airlines, regardless of whether this comes from European countries or from states or state-owned enterprises outside of Europe. We call on the European Commission to stop these kinds of work-around tactics."

The possibility of a deal with Etihad – no details have been released but under European ownership rules the Gulf carrier can take a maximum of 49% of Alitalia – is eased by the positive notes coming from the Italian government. In 2008, when Air France was looking to take control of Alitalia, then-opposition leader Silvio Berlusconi made keeping the airline in Italian hands a central part of his winning election campaign. The result was a consortium of Italian investors picking up the Italian carrier.

More than five years and one financial crisis on since then, it appears that Italy – in keeping with several other countries before it – has less of a problem with ceding at least a minority of the ownership overseas now.

Additional reporting by Oliver Clark