As it appeals against a Rome court decision to block its proposed take-over of low-cost carrier Volare, Alitalia can take heart from a rare vote of confidence from the financial community – an upgrade from investment bank Morgan Stanley.
Alitalia is appealing against the decision brought by rival Air One
, which argued that the flag carrier should have been excluded from the sale given its financial problems and the fact that it was the recipient of a state-backed loan.
Alitalia underwent a controversial $1.2 billion capitalisation towards the end of last year, and also secured medium- to long-term financing of $445 million. The carrier is undergoing a restructuring that has seen the company split in two – with AZ Fly covering core activities and AZ Servizi non-core operations. Alongside this there is a cost-cutting programme, which is meant to cut unit costs by 24% between 2004 and 2008.
Morgan Stanley airline analyst Penelope Butcher argues that the restructuring plan may bear results. “This time we believe it’s different,” she says.
While admitting that the carrier has a history of failed attempts, “the divestment of Servizi provides a great boost to the remaining airline operation,” she argues. Butcher also points to the European Commission’s approval for the refinancing and the fact that Alitalia has already experienced much of the pain from low-cost market penetration, as significant hurdles that have already been overcome.
However, Butcher also qualifies her optimism, admitting that “success is by no means guaranteed”, pointing, in particular, to labour problems. Alitalia has already delayed moving its maintenance activities into AZ Servizi until 2008 to ward off labour troubles.
Butcher says that, “the shares have an option-like valuation”, based on the fact that the airline will either survive and, to some degree at least, prosper, or it will fold.
Others warn that the carrier is far from reaching safe ground. “Alitalia needs to drastically change its strategic perspective. The main attention is on cost cuts, but they also need to increase revenues,” says David Jarach, professor of air transport marketing at Bocconi University in Milan. Jarach says that Alitalia still has many fundamental strategic weaknesses, such as a fleet with 11 different types.
“Alitalia lacks a clear market position, it is a little bit of a mess, stuck between the low-cost carriers and the large network carriers,” Jarach says. “They don’t have the cost base to be a low-cost carrier, and they lack the destinations, frequencies and service levels of the likes of Air France, British Airways and Lufthansa.” Matching them will clearly be difficult, and Jarach says that a merger may be the only way forward.
The somewhat crowded and fragmented domestic market may offer opportunities sooner than alliance partners, however. Although the attempt to merge with Volare has so far been unsuccessful, Jarach points out that the latter has only a 2% market share anyway. Ironically, given the recent court case, observers within the Italian airline sector report that Alitalia and Air One have been talking to each other about a possible merger. Both airlines refuse to comment on this.
In the meantime, with the government’s stake dropping from 62.3% to 49.9% as a result of the recapitalisation, the carrier’s main shareholder base is now made up of hedge funds, with institutions deciding the airline was too risky. Jarach warns that these funds will be demanding that Alitalia delivers on its promises – and quickly, or they will bail out of the airline. “Alitalia has around a year to 18 months to change. Otherwise this recapitalisation will not be the last,” he warns. ■
COLIN BAKER / LONDON