Commercial aviation in Italy faces major upheaval as the country’s flag-carrier struggles to cope with rapid changes in air travel. Can debt-ridden Alitalia survive?
Of all those to have crossed the Rubicon – the river no Roman general could traverse without signalling imminent military threat – the arrival of the low-cost carrier represents one of the most fearless assaults ever mounted on Italian commercial aviation.
At a time when national carrier Alitalia’s troubles seem unremitting, foreign low-cost competition has declared itself irrevocably committed to a campaign to dominate the Italian air travel landscape.
Alitalia – burdened with staggering net debts of €1.8 billion ($2.18 billion) and €2.4 billion worth of accumulated net losses – has meanwhile managed to buy a little time and remain airborne thanks to a European Commission-sanctioned rescue that granted the carrier access to a state-guaranteed €400 million bridging loan.
Repayment of that loan is, however, due in March and, with an additional €168 million of debt falling due over the next year, Alitalia may find its €1.2 billion recapitalisation plan lacking obvious and immediate appeal to potential financial backers.
Alitalia’s woes have heralded not so much a retreat from the low-cost battlefield, rather an acute inertia preventing the carrier from addressing the air-travel revolution in which foreign insurgents risk creating an ever-worsening breach in the national airline industry’s defences.
This vacuum has been swiftly filled by Irish low-cost carrier Ryanair which, after entering the Italian market in May 1998 with services to Pisa and Treviso near Venice, now serves 15 airports, including a strategic regional spread of bases at Milan Bergamo, Rome Ciampino and Pisa. In 2005, Ryanair expects to carry 10 million passengers on 66 Italian routes, double the 5 million passengers it carried only two years ago.
Peter Sherrard, Ryanair’s communications chief, says Alitalia needs to get its house in order as any vestige of allegiance to the national flag carrier by the average Italian citizen is swiftly disappearing. “There’s a huge demand for low-fare travel within Italy, which has often wrongly been considered merely as a destination rather than an outbound market. Our Rome figures have shown there is a huge appetite for outbound travel and if you consider that we launched our Milan base with six destinations and now have Alghero – which is not a base – launched with an initial five, you can see that the market has certainly developed.”
UK low-cost rival EasyJet is also eyeing significant growth in Italy after recently unveiling Milan’s Malpensa as its first base airport in the country, from where it will operate new services to Athens, London, Madrid, Malaga and Paris from March.
Philippe Vignon, EasyJet’s country manager for Italy, says Malpensa – from where it expects to carry 1.2 million passengers in its first 12 months – represents a move to establish an enduring brand identity in Italy, a flag behind which EasyJet can rally the Italian citizenry and achieve a swift maturity rate on the back of a growing clamour for low-fare mobility.
“Between 2004 and 2005, we saw a 92% growth rate in Italy and we doubled the number of flights,” says Vignon, who says that such a continued rapid rate of growth would make it “quite tough for other more established airlines to have a significant effect on our business”.
He adds: “The Italian market is much more fragmented – unlike, say, Germany, which early on saw a marked concentration process of low-cost carriers – and it has even greater potential due to the lack of any real strong national player.”
Alberto Denzler, chief executive of Air Blu and a veteran of Italian air transport, believes it is the foreign low-cost carrier that stands to profit from the geographical advantages of the north-south geo-operational axis that Italy offers.
“Italy was made for foreign airlines. Its long peninsula offers very good direct service possibilities and, arguably, it is easier to operate direct services from London airports than, say, Alitalia routeing services through Milan. I know that Italians can run a low-cost carrier, but they just can’t do it from a high cost base, which most of them are attempting to do.”
ABN-AMRO financial analyst Andrew Lobbenberg believes further victories in low-cost territory are assured as Italy remain “a decentralised country with meaningful cities and with potentially even further meaningful traffic generation to be had” with, additionally, a naturally strong market between the islands.
“There remains a great deal of potential in terms of the Italian domestic market and in certain other inbound markets. Although Tuscany and Venice are relatively developed, Naples is not and there’s not much capacity on the island routes to northern Europe either,” says Lobbenberg.
Ryanair spied this potential stronghold in domestic route services earlier this year – a move which importantly helps improve the carrier’s aircraft utilisation – with 10 new daily services from its Ciampino base to Alghero, Venice and Verona.
The dynamism of the foreign low-cost carrier should not, however, detract from some valiant attempts to establish home-grown champions.
Air One – celebrating its tenth anniversary this month – broke into the market with its inaugural Rome-Milan service in November 1995, introducing competition onto what was then the fifth densest route in Europe and the most densely travelled monopoly route in the western world.
Rome-based Air One provides its typical client – the high-frequency business traveller on one hour domestic flights – with high frequency services from preferred and, therefore, more expensive airports such as Rome Fiumicino and Milan Linate, operating 1,400 flights per week with a fleet of 30 Boeing 737s. Frequency is linked strictly to demand and in the frenetic case of the Rome-Milan route, Air One operates an impressive 18 daily return flights.
“Air One has the will to compete running through its DNA. It has recorded a profit in each of the last three years, the result of strict cost control and high productivity combined with a solid network of frequent service on all the major business travel routes in Italy,” says Giorgio De Roni, Air One’s director of planning, network and marketing. He says low cost carriers may well have established a significant presence on intra-European routes to and from Italy, but many seem to have passed over domestic route development, an arena in which Air One carried almost six million passengers in 2004 across 22 Italian airports.
“Passengers are very willing to pay a “reasonable” premium for the benefits these services provide. Our additional costs are to provide for additional service, not to carry the fat of an inefficient organisation. The important thing is to be as efficient as low cost carriers,” says De Roni.
The spectacular rise and even more spectacular fall last year of cash-stricken budget airline Volareweb – amid low rumours of high political intrigue – may have dampened the enthusiasm of the aircraft leasing and banking fraternity to back Italian airlines. One industry source confides that Volare’s downfall was essentially due to the airline’s “high-cost, low-fare” commercial reality: “For reasons best known to itself, the carrier went on routes it should never have flown. It was happily flying into Rome Fiumicino and Venice – whereas it should have gone to the likes of the cheaper Ciampino and Treviso.”
Nevertheless, the airline enjoyed a renaissance of sorts – albeit as a shadow of its former self – when it relaunched domestic operations in June while under the administrative aegis of government-appointed Carlo Rinaldini. Today, Volare is for sale with perhaps its most attractive asset on offer being its valuable suite of Milan Linate slots.
Italian low-cost start-up carrier Myair also launched late last year with a business plan based on growing the budget market and exploiting the troubles of beleaguered Volare and Alitalia by seizing market share. Sicily’s Windjet (see box) also has a unique take on the traditional low-cost model by running scheduled domestic and charter flights between northern and southern Italy alongside each other.
Wolfgang Kurth, chief executive of Italian start-up Blu-express.com, points out, however, that both Myair and WindJet remain minor players with relatively high unit costs. He also acknowledges that Blu-express.com is being established to offset the potential risk to parent leisure airline Blue Panorama Airlines from any future moves by tour operators to cut capacity.
Kurth says it aims to invest €12 million in the operation and carry 800,000 passengers in its first year, operating two Boeings 737-400s that are to be returned to the leisure airline’s fleet next summer and replaced with three dedicated 737-300s. “We are making minor changes that give the impression of Blu-express.com being a different airline,” admits Kurth, who says the judicious application of sticky tape to the aircraft exterior seems sufficient to differentiate it from the parent airline livery.
The former Hapag Lloyd Express chief believes the low-cost industry is still in change mode and that many current carriers will migrate to become hybrids with elements of their full service counterparts alongside the “hardcore” low-cost torch bearers such as Ryanair.
Lobbenberg adds that Kurth’s vision of a low-cost diversity of offerings will doubtless be accompanied by the systematic urge to merge. “Just as we are seeing in Scandinavia, with the proliferation of a lot of start-up low-cost carriers – most of which are not making much profit – the time will come when their Italian counterparts are ripe for consolidation,” he says.
Lobbenberg is quick to point out that corporate activity in la Bella Italia exhibits many of the hellish idiosyncrasies of Dante’s Inferno: “With Italy you should never forget that it is an intensely political environment and it’s a classic case of not what you know, but who you know.”