This article appears as a comment piece in the March 2014 issue of Airline Business.
Faced with the prospect of starting a Grand Prix in damp conditions, middle-order teams often take the crazy gamble of putting their drivers on dry-weather tyres. The thinking is that if you start 15th and follow everyone else’s strategy, then the best result you can hope for is 15th.
But if the gamble pays off, your driver could find himself further up the order and into a point-scoring position.
That, in a nutshell, is the logic behind James Hogan’s investment strategy at Etihad. He’s starting last and third in the race for Gulf carrier supremacy – mimicking his peers along the coast and across the water can guarantee only that he stays where he is.
But after a series of investments across the globe, even some of the more radical strategists are wondering just what Hogan was thinking when he revealed his interest in Alitalia. If investing in Air Berlin could be compared to racing dry-weather tyres on a damp track, then the challenge at Alitalia is like starting on slicks in a monsoon.
Over the years, a succession of well-respected executives have passed along its corridors of power and failed to engineer a turnaround – prompting some to wonder whether it is really worth saving. So would Etihad be attempting to sustain what is unsustainable?
It will face many obstacles trying to right Alitalia, for a prize that is uncertain. The airline has struggled to keep up with its European peers in reshaping for the challenges of the 21st century.
The fleet is in much better shape than it was a few years ago, after the phase-out of older inefficient types and the standardisation on an Airbus short-haul operation. But Etihad will still have to tackle the deep-rooted links with government, complex union relationships and pension issues, which will be like trying to unravel a big bowl of cold spaghetti. The mission will be as much about tackling the cost base as about winning hearts and minds, to bring about the cultural changes needed within the airline.
Hogan says Italy is a “great market” with traffic flows that would complement the combined network of Etihad and its partners. The Abu Dhabi carrier already has links with Alitalia minority shareholders Air France-KLM, and an investment deal would strengthen its relationship with the European heavyweight. No one will dispute the size and opportunity in Alitalia’s home market – northern Italy is the third-richest region in Europe.
But, as Alitalia well knows, the country is a dichotomy, with a rich industrial heartland around Milan and Turin and a political and cultural centre around Rome. Successive strategies have tried without success to address this fragmented market. Similarly, overseas carriers like British Airways and Lufthansa have been unable to infiltrate the market using local operations.
But to generate true value from any tie-up, big structural changes will have to be forced through – and they will not go down well with the staff or the politicians. Keeping the government’s nose out of the process will be a challenge in itself, and the question remains whether the shape of the business that emerges is one that is attractive and can deliver the returns to justify an investment.
Alitalia has already suffered at the hands of the low-cost brigade, with the likes of EasyJet, Ryanair and Vueling all grabbing a slice of its domestic market. They for one will not greet the prospect of an Alitalia rescue with joy, having been aiming to capitalise on its likely failure.
But with Etihad now holding shareholdings in seven airlines, its management already has its hands full, and must not allow Rome to become too big a distraction. And they won’t need reminding that multi-airline investment strategies are littered with failures.
Source: Airline Business
