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Italian market review: Coming to the party

It has been a year since Italian national carrier Alitalia was revamped in private hands and merged with Italy's second largest operator Air One. Its market share long-eroded, Alitalia's tie-up with Air One has bolstered its presence. But Italy remains a fragmented market where overseas airlines, particularly low-cost carriers, have made their mark. Ryanair already claims to be the largest international carrier in Italy and expects to overtake Alitalia as the largest in the country in the next year. At Milan Malpensa, it is UK carrier easyJet and Lufthansa, in part through its Italian operation Lufthansa Italia, which vie for market share. While at Alitalia, a powerful overseas strategic investor exists in the shape of Air France-KLM.

For Alitalia-Air One, and its Italian business consortium owners, the last 12 months have been a welcome year under the radar after a torrid 2008 where every move in its on/off rescue saga played out on the political stage. Progress of the new company is hard to track. Year-on-year comparisons are rendered ineffective because of the differing size of new Alitalia - capped by the European Commission at 65% of the previous Air One and Alitalia size as a condition for creating the new debt-free company - and by limited availability of Alitalia's financial data after it entered administration in 2008. A recession, in which all have suffered, further complicates things.

Data for new Alitalia from its January launch, to September shows an operating loss of €258 million ($352 million). But it did turn a €15 million profit for the third quarter, ahead of its break-even target. Final results are not yet published, but Alitalia chief executive Rocco Sabelli indicates it will about breakeven in the second half and full year losses will be around €300 million. For the year ahead it expects to increase revenue, helping to partly offset a likely higher fuel bill. Break-even is not expected until 2011, three years after its start-up. Longer term Sabelli believes it can grow passengers to 28-30 million within five years. It carried 21.2 million in 2009.

David Jarach, air transport marketing professor at Milan's SDA Bocconi School of Management and managing partner at consultancy Diciotte Febbraio, expects Alitalia's long-term strategy to become clearer in 2010. "A merger between Alitalia and Air One was a matter of logic," he says, in creating a carrier with domestic share more comparable to its peers. "You have to turn a merger into an opportunity to grow, not just a short-term measure."

After the end of its burdensome Rome Fiumicino/Malpensa dual-hub strategy in 2008, the new operation still operates from several key Italian cities. But the largest chunk of its network, and most of its long-haul routes, are from Fiumicino. The cut in capacity related to Alitalia-Air One's merger was a key contributor to a 3% fall in passengers at Italian airports in 2009. But this was not as high as some predicted, chiefly because of low-cost carrier growth. While easyJet and Ryanair led this expansion, others like Air Berlin and Wizz Air also grew their presence, though Italian low-cost carrier MyAir failed in 2009.

 Italy map - AB (Mar 10)

Ryanair has 10 bases in Italy, second only to the UK. It opened five last year alone: Alghero, Bologna, Cagliari, Pescara and Trapani. Bari and Brindisi followed this year, exploiting MyAir's demise. "We are already the largest international airline in Italy and next year we will pass Alitalia-Air One as its biggest airline," says Ryanair deputy chief executive Michael Cawley. It flew 20 million passengers on Italian routes last year and will add nine more aircraft and 67 routes in 2010. Cawley says Ryanair has benefited from Alitalia's weakness, which saw its domestic share slip to 30% before the Air One merger, and from consolidation in the market. He also cites the market for north-south air transport within Italy and the relatively high population levels at a number of Italian cities where it has bases. "We are only scratching the surface," he adds, pointing to Venice, Turin, Naples and Lamezia as cities where it does not yet have a base.

EasyJet's marketing manager, Italy, Thomas Meister, points to similar factors for its Italian growth. "If you look at the geography of Italy, it is a very long country, with two islands. If you want go from one place to another, you have to fly," he says. EasyJet's strategy has seen it exploit gaps left at Malpensa by Alitalia's cutbacks, and expand at Fiumicino. It launched its Malpensa base in 2006 and doubled its presence to 14 aircraft there last year, its largest base behind London Gatwick. "Flying out of Malpensa allows us to serve a market that is not just Milan. Malpensa is northern Italy's biggest platform," says Meister.

Lufthansa Makes Its Move

Also vying for market share at Malpensa is Lufthansa. The German carrier, wooed as a potential investor by Silvio Berlusconi during his efforts to save Alitalia, sees the Lombardy region as a key market and ultimately opted to go it alone in Malpensa in establishing its first non-German airline unit. "We had the belief, and we still have the belief, that there is a high market value and there is a need for such services that we offer," explains Lufthansa's head of Italian operations, Heike Birlenbach. The carrier has had to balance its ambitions with the tough economic climate. "It affected us in terms of passenger figures. If I look at the business plan we had in mind before the crisis started, of course the [figures] are a lot different now. But they are a lot different in the overall airline industry." She says faced with waiting or starting right away, Lufthansa opted for the latter as " there is only a certain opportunity you get to start". Lufthansa Italia has carried around a million passengers since launching a year ago and this summer will add routes to Stockholm, Warsaw, Palermo and Olbia. Long-haul routes are a longer-term objective. "It is on our radar, but currently rather mid- to long-term," she says. "We first have to watch the economic situation and our first priority is to have a strong offering on European traffic and domestic operations."

The carrier continues to work on securing an Italian AOC and on creating its own distinct brand, especially to address those yet to try its service. "With the general public so far I still don't think we have succeeded in making it clear to everybody that there is a difference between Lufthansa and Lufthansa Italia. This is why we are working on a communications concept to have a more dedicated positioning of Lufthansa Italia."

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The resiliance of Alitalia, read the Airline Business comment from 2009 on the carrier that keeps fighting on

Alitalia meanwhile has now revealed a new tack for Malpensa and signalled its growth aspirations. It will focus its Malpensa efforts under the Air One name, with what it calls a "smart carrier" service positioned to offer affordable fares and traditional frills. The new Air One product begins in March and will see it add ten more destinations next year and aims to double passengers to 3 million at Malpensa by 2012. This will leave Alitalia to focus on business services from Linate. The old Alitalia had previously attempted to operate low-cost flights from Malpensa through Volareweb, and Jarach notes any move to address this market will be even harder challenge now given easyJet's subsequent growth.

"Italy is becoming more and more of a low-cost market," adds Jarach. This reflects not just budget carrier growth, but a demand environment where network carriers have lowered fares to help stimulate traffic. A further sign of this in Milan is the rise of Orio Al Serio Airport in nearby Bergamo. Fuelled mostly by Ryanair's growth, the airport grew from about a million passengers in 2000 to end the decade as Italy's fourth busiest with 7.16 million passengers, and third busiest in August.

Linate Restrictions

Linate, with its downtown location limiting expansion, remains one of the jewels of the Italian system; in particular the sought-after business shuttle link to Fiumicino. This is currently only operated by the new Alitalia following its merger with Air One, much to their competitors' frustration. The situation has been allowed to continue in the near-term, with Italy's competition agency tasked with setting a deadline for ending monopoly positions created by the merger by December 2011. Lufthansa Italia continues to lobby for sufficient slots to fly on the route, having given up efforts to develop its own Malpensa-Rome connection. "We would really like to offer Linate-Rome services from our side, since it is difficult to sell those short city-to-city connections out of Malpensa," says Birlenbach. "So we do everything we can in talking to the politicians locally, checking out possibilities via the European Commission to see if there are options for us to open a window to fly those routes." There is, though, new competition through a high-speed rail link. Italy's competition agency, meanwhile, has proposed freeing up extra capacity at Linate by increasing the hourly movements limit, in light of the competitive impact of Alitalia-Air One, This proposal is with the Italian authorities to decide.

The merging of Alitalia-Air One left Meridiana as the next largest Italian airline, which is itself hoping to finalise a deal to merge with Eurofly. It would cement a partnership dating back to 2007 under which Meridiana already owns a stake in Eurofly. If completed it would create a new company, Meridiana fly, which would operate charter and scheduled short- to medium-range services. The merger aims at increasing operating flexibility and cutting costs and is subject to Eurofly securing €30 million of financing to be made available post-integration. A further €40 million is being raised through capital increases. It aims to improve their financial fortunes after both lost money in 2008. The partners focus international flights from Verona and Milan in northern Italy, while providing domestic links from the Sardinian cities of Olbia and Cagliari, and between Sicily and northern Italy.

Other Italian airlines include WindJet's growing operation, leisure carrier Blue Panorama and Lufthansa's northern Italy regional Air Dolomiti. Italy lost four carriers in 2008 and three more in 2009 - although Air Vallee has since regained a new temporary licence.

The economic and geographic make-up of Italy, with a number of strong cities and regions, makes it difficult for one hub to cater for everything in the country. "Alitalia had to cope with structural complexities that even the new Alitalia has to face," Jarach observes. "In Italy we have a dispersion. There is Rome and Malpensa, but a lot of other regional airports not only have ambitions to operate spoke to hub, but also to develop long-haul services." Jarach notes that there is also not much specialisation within Italy's airports, with many seeking to grow in all sectors.

Birlenbach suggests Italy is unlikely to have one single dominant player. "I think, even in the long run, there will not be one big airline covering the whole market. Alitalia has never covered the whole market. There were always holes in this big net." Meister also sees room for growth, but expects more consolidation. "There is still some space," he says, but, "there is still a need for consolidation".

Read more about the Italian market and the formation of new Alitalia

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