Alitalia aims for the big turnaround after Etihad deal

Recent global air traffic figures are impressive. A record 3.3 billion passengers boarded aircraft last year – about 170 million more than in 2013, says the International Air Transport Association, the industry’s global organisation.

That is about the equivalent of the population of Pakistan catching planes. International passenger traffic rose 6 per cent last year, whereas in 2002 the figure was just 0.6 per cent.

That year was also the last time Alitalia, the loss-making Italian carrier that Etihad Airways recently took a 49 per cent stake in for €560 million (Dh 2.32 billion), recorded a full-year net profit. Now the task, says the Etihad president and chief executive James Hogan, is to make it profitable again by 2017.

But a turnaround could ignite a fight with other European carriers.

For Germany’s Lufthansa, Alitalia’s strategy is “an incremental threat”, says Credit Suisse in a report. The Italian carrier will move from a hub strategy based on Rome’s Fiumicino airport to a new three-hub strategy. This includes increased long-haul operations from Milan Malpensa and Milan Linate connectivity with partner airlines, as Rome Fiumicino will grow on long and short-haul services.

“This is a strategy focused on feeding Abu Dhabi best. We see the key risks of Alitalia being to Lufthansa and Air France-KLM, potentially depriving each of crucial transfer traffic to Asia and the Americas,” the Swiss financial services group says, as Alitalia “loads up on Abu Dhabi connectivity as well as launching new direct long-haul services to Beijing, Seoul, Tokyo, San Francisco, Mexico City and Santiago.”

On top of that, new Rome-Berlin and Dusseldorf routes, as well as increased cooperation with airberlin (in which Etihad has a 29 per cent stake) “suggest Etihad is seeking to divert German long-haul traffic away from Lufthansa’s Frankfurt and Munich hubs”, adds the report.

But the potential headwinds for European incumbents do not come only from Etihad’s plans.

“Already hemmed in by low-cost carriers in their short-haul operations, European airlines face an escalating squeeze in long haul, too. The most visible threat comes from the three so-called Gulf ‘super-connectors’ – Emirates Airline, Etihad and Qatar Airways”, says a report by the Financial Times. Just 10 years ago, Arabian Gulf airlines ran 19,000 flights a year to and from the European Union. “By last year, the figure was 37,000,” the FT says. It is clear then why the Lufthansa chief executive Carsten Spohr has identified the threat of fast-expanding Gulf carriers as his biggest problem.

European carriers, such as Lufthansa, Air France-KLM and British Airways, have long called for curbs on the expansion of Gulf carriers on long-haul routes.

The Europeans claim the Gulf trio uses unfair government subsidies to finance aircraft deals and to take market share from existing airlines.

Aviation experts point to another reason the big three are so competitive, saying there are clearly labour and infrastructure cost advantages: with Gulf airlines operating from such efficient domestic hubs with large aircraft and so much of the business is long-haul, the result is very low unit costs.

“So whereas there’s some scepticism on state support for each of these carriers, there are also good reasons as to why each carrier is very competitive” Neil Glynn, the Credit Suisse analyst author of the report, tells The National.

Now it is possible European carriers will step up pressure on Brussels to defend their market share, but Mr Glynn says probably not. “Air France-KLM are now partners with Etihad, they have a relationship,” he says, “which means it is unlikely they will strongly oppose Gulf carriers’ growth, as they have done in the past.

“For Lufthansa we see more challenges, it becomes incrementally more difficult for them to succeed on eastern routes.”

Alitalia, too, has been accused of unfair practices but in this case they reflect the strength of transport unions in many European countries. The Italian carrier is shedding about 2,000 jobs and critics complain that, thanks to a €3 (Dh12) tax introduced in 2008 and levied on passengers, Alitalia workers who lose their jobs enjoy welfare benefits that last much longer and are much higher than those provided to other sectors.

“What would you say if at the supermarket you are asked to pay €1 more on your bill to pay for welfare benefits for the former supermarket workers?” asks the transport expert Dario Ballotta.

Alitalia overprotects its workers, critics claim. Whatever the feeling among other Italian industry workers, Etihad’s plan for Alitalia is to win back business traffic in Europe and make a profit of €46 million in 2017, after losing an estimated €203m this year and €44m in 2016. Success is crucial for the Abu Dhabi carrier’s strategy. Some Alitalia employees, who do not wish to be named, are sceptical the turnaround will work.

However, “the first signals are encouraging and go in the right direction, although it’s still to early to give a full judgment,” says Marco Veneziani, an aviation trade union leader who has followed the deal.

Etihad’s European strategy is clear – try to lock in so-called “feeder” traffic by purchasing stakes in troubled carriers such as Alitalia and airberlin. The other Gulf carriers are following different paths.

Emirates, the biggest of the three, is pursuing organic growth by serving ever-more destinations.

Qatar has joined oneworld, one of the three main alliances of global airlines, to gain passengers making connecting flights. And it is just the beginning – more than 600 new aircraft will be delivered to the Gulf trio by 2027.

So, with the booming Gulf carriers, competition in Europe is getting tougher and it is increasingly likely the Europeans will have to cut costs further to challenge effectively.

But they have experience of overseas threats. In 1978, the United States deregulated its airlines. “Deregulation changed everything,” say Steven Morrison and Clifford Winston in their book The Evolution of the Airline industry. This time, however, the world of international aviation is a very different place.



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