ICARUS COMPLEX

Currently losing some €1 million a day, Italy's state airline, Alitalia, is holding out for a deal that will finally give it some much-needed stability, reports PADDY AGNEW.

IT WAS a hot Sunday morning in May last year and the queue at the check-in desk was decidedly long and even more slow-moving. We were in Rome's Fiumicino airport, the main hub of Italian state carrier Alitalia, in a queue made up entirely of Alitalia passengers.

A lightning strike by Alitalia flight assistants had greatly slowed up the check-in procedure. The computerised, self-service check-in machines were all out of order while, as if by way of insult, only three out of the hundreds of Alitalia check-in desks in the "nazionale" section of the airport were manned. Inevitably, tempers got frayed. One man in front of me, on the last leg of a transcontinental flight from Beijing, vented his frustration when he finally got to the desk, shouting at the Alitalia employee: "You lot are disgraceful, I hope they close you down and do it soon."

Delays can occur with any airline, of course, but it has to be said that Italy's national carrier does not always enjoy a glowing reputation with Italians. For too long, they have perceived Alitalia to be nothing less than a bloated, sacred state cow that costs taxpayers all too dearly.

Italians are right. Italy's ailing, if not to say quasi-moribund, national carrier has cost the exchequer €15 billion over the past 15 years - Rome daily La Repubblica recently calculated that Alitalia has cost €270 for every one of the country's 57 million-plus citizens, babies included.

Last May's strike had been called because flight assistants were looking for a €200 per month rise as well as the renewal of their contracts. That seems reasonable enough until comparisons are made with other Italian airlines - an Alitalia assistant was already earning €3,400 per month, compared with €2,500 at Volare and €2,200 at Air One. And this in a country where a teacher with 20 years' experience does well to earn more than €2,000 per month.

Alitalia, which has returned an annual profit just four times since it was founded in 1946, is now more than €1 billion in debt. Experts estimate that the company is currently losing €1 million per day, although even that gloomy estimate is outdone by the consideration that Alitalia managed to lose €108 million in the month of February alone - a daily loss of €3.7 million.

With an industrial performance like that, Alitalia must surely be headed for a Worst Business Of The Decade award, followed by an immediate liquidation, no? Well, not necessarily. This is Italy, and Alitalia is the flag-carrier, so all sorts of political considerations may see things pan out differently.

To understand Alitalia, one has to go back to its origins. For many of its first 50 years, Alitalia was controlled by the late, state-holding giant, IRI (The Institute for Industrial Reconstruction).

At one time the IRI controlled iron and steel companies, shipbuilding and shipping, state broadcaster RAI, Alfa Romeo, Italy's autostrade and at least four major banks, as well as much else beside. It represented a uniquely Italian state "formula".

Alitalia, therefore, grew up in an era when Italy's protectionist economy looked more East Bloc than Western European, when the state-run giants generated well over 50 per cent of GDP. Put simply, Alitalia grew up with a state body mentality where the bottom line was that, whatever the loss, the state would pick up the tab.

Prof Oliviero Baccelli, an airline and transport analyst at Milan's Bocconi University, acknowledges that being a state body (the Italian treasury still has the major shareholding of 49.9 per cent in the company) certainly has not helped. Management have not really been out competing in the open marketplace, though in its defence it has been subject to no end of political interference. Not for nothing has the company had nine different chief executives over the past 15 years, undermining all hope of pursuing a consistent business strategy.

Likewise, trade unions (there are currently nine representing Alitalia's 18,000 workers) feel encouraged to make demands that seem totally unreasonable, given the company's performance.

Inevitably, the unions have come in for a lot of public stick (and, indeed, criticism from some Alitalia employees). Senior Alitalia trade unionists reject such criticism. Fabio Berti of ANPAC, the pilots union, argues that Alitalia has been consistently crippled by political interference. He points to the vexed question of Malpensa airport in Milan as just one example.

Redeveloped more than a decade ago as a "hub", Malpensa was intended to largely replace Milan's existing airport at Linate, much closer to the city centre. Alitalia management were opposed to the scheme for the good reason that they knew all too well that consumer preference was for the much more convenient Linate. For political reasons, not least strong Northern League support, the Malpensa scheme went ahead. Yet customers and Alitalia (although not many international carriers) stayed at Linate. Thus, says Berti, Alitalia runs a highly expensive, duplicate service to Milan.

Take two travellers from Palermo in Sicily, one going to Milan city centre and the other on his way to Milan to pick up a transcontinental connection for New York. In any logical service, those two passengers would travel to the same airport in Milan on the same plane, and then go their different ways. In the Alitalia system, one travels to Linate and the other to Malpensa. Berti suggests that such constant duplication costs Alitalia €200 million per annum. Not for nothing, as the current crisis worsened, Alitalia last month opted to reduce its flights from Malpensa from 1,238 per week to 360.

Bacelli suggests that, in this last decade of Alitalia "crisis", there have been at least two key moments when the company missed historic opportunities. Firstly there was the 2000 collapse of a proposed merger with KLM Royal Dutch Airlines, a merger that also incorporated KLM's existing alliance with US company Northwest Airlines. When the deal was formally unveiled in November 1998, it was proudly flagged with the slogan, "One Ticket To The World".

It turned out to be one ticket to nowhere. By April 2000, KLM had pulled out of the deal, having lost faith in both Alitalia and the Italian (centre-left) government of the day, arguing that promises to fully privatise Alitalia had not been maintained. The privatisation issue was at the heart of another historic wrong turn in 2005 when, following a recapitalisation, the Berlusconi government failed to seize the moment for privatisation.Thus it is that Alitalia is still in state hands.

The Romano Prodi-led centre-left government last autumn thought it had come up with a solution when it agreed to sell Alitalia to Air France-KLM. Industry analysts were sceptical. Given its spectacularly poor track record, Alitalia did not look like a good buy.

Air France-KLM had offered an overall purchase price of €138.5 million as part of a takeover package that promised an investment of €850 million over the next two years. However, the Air France-KLM offer also envisaged dropping the Malpensa hub, reducing Alitalia's cargo operations and enacting up to 2,100 lay-offs in the 18,000 strong workforce.

At this point, as so frequently occurred in Alitalia's past, political events overwhelmed the company. The Prodi government fell in late January and all of a sudden we were into an election campaign, with the Air France-Alitalia deal by no means concluded. If Air France were feeling jittery before, they were even more so now, especially when centre-right leader Silvio Berlusconi made it clear during the election that, if elected (as he duly was), he would block the Air France deal.

To no avail did Finance Minister Tommaso Padoa-Schioppa warn that this might be the company's last chance, pointing out that Alitalia was perhaps only weeks away from bankruptcy. In Berlusconi's view, the Air France offer (valuing one Air France share as worth 160 Alitalia shares) was "arrogant and unacceptable", while he argued that there was still time for another offer to be made by an Italian consortium (a consortium that many felt existed only in his mind's eye).

Along with his electoral partners, Berlusconi began to beat a nationalist drum. Even the centre-left Deputy Prime Minister Francesco Rutelli commented: "Alitalia must propose the best partner but the government also has a responsibility. It is not a nationalistic issue, but the interest of the country is at stake. Where will our children, our firms leave from to go to China or India? Will they have to fly from Paris, or even Frankfurt, or will they be able to leave from Milan or Rome?"

Brett Synder, author of a blog entitled "Cranky Flier", which carries a regular feature called "Alitalia - Worst Airline Ever", duly replied, "somebody get this guy an economics textbook. If there's demand for flights between Rome and China, you know there will be non-stop flights there regardless of who owns the airline."

It would seem that Italian movers and shakers still see an airline as a symbol of nationhood, albeit a rather expensive one.

Thus it is that Berlusconi has begun to quarrel with the European Union about Alitalia even before he had formally taken office.

The reason, of course, is the €300 million emergency loan that Berlusconi persuaded his outgoing predecessor to make available to Alitalia in late April. To rival operators such as Ryanair, this looks like "unlawful state aid".

"The European Commission, as always when it comes to flag-carriers, turns a blind eye and does nothing," says Ryanair's Jim Callaghan, who terms the €300 million payment a "bailout that makes a mockery of EU State Aid rules". Callaghan goes on to point out that, without repeated doses of such illegal state aid, Alitalia would have gone bankrupt years ago.

Berlusconi had called for the €300 million loan in the wake of the hardly surprising decision by Air France-KLM in late April to pull out of the takeover deal (much to the widespread relief of Air France-KLM shareholders).

We need time, said Berlusconi, to put together that much-talked of Italian consortium - even threatening to "nationalise" the company by selling it to Italy's state-run train service, FS Spa, if the EU continued to "cause problems". That, of course, would be a brilliant idea. The FS train service is currently booming - it has just reduced its debt from €9 to €6.5 billion.

So, what is the future? Nationalisation? Another Air France-KLM offer? Liquidation? For the time being, the jury is still out. Do not be surprised, however, if some form of Alitalia will survive, against all commercial logic.