Analisi del Business Plan Alitalia/ITA

[kenyaprince]

Vi condividiamo l'analisi sul piano industriale di Alitalia/ITA a cura di Massimo Di Perna, consulente indipendente settore Aviation, Travel & Tourism.

Fonte: Massimo Di Perna, Linkedin linkedin.com/in/massimodiperna/
linkedin.com/pulse/analysis-new-alitaliaita-business-plan-part-1-massimo-di-perna/
linkedin.com/pulse/analysis-new-alitaliaita-business-plan-part-2-massimo-di-perna/


Introduction
As you all know, since when Italia Trasporto Aereo (ITA), the state owned company which has been set up to relaunch Alitalia, did the press call to present the business plan to the journalists some weeks ago, there have been different analysis/articles about the plan. That is the main reason because I am trying to give to my analysis a more strategic angle of the business plan in order to be different from other ones.

For the above reason I am not going to focus on:

• the political decision of the Italian government about Alitalia/ITA nationalisation.
• if EU commission will give or not the approval to the state aid.
• if there is discontinuity with the old Alitalia (clearly not).
• if it is possible, in the current situation of the airline, to create “technically” , and according to the laws, a new-co and consequently to create a bad-co keeping there all the debts. A new-co could be created only if EU rules will be matched.
• if the Italian government loan of €1.3 billion will be given back or not, regarding that I can imagine the loan will be left in the bad-co.

Latest updates

• A letter was sent by EU DG Competition to the Italian government, to the President of ITA and to the CEO of ITA containing 123 questions about the creation of the new-co. Fundamentally , EU DG Competition has focused on two major points: if there is discontinuity between the old and the new Alitalia and if Alitalia will sell the assets at market conditions and with transparent tender processes.
• There was a meeting between Alitalia extraordinary commissioner and the unions which it has been highlighted that the airline is going out of cash with the risk that future salaries couldn’t be paid in the next months (January will be paid) if Alitalia will not receive the payment of the last instalment from the Italian government of the special fund connected to the Covid-19 emergency (it must be approved from EU). Alitalia commissioner remarked also the importance that ITA will start flying as soon as possible because Alitalia financial situation is very bad. According to the business plan, ITA should start the operations between April and June 2021.

However, before going to the strategic analysis please let me make some considerations:

Alitalia entered into extraordinary administration in May 2017. Since then, two different extraordinary commissarial structures were named for the management of the airline. Surprisingly (maybe also not), no relevant restructuring plan has been carried for the airline in any of the two period of the extraordinary administration. Even, Alitalia financial performances got worse during the period of the extraordinary administration, that is indeed unacceptable.

I would like to highlight that extraordinary administration/Chapter 11 is a “fantastic” tool in the hands of the airlines in order to have the possibility to reorganise and restructure during a crisis period and becoming more competitive in the marketplace. Only in Italy, extraordinary administrations are not considered in a positive way, probably due to the bad Italian examples.

To confirm that, I remind that Delta went out from Chapter 11 about 13 years ago following 18 months restructuring plan and we know all, what a great airline Delta is now, becoming one of the most profitable airline in the world, creating a great corporate culture with strong core values thanks to the great job of two excellent leaders as Richard Anderson and Ed Bastian. Instead, in our little Italy, Alitalia is in extraordinary administration from 44 months with no restructuring plan in place and no action in order to improve the airline performances.

If from one side, I can be open that governments could take a stake in an airline (it should be a minority stake around maximum 10-20 % regulated at EU level for all countries), from other side it is really not acceptable to talk about airline nationalisations in 2021, especially for the airlines that got different chances during the last decades and not able to become competitive in the market.

Moreover, State aids will allow companies that are “dead” already from ages to continue to survive for a longer time so this is a serious issue for the free competition and for the profitability of the “health airlines” because there will be an unfair competition between the state owned airlines with public money and the other airlines.

I would give also the opportunity to nationalise Alitalia ( btw it is already a fact) only in the case it would be for a limited period of time, with the redundancy of all the “old” employees ( protected from the Italian State with ad hoc welfare funds) and the cancellation of all the “old” contracts in order to start-up as a “new entity” with the right size. The new Alitalia/ITA should recruit only the correct number of employees, hiring the best talents in the Italian market (not important if ex Alitalia or not). Immediately after or following a short start-up period the new airline should be sold to private investors and partnership with a large airline group or in alternative directly merged/sold to one of the airline groups that it is my favourite option.

Overview
During the presentation of the new business plan, Alitalia/ITA defined itself a start-up. I am quite surprised about the comparison with a start-up because a start-up company brings in the marketplace a new business model, innovation, new concepts and ideas together a new team, here instead everything remains the same, from the business plan (that is always the same from ages) to the management.

It seems quite clear to me, that if there will not be a heavy restructuring as soon as possible together new processes and a new work design, the end will be the same of the last business plans.

I am afraid that there will be not a happy end despite three billion euros that Italian government and we, as citizens, are injecting in the new Alitalia/ITA, so please be ready for the next episode of the saga…

Alitalia/ITA business plan

General considerations

Usually, a three-year plan is already something long in the airline industry because the industry is often affected from the exogenous variables so business plan has to be flexible in order to be updated very quickly to the new reality, as well as it should foresee different scenarios based on internal and external factors that could impact the business plan.

Currently, aviation industry is facing the “biggest shock ever” due to the pandemic situation in which it is already difficult to make plans for one year whereas Alitalia/ITA created a business plan for five years, more than the average of a business plan in normal times so that leaves somewhat puzzled.

Do not take me wrong…It is normal that airlines must have a business plan both for short-medium and long term but, in those cases, the assumptions and the relevant historical data are coming from “normal times” which those airlines were profitable (of course not all the airlines but most of them). Undoubtedly, this is not the case of Alitalia/ITA because in the last decades Alitalia only lost money.

In my humble opinion , sorry for repeating me, Alitalia/ITA should run before a serious restructuring plan and only after drafting a new business plan for the future, the current running plan should be something basic without drawing unrealistic goals for the future.

Analysis of the business plan

What makes me very doubtful of the new Alitalia/ITA business plan it is that there is no evidence in the presentation on how the targets will be achieved, the presentation is just a number of slides, nice looking, prepared from an important consulting firm but without clear indications why Alitalia/ITA should be successful this time compared to the past. It seems to me that the plan is very similar to the other Alitalia plans of the past, that for most of the people (not to me), looked sexy and great but, at the end, they have never succeeded. If we take only the information given to the press it is very probable also this time the plan will be not successful.

Building and creating a business plan is not so complicated whereas implementation and execution are difficult to be achieved that it is where, most of the top managers, fail, especially in Italy.

Let me highlight an additional point, consulting firms are very good at creating a nice presentation and sexy plans based on lots of assumptions but they are not accountable for the plan, often they have never run an airline, so the key for me to be successful it is always in the hands of airline top management that should be empowered and take the right decisions, always that they have the right skills to do that.

An additional issue for Alitalia/ITA is, without any doubt and as always, the involvement of the politics because Alitalia/ITA President and CEO, as well as board members, were named directly by Italian politics.

It seems quite clear to me that Alitalia/ITA stand alone will not go anywhere so “priority” should be the definition, now and not after, of the industrial partner, merging or selling minimum 51 % of the airline to an European airline group, giving them the full control of the airline from a management point of view. ITA business plan, instead, expects “only” a commercial partnership in 2021/2022 that, in my opinion, complicates the execution of the business plan.

Someone could underline me that, at the moment, all the airlines of the world have facing liquidity issues and they cannot afford any investment, as well as they could have some limitation due to the fact that they received public funds from governments that block them to invest in another airline.

Of course, that it is in part true, even if it could be followed IAG/Air Europa deal to hurdle the obstacle with Air Europa buying that will be finalised from IAG now (at half of the original price) and payment postponed in 2026.

Under the current circumstances, I would say that it is very appropriated the saying:

”Where there is a will there is a way”.

The importance of being part of an Airline Group.

As stated above, I fully believe it is essential for Alitalia/ITA being part, as soon as possible, of an international airline group because having only a commercial partnership it is quite limitative for various reasons. It goes without saying that greater benefits could be obtained entering in a consolidated group , below main advantages :

• Revenue synergies : it is very simple to explain because a company cannot get the same scale of revenue synergies from an alliance as you can get when you are part of an airline group. Moreover, Alitalia/ITA could exploit benefits for Alitalia maintenance and Alitalia ground handling being inside a big group.
• Cost synergies: being part of an airline group would bring direct and indirect cost synergies, that will reduce, overall, Alitalia/ITA cost structure, from the optimisation of the sales force to the purchasing of spare parts, from distribution costs to ground handling, from MRO costs to the fleet cost, from fuel cost to many other things.
• Bargaining power: stand alone Alitalia/ITA doesn’t have any bargaining power for two reasons:

1. Alitalia/ITA is too small to have an important bargaining position in order to get good deals from partners and suppliers.
2. Due to two extraordinary administrations, in around a decade, Alitalia/ITA is considered a bad payer from the suppliers so it is difficult to get great deals because suppliers, lessors, manufactures, banks, etc. have to consider the high risk of being not paid so pricing will be proportioned to that risk because it happened often in the past that Alitalia created bad companies without paying then airports, suppliers, lessors, etc.

Guidelines of the business plan

During the presentation of the plan, the management has identified seven key points of the new Alitalia/ITA, five of them are quite generic and are a must for any airline so I am going to focus on the other two points that deserve a more in depth analysis.

Tourism

It is very clear the reason and purpose because Alitalia/ITA is trying to highlight that the italian flag-carrier brings tourism to Italy. In part it is true but Alitalia is not the only one and especially its market share is single digit number decreasing year by year so reality is little bit different but let’s check numbers in the last five years even if we could go back also more and the things wouldn’t be different:

• From 2015 to 2019 Air Transport in Italy increased from 127.665.221 pax to 160.667.939 pax (+25,9%) whereas Alitalia decreased the number of carried passengers from 22.987.134 to 21.770.174 (-5,3%).
• Alitalia is in clear counter-tendency if we benchmark the Italian carrier with the other main airlines that are operating and growing in the Italian market in the last 10 years (Ryanair, easyJet, Vueling, Volotea, Wizz Air, etc.)
• Alitalia is in second place in the ranking 2019 for total number of carried passengers (domestic + international) even if it is very impressive to see that Ryanair (number one in ranking) carried over almost the double of Alitalia passengers in 2019.
• In the last five years (2015-2019) number of international air passengers increased from 97.870.858 in 2015 to 126.965.972 in 2019 (+29,7%) whereas Alitalia decreased from 10.636.650 in 2015 to 9.891.008 in 2019 (-7%).
• In 2019, Alitalia market share for international passengers was only 7,79 % so it means that more than 92 % of the international passengers were carried to Italy from other airlines (Fig.1).

Fig. 1 International Air Passenger Traffic 2019 Italy - Market share by airline - TOP 5

Source: Traffic Data ENAC 2019

• There are not only international passengers for Italian Tourism because there is also the domestic tourism but also in this case Tourism was mainly pushed from low cost carriers that opened different cross-country flights from Northern Italy (Lombardia, Veneto, Emilia Romagna, etc.) to Southern Italy (Calabria, Campania, Puglia, etc.) and to the Islands (Sardegna and Sicilia). That is reconfirmed also from the decrease of Alitalia domestic passengers in the period 2015-2019 that passed from 12.350.484 to 11.874.839 (-3,9%).
• Alitalia offers direct flights mainly from/to Rome and from/to Milan (but in smaller proportion), so it is correct to say that the number of tourists that Alitalia is bringing to Italy, it is mainly concentrated on those areas especially if we consider short-medium haul flights, for long haul flights it is little bit different because there is a higher number of connecting passengers even if we have to remark that foreign legacy airlines have intercontinental direct flights to the main italian cities (Rome, Milan, Venice mainly). In most cases, international tourists prefer to fly with their national carrier and this is the case for most of the tourists coming from Canada, China,South Korea & USA, the exception is Japan because there are no direct flights operated from a Japanese carrier to Italy so they are flying with Alitalia to Rome and Milan. For your information, All Nippon Airways (ANA) announced last year to start direct flight from Tokyo to Milan Malpensa but, due to the pandemic situation, the beginning of the operations have been postponed.

Tourism Official Italian Data for the period 2015-2019 confirms the above considerations because Arrivals increased in Italy from 113 million to 131 million with a percentage growth of 15,9 % (Fig.2).

Fig. 2 Tourism in Italy 2015-2019 - Arrivals

Source: ISTAT

Intermodal interchange

• Talking about intermodal interchanges it has become quite fashion in Italy lately so often when someone wants to grab the attention suddenly it appears the “magic” word inter-modality even if Italy is far by reaching an intermodal connectivity between air, rail and road especially in the short-term. Nevertheless, it is highlighted in the new Alitalia/ITA business plan 2021-2025 and it refers to the inter-modality between air and rail.
• From an infrastructure point of view and intermodal interchange projects, Italy is not Germany,Switzerland,UK etc., and not even comparable to France and Spain because italian airports were built in areas with stand alone projects without considering future developments so for those reasons it is a pure “utopia” today talking about intermodal interchange between air and rail especially if we consider main italian hubs that do not have the necessary rail line in order to have High Speed Rail (HSR), well High Speed Trains could be operated from/to airports but at a “normal speed”. Building HSR for connecting italia major airports it requests a lot of investments/money (billions of euro) and one/two decades for the construction of the high speed rail line. For those reason, it is quite over-promising to insert inter-modality as a key point of Alitalia/ITA business plan 2021-2025.
• More than one time Alitalia experimented some cooperation with Ferrovie dello Stato (Italian Railways) for intermodal projects but results have been always quite poor. Moreover, there have already been some joint activities for proposing to the passengers the combination air/rail, for example between Ferrovie dello Stato (Italian Railways) and some international carriers and also between Italo (second italian operator for HSR) and Cathay Pacific for business travellers, but partnerships worked well in terms of communication and marketing activities but less in terms of additional revenue.

As per above evidences, we can say that Alitalia/ITA, for sure, could have a better cooperation with Ferrovie dello Stato (Italian Railways) but please let’s avoid to talk about an intermodal interchange project in a short term, as it is shown in the business plan.

 

[kenyaprince]

The second and last part of the Alitalia/ITA analysis will be published in the next days and will focus on fleet, network strategy, commercial strategy, objectives and assets with a short excursus about Air Transport in Europe and Italy. It will include also free tips for Alitalia/ITA and, of course, the conclusions.

The second and last part of Alitalia/ITA analysis focuses on fleet, network strategy, commercial strategy, objectives and assets with a short excursus about Air Transport in Europe and Italy. It includes also free tips for Alitalia/ITA and, of course, the conclusions.

Commercial partnership/Industrial partner

Getting a commercial partnership or an industrial partner ( better an international airline group) should be the first milestone for the new Alitalia/ITA because, if not, it creates a clear limit to the development of the business plan because you cannot define network strategy, interlines, alliances, code-shares, etc., and all that will have, as a result, a great impact on the company's objectives and profitability.

What it is really sad in my opinion, it is that in all these years Alitalia was not able, and still not able, to build a network strategy that makes sense. That would allow to choose the best commercial or industrial partner bringing, really, additional revenue synergies, simply because your network strategy would fit perfectly with the strategy of the commercial/industrial partner.

Fleet

Fleet is another key point for which Alitalia/ITA should be part of an international airline group as soon as possible.

It would allow to get more bargaining power with lessors and manufactures because it would be the group going to negotiate directly with them and not an airline with a normal order and a controversial past.

Being part of a big group it means that the group could aggregate different orders from each airline of the group, so getting stronger bargaining power with the result of a better agreement that Alitalia /ITA stand alone would never get. Moreover, it is to be considered also the benefit coming from the reliability of a big group in contrast with an airline that it is coming from different bankruptcies/bad-co, extraordinary administrations, etc.

By the way, let’s come back to the business plan. It foresees by 2025 to have a fleet of 110 aircraft with 84 narrow body and 26 wide body, 83 aircraft will be "new generation" between leased and owned aircraft and 27 will be old generation (probably leasing coming from Alitalia in extraordinary administration).

One of the key points highlighted from the new ITA CEO and DG ( CCO in Alitalia) is, and it was, the focus on the long haul but number of the aircraft for the long haul it remains the same as the old Alitalia so nothing changes really except some new long haul destination that replace other ones.

Again, nothing is different from previous business plans so why Alitalia/ITA should be successful now ? Probably it is better do not waste other €3 billion…

Just to be clear, I do not think the problem of Alitalia is only the long-haul...

Network strategy

To be frank, in my humble opinion, Alitalia haven’t ever had a network strategy and new business plan confirms me that.

Route network is simply always the same from ages just closing some destinations and opening others and then cancel them again, a lot of confusion...

Alitalia/ITA management said that they do not want to be a low cost so it is clear that they will be a legacy airline with hub and spoke model but here my doubts are coming because they do not have critical mass and a wide network focused on feeding/de-feeding the hub. It is true that domestic network covers well Rome Fiumicino hub but if we check their international network Alitalia/ITA flies almost nowhere (it was also in the past in the same way) except the classical European cities like Amsterdam, London, Paris, etc.

Honestly, ITA and before Alitalia are too small to be considered a hub and spoke airline and be successful with that model.

Commercial strategy

According to the business plan, commercial strategy will focus on four main macro-areas:

• Sales, Marketing and Distribution.
• Revenue Management
• Ancillaries
• Cargo

Above macro-areas are quite generic so no need to analyse in depth , let’s focus, instead on the following points:

• Distribution : My first recommendation to Alitalia/ITA would be to run a deep analysis about the cost and revenue per channel in order to have the full picture and consequently to implement the best distribution strategy. According to me, they should re-negotiate all the contracts focusing on the cost of sale.
• Online sales : Alitalia/ITA target for direct channel is 40 % according to the new business plan. If we consider the current Alitalia market share for the direct channel could be also a positive result achieving 40 % of direct sales, but if we benchmark with the other legacy carriers the target is not so great. . A decent level percentage of direct sales in home market should be more than 60 % whereas for all the network would be better to get a more balanced 50 % between direct and indirect even if the best would be more than 60 % online. However, right percentage depends from the cost of sale per channel and based on that, then you implement a distribution strategy.
• New Distribution Capability (NDC) : Almost all the legacy airlines have already implemented or are implementing NDC protocols, most of them are already selling their fares via NDC to the trade market taking advantages versus their competitors . In the same time, they are reducing the cost of the sale and increasing the revenue coming from the ancillaries. At the moment, there are no news about NDC implementation for Alitalia/ITA. For sure it will be implemented but I am wondering why everything so late???
• Workforce :

1. Headquarters staff counted around 11% of the total workforce for Alitalia at 30 September 2019 whereas the average for full service carriers with hub and spoke model like Alitalia/ITA is around 7/8% so for sure there is room to improve staff costs.
2. As already underlined different times during my analysis, for Alitalia/ITA is key and absolutely necessary to be part of an airline group or alternatively having a strong commercial partnership ( not my favourite option). In both cases, it could be obtained cost synergies using a joint salesforce that could help Alitalia/ITA for the reduction of the staff costs.

After all, all the airlines of the world are doing in that way, from Delta to Lufthansa Group, from AF/KLM to IAG whereas Alitalia/ITA has, perhaps, more branch offices than countries which Alitalia is flying…

Two phases of the business plan

The business plan defines two phases:

1. Launch 2021/2022
2. Growth 2022/2025

Some remarks from my side:

• The definition of the commercial partnerships and alliances is in the first phase (2021/2022), honestly too late…it should not go beyond January/February 2021.
• Second phase has called “growth” but it is not appropriated to call this phase growth because Alitalia/ITA would come back in 2025 only to the level of 2019. Additionally, I would add also that, under the current pandemic situation, it is very difficult to forecast when the rebound will start and when a full recovery to the 2019 levels will happen.
• I strongly believe that, before defining unrealistic phases of the business plan, Alitalia/ITA has to proceed with the restructuring of the airline, only after it is possible to draft a realistic and accurate business plan keeping always an eye on how the market is rebounding/recovering and taking into considerations different scenarios.

Objectives

The new plan targets a 7% operating margin in 2025.

Going straight to the point, I fully believe that the plan is over ambitious and they will not be able to achieve if the plan remains how it is now, being ambitious is very good but being over ambitious can be dangerous.

Compared to the latest Alitalia plans (2008, 2013 and 2017) the new plan should get better results according to the presentation but I would like to highlight that both marketplace and market conditions are completely different now and they are worse compared to those plans, so good luck to Alitalia/ITA because indeed they need.

Then, we can discuss if investing €3 billion of equity in an airline like Alitalia/ITA is a good business and the answer is clear and it is NOT, only a government can do that. An operating margin of 7 % would be not acceptable from a private investor if we consider the big amount of money they should inject into the airline.

To be frank, I can’t see any private investor ready to invest €3 billion of equity in a company loss-making like Alitalia considering also the small size of the Italian airline. It would be almost impossible during normal times and now we are not in normal times...

Margins/Benchmark with competitors

There is a slide in the presentation that leaves me quite perplexed, it is the one with the benchmark with the main International carriers and their figures in 2018. The slide shows Alitalia/ITA EBITDAR ex fuel and EBIT margin % in 2025 compared to the other carriers. It is difficult to imagine a carrier like Alitalia/ITA, coming from decades of losses and bankruptcies, to perform better than Air France/KLM and close to Lufthansa and Iberia, this is pure utopia, especially if Alitalia/ITA doesn’t enter in an airline group and in the same time doesn't run a deep restructuring..

Assets

It is clear that Alitalia/ITA doesn’t have a lot of assets in own hands, except:

Brand: it is very well known and also appealing but I doubt that an investor would put money in a loss-maker airline like Alitalia/ITA, especially because there are different structural and endogenous problems that were never sorted out.

Fleet : 36 % of the current fleet is owned but most of the fleet is not so “young” with high operating costs and an old configuration so fleet is not a valuable asset. Then, I imagine that extraordinary commissioner should sell part of the old fleet in order to recover some money to pay/repay government loans, creditors, employee credits, etc.

Loyalty program : Millemiglia loyalty program is, undoubtedly, an asset because has more than 5 million of subscribers. 75 % of the loyalty program was sold in 2015 to Etihad Airways for 112 million but it was bought back in December 2018 for a not specified amount, probably the same price of the sales.

Slots :

• Milan Linate slots are a great asset but, let me clear immediately, that the sale of the slots is forbidden in Italy so Linate slots cannot be sold so you use or you lose them, even if there would be a lot of things to say how the slots in Linate are managed from all the airlines and not only from Alitalia, all that is allowed from an old regulation that should be reformed.
• London Heathrow: In 2016, Alitalia sold five couple of slots to Etihad Airways at London Heathrow for 60 million Euros even if it seems that Alitalia would have the right to buy back the slots, according to a clause present in the contract (reported from italian media), any time for the same price paid from Etihad Airways.

Air Transport
Before to go the conclusions of the analysis let me do a short excursus about the aviation industry in Europe with a special focus to Italy.

Air Transport in Europe

It seems very clear to me that there some key decisions that EU cannot anymore delay and that should be implemented as soon as possible for the safeguard of the aviation industry, putting the bases for “ a new era” of the Air Transport in Europe, below the main ones:

• Single European Sky
• Reform of the Airport Charges Directive 2009/12/EC (ACD) and new regulation for airport charges
• New local independent authorities.
• Homogeneous fiscal tax scheme in Europe.
• Same level of aviation taxes in Europe.

For more details you can read my article on the following link:

Air Transport in Italy; Spain-Italy = 5-0

Poor performances (crisis and failures) of the Italian airline industry, in the last decades, are due from one side to the bad management of the managers working in the italian airlines and from the other side to the politics that never had a vision for the Air Transport sector in Italy.

We, Italians, are very good in different industries but not, unfortunately, in the airline industry, Honestly, I do not know the reason, probably due the italian culture of clientism or because managers are chosen by politics. However, the reality is very sad for the Italian airline industry, especially if we compare Italy with some countries that are for many aspects very similar to Italy, I am referring particularly to Spain, if it would be a football match we lose 5-0 with them. In Spain, there are five airlines with a story of success and working quite well, Air Europa, Air Nostrum, Iberia, Volotea and Vueling and I am non considering Iberia Express and Level (the Spanish branch), whereas only bankruptcies and closures in my beloved country.

By the way, let’s come back to the italian flag carrier…

Alitalia managements have always had large responsibilities for not having been able to bring the italian airline into the profitability ( no work design, no cost competitiveness, no network strategy, no strategy distribution, etc.), but Italy has clearly an issue with the entire Air Transport system.

That being said, it is correct from my side to highlight that Italian Air Transport has different “issues” that obstacle the flourish of the aviation industry in Italy and consequently impacting also on the tourism sector.

Within the “issues”, two main obstacles, that we could be also defined clear mistakes, are coming from politics and authorities, especially because decision-makers in charge for managing Italian aviation industry, are not well-resourced and skilled to perform their duties and consequently all that is impacting negatively on the Air Transport sector in Italy.

The two obstacles are:

• Application of the double till model instead of the single till model

It is not possible in an incoming market with low unit revenue that airports apply double till model for the determination of the airport charges.

In 2018, main 19 airport systems got a +38% EBITDA margin average, +21% EBIT margin average and + 18% Net Profit margin average, without any doubt much more of the average of any other industry...

Single till principle is the only way to effectively regulate the airport charges and it is the best mechanism to produce charges that are close to the competitive outcome.

The single till principle shows clearly the connection between aeronautical and non-aeronautical revenue and the interdependency between the passengers that airlines transport to airports and the non-aeronautical revenues that the same passengers generate at the airport.

Single till is the only mechanism that recognise the airport as a single business entity, by giving to the airport, with the right economic regulation, the possibility to get an appropriate return on investment (ROI) across the whole airport activity while protecting airport users and passengers.

• Council Tax

Current Italy’s Addizionale Comunale, translated as the Council Tax, was introduced in March 2012 from the italian government. This tax is levied on passengers departing on domestic and international flights, it was introduced with the purpose of raising tax revenue.

The tax rate varies according to the airport from which a flight departs. The rates are as follows:

• €7.50 – Rome airports (FCO and CIA)
• €6.50 –All other italian airports

Italian government received more than 625 million from the payment of the Council Tax in 2018. Aviation tax is paid by the airlines that pass that cost to the passenger, including that cost in the final price of the air ticket.

Italian Council Tax is impacting strongly the aviation and tourism sector and Italy is losing connectivity and competitiveness with its peers, I am referring to direct competitors of Italy like Greece and Spain both for Aviation and for Tourism.

Indirect taxes, such aviation taxes, create distortions in the market by increasing the price of the service to which the tax is levied (in this case, flights), leading businesses and consumers to adjust their behaviour to avoid paying the tax, resulting in a lower quantity sold.

For more details about Council Tax you can read my article on the following link:

There also other “issues” that are, instead, more “structural” and more connected to the specificity of Italy,they are:

Incoming market

Italy is mainly an inbound tourist market which brings, as an effect, low yields for the airlines.

Moreover, Alitalia/ITA doesn’t have a strong advantage in the incoming market for three main reasons:

1. Small number of destinations operated by Alitalia from Europe and long-haul destinations to Italy.
2. Incoming from short-medium haul is almost “exclusive” of the low cost carriers.
3. Long-haul passengers fly for the most with their national airlines, additionally they do not fly only to Rome but also to Milan and Venice and in few cases also to Naples, Palermo and Lamezia Terme.

Those are the main reasons because Alitalia/ITA needs, absolutely, the support of alliance partners, especially from overseas.

To highlight still more how Tourism is important for Italy it is enough to give a look again at the numbers.

Tourism had a net positive income of around €17 billion for Italy in 2019 that it is the difference between foreign tourist expenditures in Italy and italian tourist expenditures abroad.

Fragmentation of the Italian market

Italy is a very fragmented market compared to the other European markets and for sure, the morphological nature of the Italian peninsula contributes to that. Unlike the other main European countries that extend their borders in width, Italy is the opposite because it extends in length, “a long boot”, that favours the fragmentation because it doesn’t allow any efficient transport system like it happens in other countries.

Moreover, prevailing a local rivalry logic rather that a national approach, it favours the other countries that are competing with Italy. As, for example, in the case of Tourism. It is quite common to hear from Foreign Tourism Boards that Italy is not able to sell itself in effective way due to the missing of a coordinated tourism strategy plan that creates, as a negative consequence, a competition between different Italian regions reducing, dramatically, the appealing of Italian market in favour of other countries, mainly France, Greece and Spain.

I would like to remind that Italy has more than 60 % of UNESCO heritages but it is only at the fifth place in terms of touristic arrivals.

Fragmentation affects also Italian Air Transport system because passengers would like to fly from “home airport” that brings to have too many airports considering the yearly volume of passengers carried in Italy.

In 2019, Italy had 38 airports for the passenger traffic and in the Northern Italy there is an airport every 100km.

All that is due to the “crazy” logic of the local politicians that every time, during the regional elections, promise the development of the region thanks to the introduction of new direct flights from everywhere in order to stimulate tourism demand and, consequently, the welfare of the region.

It is absolutely necessary to have a new airport strategic plan in Italy, that it has to be part of a wider Air Transport reform but I am very afraid that politicians are not able to do that in a proper way.

Geographical position

Compared to other countries, Italy is not so well placed from a geographical point of view for intercontinental flights, especially if we take into consideration main markets for Italy that are also the main ones for Alitalia/ITA (Northern and Southern America).

Above consideration brings to an obvious conclusion, the choice of the network strategy is fundamental for the success of any airline and, of course, also for Alitalia/ITA but it cannot be the same, if there was one, which we have seen in the recent business plans, included the new one.

Then, there is always the “hamlet” dilemma if Alitalia hub is better in Rome or in Milan. From a business travel perspective the choice is for Milan, even if Milan Malpensa is not well located , whereas from a touristic side it goes without saying that Rome is much more better.

I will not enter in that game because analysis should be done looking at the numbers but it is true that a country like Italy, that is not Germany, cannot support two main hubs because it is missing the critical mass. After all all the other European countries have just one hub if we exclude Germany.

In my humble opinion, a mixed business model should be considered for Alitalia/ITA.

We have also to underline that almost all Northern Italy airports have direct connections with main European hubs with multi-daily flights so difficult to “move” those passengers via Rome Fiumicino or Milan Malpensa for three main reasons:

1. Alitalia/ITA network is very small.
2. Missing an efficient intermodal interchange.
3. The power of the frequent flyer programs, especially Miles and Mores from Lufthansa for corporate passengers but also Flying Blue and Avios.

Low unit revenue:

It is normal that in a country, like Italy, an incoming market with a high low cost penetration and a clear over-capacity, produces low unit revenue so the focus should be clearly based on the unit cost but it looks like that Alitalia/ITA is unable to lower own costs.

On top that, there are also other reasons, among which:

• Wealth: Italy average income is lower than EU average.
• Travel: Italians travel less than other countries by air.
• Airline market industry value in Italy is less than other countries in the TOP 5, in most of the cases in relevant way.
• Seasonality: being an incoming market the peaks are mainly during Summer Seasons.
• Business travellers: the percentage of premium passengers is quite low.

My 6 tips for Alitalia/ITA (free of charge)

• Restructuring - focus on costs, processes and work design.
• A well defined network strategy.
• Mixed business model.
• Merger into an airline group or acquisition from an airline group, with €3bn in portfolio everything is possible.
• Asking and getting from Italian State, as soon as possible, the application of the single till model for the determination of the airport charges in order to replace the double till model.
• Asking and getting from Italian government, as soon as possible, the cancellation of the Council Tax.

Conclusions

Alitalia is, undoubtedly, a never-ending story which different italian governments and politicians have big responsibilities together with a long list of managers that are/were not able to make Alitalia/ITA competitive and profitable.

Alitalia is clearly in the wrong business model because it has CASK similar or higher of the full service carriers (FSCs) and RASK similar to the low cost carriers (LLCs), additionally 75 % Alitalia/ITA network has focused on short-medium haul, competing mainly with LCCs.

It goes without saying that in the above conditions, Alitalia/ITA has no hope to survive, also with €3 billion.

Beyond all the "issues" explained in the analysis, one of the main reasons because Alitalia/ITA cannot stand alone it is the fact that the italian flag carrier doesn’t have a critical mass in order to be able for competing efficiently with legacy carriers and low cost carriers.

Alitalia stand alone will not go anywhere so it is strongly recommended to move quickly for a merger or an acquisition from a big airline group and running immediately a serious restructuring plan.

Let’s be clear, other airlines are not interested about Alitalia, as such, but they are more than anything else interested about the Italian market that is very important for different reasons, strategic and not.

If tomorrow Alitalia/ITA would disappear, the gaps will be filled immediately from the other carriers, both LCCs and FSCs, because Italy is very important market for the world airline industry.

Last but not least: right business model, cost competitiveness, distribution strategy, market leadership, network strategy and capable airline managers all are key factors in the airline business. Airlines that have all those characteristics are well placed and they are profitable airlines in normal times. If instead, you are missing one or two, your destiny is a continuous struggle that could bring also to break-even or a low margin depending from the market you are operating in. If you have only three or less your future will be not so brilliant and it is probably that your destiny is to go bust.

Last five words of my analysis are the main focus that Alitalia/ITA should put efforts in the short-term:

Cost, Cost, Cost,Cost,Cost.


Fonte: Massimo Di Perna, Linkedin

Analysis of new Alitalia/ITA business plan - Part 1

Introduction As you all know, since when Italia Trasporto Aereo (ITA), the state owned company which has been set up to relaunch Alitalia, did the press call to present the business plan to the journalists some weeks ago, there have been different analysis/articles about the plan. That is the main r

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Analysis of new Alitalia/ITA business plan - Part 2

The second and last part of Alitalia/ITA analysis focuses on fleet, network strategy, commercial strategy, objectives and assets with a short excursus about Air Transport in Europe and Italy. It includes also free tips for Alitalia/ITA and, of course, the conclusions.

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