Reviving Alitalia: Italy's Loss Making Airline
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Case Code: BSTR126 Case Length: 25 Pages Period: 1995-2004 Pub Date: 2004 Teaching Note: Not Available |
Price: Rs.500 Organization: Alitalia Industry: Airline Countries: Europe, Italy Themes: - |
Abstract Case Intro 1 Case Intro 2 Excerpts
"Instead of subsidizing Alitalia, the Italian government should promote competition and efficiency in Alitalia. That way, everyone, especially the consumer, wins."
- Michael O' Leary, CEO, Ryanair, Alitalia's Competitor in Italy.
A Loss Making Company
In the second week of May 2004, the board of directors of Italy's government-controlled airline, Alitalia, met in Rome to discuss the deteriorating situation of the company.
This was following strikes organized by labor unions on May 06, 2004, in which Alitalia employees took part. These strikes caused major financial damage to the already loss-making company, bringing it a step closer to bankruptcy. The stormy meeting led to the resignation of the entire board of directors, over their "failure" to work out an amicable solution with the agitating labor unions. The Italian government, which held nearly two-thirds equity stake in Alitalia, appointed Giancarlo Cimoli (Cimoli), who was previously head of Ferrovie dello Stato, Italy's state-owned railways, as the company's new CEO. Incidentally, this was the second replacement at the top position made by the government in under three months.
Cimoli's predecessors - Marco Zanichelli and Francesco Mengozzi - resigned because they could not convince the unions to accept workforce reduction, which was perceived as essential to the company's survival. Industry analysts and media reports accused the Italian government of mixing business affairs with political compulsions in view of the elections scheduled in June 2004. This, they explained the government's inaction in taking any controversial decision like workforce reduction until the elections were over. Alitalia reported net losses of € 519.8 mn in the fiscal year ending December 31, 2003 (Refer Exhibit I for its financial performance during the period 1998-2003). In the first quarter of 2004, the company reported a loss of € 189.2 mn. Company officials attributed this loss to 'a temporary crisis in distribution relations and industrial conflict in the first part of the quarter.
To further complicate things, Alitalia's auditors - Deloitte & Touche (Deloitte) refused to certify the company's 2003 financial results unless the company took incisive and adequate measures to restore profitability. Deloitte expressed serious doubts over the company's future and expressed the opinion that liquidation might have to be considered if losses increased. With huge accumulated losses, raising money from a public issue was ruled out. Another option, which was seeking equity from private investors, was also unviable as no investor could be expected to invest in company equity because of its poor financials. Analysts said Alitalia's state of affairs was mainly due to adverse macroeconomic factors apart from internal problems. The former included events such as the Iraq War, the SARS epidemic and the September 11, 2001 terrorist attacks in the US. All these hit the performance of the global airline industry. Economic recession in Italy and other European countries and the fast- rising aviation fuel prices also led to the decline in performance of the airline industry. On the internal front, analysts felt Alitalia had not put in enough effort to improve efficiency. They felt the company could survive only if it modernized its fleet, reduced workforce by at least 1500, outsourced basic administrative tasks and back office operations and revamped its sales network. Though the European Commission (EC) granted a loan of € 400 mn to Alitalia in July 2004, analysts felt this could only avert imminent bankruptcy and was not a permanent measure.
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