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
Excerpts
The Problems
Apart from adverse macroeconomic factors such as airline deregulation and unprofitable diversifications, Alitalia had to address several internal and external problems. Being Italy's national airline with full government support, Alitalia was accused of becoming complacent. Its customer service was criticized as being well below standards. Passengers complained that employees were arrogant and flights were delayed frequently. In fact, industry analysts cynically expanded the acronym Alitalia to mean Always Late in Takeoff, Always Late in Arrival. By the airline industry's standards for the 1990s, Alitalia's fleet was outdated, contributing to rising costs. The entire fleet was due for a complete overhaul. Alitalia also earned a bad reputation for its un-cooperative work force that resorted to frequent strikes, halting the company's operations. Reportedly, the labour unions had a strong government backing, enabling them to successfully oppose any move by the management to privatise the company and reduce the workforce. Repeated government intervention in the company's matters, especially those concerning labour and leadership, deprived the management of functional autonomy to run the company on commercial lines...
The New Management
Alitalia's new management faced the same problems as their predecessors. The company's largely undisciplined workforce was backed by notoriously strike-prone labour unions. The pilots often refused to take off, forcing passengers to get off and preventing the planes from being flown by other pilots, who were willing to do so. They earned the sobriquet 'aquile selvaggier' (wild eagles). Alitalia's fleet, largely comprising MD-11 aircraft, was inferior in quality compared its competitors, who had aircraft made by Airbus and Boeing. Alitalia's operating costs were 25% to 30% higher compared to its European competitors and 30% to 35% higher than American airlines. The new management team embarked on a massive restructuring exercise, involving work force reduction of 20% over three years (about 4000 employees), total cost control across the company, further negotiation of agreements with trade unions and a possible merger between Alitalia and ATI. Another significant decision was to enter into a code sharing agreement with Continental Airlines...
Alitalia in the Mid-1990s
The newly appointed executives, Cempella and Cereti, continued the reforms initiated by their predecessors. They started a major restructuring exercise in the next couple of years to make Alitalia competitive. Signalling the emergence of Alitalia as a major competitor in the deregulated European airlines industry, Cempella said, "When Alitalia, which has been asleep, finally wakes up, it is ridiculous to take it for granted that no one would react. People get worried, which I think is a sign that we're doing the right thing..."
The Trouble Begins
At a time when things began looking better for Alitalia, there was a turn of events. Mid-2000 marked the beginning of trouble for the company. In a move, which took Alitalia's management by surprise, in April 2000, KLM Royal Dutch airlines decided to pull out of the Alitalia-KLM-Northwest alliance. KLM quoted reasons such as prolonged delay by the Italian government to divest its stake in Alitalia and a controversy over setting up a new hub, in Malpensa airport in Milan by the company. The Italian government had promised Alitalia's management in 1996 that it would divest its share in Alitalia completely by 2000. However, by 2000, it still continued to hold its 62.3% stake in the company...
The Government Intervenes
In December 2003, the Italian government formally agreed to divest part of its equity stake in Alitalia. For the first time in the company's history, the government's stake was expected to come below 50%, from 62.3%. In its attempt to keep the momentum of reforms going, the management forwarded its business plan for 2004-06 to December 2003 (Refer Exhibit VII for Alitalia's 2004-06 business plan). The plan was developed in association with Turnworks consultancy, which it recruited in July 2003 to help achieve a turnaround. The plan reflected Mengozzi's view that strict measures were needed to bail the company out of trouble...
Looking Ahead
In 2004, Alitalia's new management team faced several issues. Apart from the recurrent labour problems, the company was facing tough competition, both in long haul as well as short haul routes. In the long haul or international routes, Alitalia faced intense rivalry from leading, cash-rich airline companies in Europe including Air France-KLM, Lufthansa and British Airways (Refer Table I for the 2001 market share of leading European airlines and Exhibit VIII for the statistics of passenger load for the top ten European carriers in the year 2001 and 2002). In April 2004, after receiving approvals from the EC and the US Department of Justice, Air France and KLM formally merged to give birth to the world's largest airline company - Air France-KLM...
Exhibits
Exhibit I: Financial Performance of Alitalia (1998-2003)
Exhibit II: A Note on the European Civil Aviation Industry
Exhibit III: Snapshot on Airlines Industry in Italy (1998-2002)
Exhibit IV: Services Mix of Alitalia
Exhibit V: The Sky Team Network
Exhibit VI: Highlights of the 2002-03 Business Plan
Exhibit VII: The 2004-06 Business Plan
Exhibit VIII: Statistics of Passenger Load for Top Ten Carriers (2001)(Geographical Europe + Domestic)
Exhibit IX: Stock Price Chart of Alitalia (September 1994 – August 2004)
Exhibit X: The 2005-08 Business Plan
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