Alitalia Future Hinges on Rescue Package

Management at the Italian national airline Alitalia put forward a rescue plan Monday to trade unions that foresees slashing 5,000 jobs, almost a fourth of its workforce, and splitting the struggling carrier into two in order to keep it aloft.

The company confirmed late on Monday that it foresees laying off 450 pilots, 1,050 cabin crew, 1,440 maintenance and 970 ground staff as part of efforts to stem losses, which hit €330 million ($400 million) in the first quarter of this year.

The layoffs would affect nearly one in four workers at the airline, saving the company an estimated €315 million over 2005 and 2006. Management said it plans to achieve €830 million in savings by the end of 2006, reaching €1.027 billion by the end of 2008.

The rescue plan, devised by Chairman and Chief Executive Giancarlo Cimoli, who became the head of the company in May after having turned around Italy's state-run railway, would also split the company in two: Alitalia Fly managing air transport activities, with 7,800 staff, and Alitalia Service handling the ground service business with 8,500 staff. According to analysts, Alitalia Fly will be privatized, while state-owned company Fintecna might buy into Alitalia Service, which gathers less appealing ground operations.

The rescue plan also includes a further round of privatization, reducing the government's stake in Alitalia from 62.4 percent to below 50 percent over 12 months. Alitalia has also said it plans to transfer 250 pilots and 500 flight attendants from Rome to Milan, where it does most of its business. Some 11,000 Rome-based staff currently commutes to Milan, at a high cost for the airline.

Bankruptcy looms

The state-controlled airline says it could go bankrupt within a month if it does not receive a €400 million bridging loan guaranteed by the Italian government to relieve its critical cash shortage. The airline had previously said it would have sufficient financial resources to operate until the end of March 2005 if it obtains the bridging loan.

Financial analysts have added weight to this possibility, estimating that Alitalia is likely to go out of business by spring 2005 unless it can put together a major restructuring package combining a capital hike in the region of €1-2 billion with wide-ranging cost and staff cuts.

The unions hold the key to whether Alitalia receives the government-guaranteed loan, but they have voiced opposition to any rescue plan seen to penalize the interests of the airline's 22,000 workers.

The powerful Italian unions have opposed the proposed job cuts over the past year by organizing massive strikes, including some in late April and May that grounded about 1,500 flights. The unions say they are ready to accept measures to increase productivity but say management must also find ways to increase revenues and activity.

Unions hold the keys to survival

The nine unions involved in the talks will meet Tuesday morning to prepare a joint response, Fabrizio Solari, head of the CGIL transport union said, adding that fresh talks with Alitalia management would take place later in the day. "I hope there's some room for negotiations, otherwise reaching an accord will be very difficult," Solari told the Apcom news agency.

In an early response, the pilots' union Anpac said it would not be possible to maintain the current number of flights with 450 fewer pilots. Meanwhile, the CUB cross-sector union warned that staff would resist the plans, threatening more massive strike action such as that seen earlier this year at Rome-Fiumicino international airport.

Cimoli has set a September 15 deadline to strike a deal with unions on the rescue plan for 2005-08, a condition for obtaining the crucial bridging loan. He also said that when the restructuring plan is approved, the company will need a capital increase between €1 billion and €1.5 billion (between $1.2 billion and $1.8 billion) by next March.

Agreement would secure government loan

Labor Minister Roberto Maroni reiterated on Sunday the government's stance that a union-management deal was vital. "Either there's an agreement between the company and the unions, a precondition for the bridging loan, or Alitalia's fate is sealed," he said.

Like its rivals, Alitalia is suffering from high oil prices, the cut-throat competition from discount carriers and consolidation among established players which are in part responsible for a predicted loss this year on a par with the loss of nearly €520 million it suffered in 2003.

Alitalia is not alone. Soaring oil prices, which continued to hit record highs in the past weeks, are beginning to hit the global airline industry which is still wobbling from the after-effects of the Sept. 11, 2001 terrorist attacks. Airlines need the oil from which jet fuel is made to be priced within a range of about $31 to $33 per barrel to break even and the recent increase in oil prices is making this increasingly difficult.

European carriers better off than US rivals

However, despite blanket suffering, European carriers are better placed than their US rivals to withstand the impact, according to a report published on Monday by credit rating agency Standard and Poor's.

The report confirmed that high fuel prices represented a major threat to airlines' profitability -- a situation that had prevented the European airline industry from translating improving passenger numbers into increased profitability this year -- but carriers could seek to shield themselves from increased fuel bills by imposing fuel surcharges on customers or through hedging programs, which allow airlines to fix fuel costs in advance.

But the report stated that surcharges were expected to cushion airlines from only 20-25 percent of the additional fuel costs and sustained high oil prices would make hedging increasingly expensive, resulting in higher input costs for all industry players.

Standard and Poor's added that, in general, however, European airlines were financially stronger than their US counterparts and therefore tended to be better protected through hedging from oil-price volatility," the report argued.