Alitalia-Etihad Partnership and Recommendations

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Table of Contents

Introduction
Impact of Partnership between Etihad and Alitalia
Conclusion & Recommendations on the partnership
Reference List

Introduction

Alitalia is the largest airline in Italy, with a market share capacity of 24% in the region. The carrier operates both domestic and regional network services within Italy, Europe, and international airports. However, the airline has made losses since 2009 when the new company came into existence after financial investors and Italian industrialist acquired assets belonging to the old Alitalia due to bankruptcy.

In 2012, Alitalia made a massive loss of 280 million euros, making its cumulative loss to 483 million euros since the new Alitalia was formed in 2009 (Alitalia, 2014). As a private entity, Alitalia has to be in a position to make profits or find itself being pushed out of the market/industry by its fierce competitors. The airline’s financial details indicate that it had to borrow money in 2013 from its shareholders in order to fund its operational costs (Alitalia, 2014).

There has been an improvement on operations since 2009 that led to rising load factors, on-time performance improvement, as well as a major fleet replacement and renovation process; investment in fleets and technological innovation has been the reason for success for many airlines in this competitive industry (Curran, Verhagen, Ghijs, Ghobbar, & Zwan, 2010). However, all these positive changes have failed to influence financial recovery at Alitalia. Its cost in the market has been competitive against full-service network carriers but it remains a high-cost airline in short route flights compared to its competitors (CAPA Global Aviation Industry Outlook, 2013).

Huge losses, current leadership woes, and bankruptcy are the main challenges that the airline continues to face even as it tries to improve its operations from 2013. Although debt may be termed as a viable source of capital due to its tax-shield benefits, excess debt to equity in the case of Alitalia has demonstrated the airline’s financial problems that have been precipitated by inadequate working capital. The effect of this heavy borrowing has been the worsening of liquidity position due to poor operational cash flows (Clougherty, 2002).

Fuel prices have also had devastating effects on the costs of Alitalia flights, just as they have to the entire airline industry (Curran et al., 2010). The increase in fuel prices has made operating expenses increase significantly to 160 million euros. Alitalia noticed that the average price of oil increased up by 40% from 78 US dollars per barrel to 108 US dollars per barrel (Alitalia, 2014). The change in fuel prices has caused debt increase for the company as it considers better strategies to reduce its operational costs.

Moreover, leadership wrangles had made Alitalia bankrupt, with top management unable to pay its employees. That problem continued from 2004 to 2008 when the company decided to enter into a partnership with international airlines in order to curb financial woes that had seen the company almost collapsed. The agreement saw certain terms and conditions reviewed before new owners and management took over the company.

Alitalia has encountered passenger capacity growth by 11% from 2009 to 2012, and a fall in 2012 by 1.3%. Its load factors have grown drastically, matching a figure of 74.6% in 2012, up from 65% in 2009 (Alitalia, 2014), thus moving in the right direction in trying to satisfy market demand. Despite the figures, Alitalia’s load factors continued to pull it below the average rate of 79.1% for 2012 (Alitalia, 2014) due to high carriage capacity in local travel channels. Although Alitalia has been on an upward trend for the last 4 years, its proposed partnership with Etihad that would see it take 49% control of Alitalia would be significant in turning around the airline to sustainable profitability (Jones, 2014). This will enhance its progress towards its objective of being among the leading airlines in Europe.

Impact of Partnership between Etihad and Alitalia

It is important to understand that the airline industry is one of the most competitive industries due to the presence of many players with low-cost carriers (Cento, 2008). This has forced many firms to initiate strategies that would enhance their competitiveness, with various companies preferring to enter into strategic alliances (Hunt, Lambe & William, 2002). Generally, various advantages and disadvantages can be realized when partnering with Alitalia airlines as shown below.

Access to New Market Advantage

A partnership with the Italian airline will allow Etihad airlines to strengthen its third position in market share in the global airline market as it plans to improve the number of customer flights and destination points internationally (Clark, 2014). This would enable it to generate more revenues to be able to acquire a larger fleet and expand in its market horizon (Cento, 2008). In turn, Alitalia airlines will be able to acquire an adequate supply of resources from Etihad airlines in order to curb their current debt crisis and be able to come up with new plans and strategies that would help them gain more resources (Etihad and Alitalia airlines in ‘final phase’ of investment talks, 2014).

Most Italian flights are domestic and have higher capacities than international seats. It is worth noting that, the airline’s biggest route in terms of capacity links Rome to Milan Linate, while other key domestic routes link Rome to other bases like Venice, Palermo, Turin, and Catalia. This indicates that the local market in Italy is well established for international flights to venture.

Alitalia financial burden disadvantage

Despite being the fourth largest airline in Europe (Flak, 2014), Alitalia has been facing a major debt burden since 2009, which had almost paralyzed its activities in Europe. The result of this huge borrowing means that Etihad Airlines will set aside funds to settle the long term losses that Alitalia has been incurring before embarking on new strategies for growth (Wensveen, 2012).

Alitalia large Capacity Advantage

Alitalia is the largest airline based on capacity, comprising of an overwhelming 24% share market and group’s 29% market share when combined with its subsidiaries such as Air One and Alitalia Express. These numbers reflect the huge potential for growth and profits that the airline can achieve when good management and policies are implemented despite its huge debts.

Leadership Wrangles Disadvantage

In recent years, Alitalia has been involved in top leadership wrangles that forced the government to withdraw its financial assistance to the airline, even though it was a major shareholder. Generally, internal wrangles drive away any potential investors willing to help the company rise above its financial challenges; this has made the airline to stagnate over a long period of time without any growth (Oum & Yu, 2012).

Renovation Fleet Plan Advantage

Alitalia’s group had a large number of flights in March 2013 that comprised 140 flights, 10 of which were Airbuses A320. The airline embarked on a process to overhaul its fleet, with older flights such as Boeing 767 and MD 80 being replaced with new A320 and A330 family of flights; this makes the fleet pre-dominantly Airbuses, Embraer, and 777’s (Alitalia, 2014). Etihad would benefit from these capital and investment strengths when it enters into partnership with Alitalia.

Increase in Fuel Cost Disadvantage

Over the years, fuel prices have been increasing, thus contributing to increased operational costs for Alitalia. This makes it difficult for the company to pay its crew members and other employees, making it sink deeper into debt (Curran et al., 2010). However, for the past few years, the company has been trying to come up with strategies to reduce the overall company costs. When Etihad comes in, it would have to bring financial expertise on board in order to enhance stability in the company.

Conclusion & Recommendations on the partnership

There are numerous benefits that Etihad and Alitalia Airlines can reap from this partnership provided they come up with sound and effective strategies to counter competitions from other airlines in the market. This will lead to better profit returns and entry into a larger global market. Given the high turnover in the airline industry, proper strategies would help these companies to take advantage of potential growth opportunities by focusing on planned expansion and diversification of operations. However, the two firms would first have to find a solution to challenges that bedevil Alitalia.

Based on the information of market analysis and logistic issues, there are more potential benefits that can be accrued from Etihad’s partnership with Alitalia Airlines. Etihad Airlines, being a dominant player in the flight industry, can take advantage of the opportunity to diversify into the huge market controlled by Alitalia Airlines despite its financial crisis. This partnership should focus on potential long-term benefits that would accrue when the two firms invest prudently in the expansion and diversification of their operations in order to enhance sustainable profitability (Jones, 2014).

Reference List

Alitalia 2014. Web.

CAPA Global Aviation Industry Outlook 2013 – Pursuing certainty in an uncertain world 2013. Web.

Cento, A 2008, The Airline Industry: Challenges in the 21st Century, Springer, London.

Clark, N 2014, Etihad Airways Reports Jump in Profit as It Considers Stake in Alitalia, The New York Times. Web.

Clougherty, JA 2002, ‘US domestic airline mergers: the neglected international determinants’, International Journal of Industrial Organization, vol. 20, no. 1, pp. 557–576.

Curran, R, Verhagen, W, Ghijs, S, Ghobbar, A, & Zwan, F 2010, Air Transport and Operations: Proceedings of the First International Air Transport and Operations Symposium, IOS Press, Amsterdam.

Etihad and Alitalia airlines in ‘final phase’ of investment talks 2014, BBC News. Web.

Flak, A 2014, Alitalia CEO says Etihad needs three-four weeks for due diligence, Reuters. Web.

Hunt, S, Lambe, J & William, M 2002, ‘A Theory and Model of Business Alliance Success,’ Journal of Relationship Marketing, vol. 1, no. 1, pp. 17-31.

Jones, Z 2014, ‘Alitalia creditor refuses to restructure debt in Etihad talks’, Gulf News. Web.

Oum, T & Yu, C 2012. Winning Airlines: Productivity and Cost Competitiveness of the World’s Major Airlines. Springer London, Limited, London.

Wensveen, J 2012, Air Transportation: A Management Perspective, Ashgate Publishing, Ltd., Surrey.

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