Reviving Alitalia: Italy's Loss Making Airline

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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..."

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...

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...

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...

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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