Alitalia downfall: What Gulf airlines can learn from Etihad’s ‘arrivederci’

The decline of Alitalia, Italy’s flag carrier, has lessons for the aviation industry and more particularly the Arabian Gulf airlines competing globally as “super connectors.”

The first, obvious lesson is that any would-be world contender should stay out of European airspace, except for flyover purposes.

Etihad Airways, the Abu Dhabi carrier, was among the Alitalia shareholders that called it a day for the Rome-based carrier last week, in a move that could see the UAE airline write off up to €2 billion ($2.2 billion) on its three-year involvement with the Italian carrier. That is the estimate put on it by analysts, although Etihad has not confirmed the figure.

The other two Alitalia shareholders are Italian financial institutions which will probably at least get some political credit from their “investment.”

For Etihad, there will be little in the way of return, financial or reputational. The Abu Dhabi carrier has tried its best to turn Alitalia around, with a mixture of financial incentives and strategic argument, but it appears to no avail. “Arrivederci” is probably the best thing to say now.

What makes it more galling for Etihad is that it had put together a sensible strategic plan for Alitalia, involving some job losses at the bloated airline, but also injecting cash to make it a credible force in European aviation. Even the bosses of the Italian unions involved were convinced of the merits of the plan but could not sell it to their more militant membership.

The administrators, appointed last week, will have the bolster of €600 million from the Italian government to see Alitalia through the next few months but in the meantime, the serious negotiations begin.

Will Lufthansa bail them out? Possibly, but in that case, Michael O’Leary of Ryanair — who, analysts believe, could be considering a complaint to the EU over the state aid by the Italians — will have a field day in the courts.

O’Leary and others will also be looking greedily at Alitalia’s route network. It has some good intercontinental routes and the domestic network is also potentially valuable if you can de-claw the unions. 

Etihad could reasonably expect some payback on the trans-Atlantic and other routes for its financial indulgence.

Etihad’s other headache is Airberlin. Last week, it reported a loss of €781 million, making the total “hit” for Etihad a cumulative €1.9 billion over the five years it has been a shareholder. 

On top of that, it emerged that Abu Dhabi is also footing the bill, to the tune of €350 million, to keep the German airline solvent for the next couple of years.

Lufthansa and Etihad are in talks about the future for the Berlin-based airline, which has shifted its focus away from low-cost toward the travel and leisure market. But again, O’Leary’s lawyers will be keeping a close eye on the outcome of those negotiations.

All this has gone down very badly in Abu Dhabi. A strategy that was offered as an alternative to the expensive organic growth plans of Emirates and Qatar Airways has turned into a mechanism for subsidizing two of the biggest loss-makers in European aviation. Policymakers in the UAE capital, struggling to balance the budget in the new era of low oil prices, did not bargain for that.

James Hogan, the outgoing chief executive of Etihad, put in place the strategy of buying equity stakes in foreign airlines over the past 10 years. 

It has had some success, notably with Jet Airways, the Indian airline taking advantage of the subcontinent’s booming air-travel market. The “partners” strategy has also done considerable economic good for the Abu Dhabi aviation business and the wider UAE economy.

The disasters at Alitalia and Airberlin have taken the shine off that and it is natural to expect that the new boss at Etihad (whoever that might be) will want to re-evaluate the whole strategy. You can expect to see a reorientation toward Asia with new fuel-efficient aircraft in the coming years.

But that is also the market other Gulf carriers are aiming for. Emirates and Qatar Airways are both looking eastward for new destinations and thinking of long-term alternatives to huge wide-bodied aircraft. The competition is bound to hot up, with Saudi Arabian Airlines (Saudia) looking to bring more Muslim travelers to the Kingdom from Asia and the Far East. 

There is a gap in the market, no doubt, but for how long will there be a market in the gap?

Maybe the fundamental issue is that there are just too many airlines operating from the region. Realistically, Emirates and Qatar — the two biggest — are way ahead of Etihad. The rumors of a few weeks back of a merger between the two UAE flyers were wildly premature. But maybe there is more than a hint of strategic sense to that idea.