Much has been said about Alitalia and TAP. What do they have in common?

Alitalia and TAP are being restructured by local politicians and Commission officials and have been renationalized against the tide of 1993 liberalization aimed at private companies able to adapt to competition rules and demand requirements, creating a highly competitive market. Liberalization is unfavorable for state-owned and politicized companies such as the “old” or “new” TAP and Alitalia, even if they have been restructured. In short, TAP and Alitalia are united by the fact that the state is a shareholder, they have more losses and the taxpayer pays.

So what is structurally different between the two airlines?

Alitalia and TAP differ in several ways. Due to the severity of the economic and financial situation – among other things, Alitalia’s accumulated net profit for the period from 2009 to 2017 is -2603 million euros for Alitalia and 16 million euros for TAP; a business strategy in which Alitalia does not operate the hub that gives critical mass to its intercontinental network, while TAP operates the intercontinental hub that allowed it to survive; in the application of European regulation – the European Commission takes four years to decide on Alitalia and less than one and a half years in the case of TAP, which indicates double standards; and, finally, in domestic traffic, which accounts for over 50% of Alitalia’s passengers, which, despite the unprofitability of transportation, increases the importance of Alitalia in the country. In Portugal, TAP is irrelevant in Faro and in the face of the extraordinary growth in traffic in Porto, while SATA operates in the Azores autonomous region and the Madeira autonomous region has many complaints.

How is the restructuring of Alitalia going?

Until then, we have a happy ending. In two press releases dated 10 September, the European Commission concludes that Italy’s 2017 government loan to Alitalia is illegal and must be repaid. A pitiful conclusion after four years of the return to the state of the renationalized and insolvent company. In addition, he considers that Italia Trasporto Aereo SpA is not a continuation of Alitalia and that the € 1,350 million state capital injection is in line with market rules. Between the strict Commission letter of 8 January 2021 and this press release, intensive negotiations were to take place between Italy and the Commission, which we will only learn about after the publication of the Commission Decision, which is already late. I do not hide my fear of mediocre commitments.

But Alitalia has gone through a troubled period too …

We have to overcome the rapid evolution of Alitalia at the beginning of the millennium. In August 2014, when Alitalia and Ethiad from the UAE signed an agreement, it was intended to give financial stability to Alitalia and is part of Ethiad’s strategy to “create an alliance of airlines capable of providing passengers for its fast growing long haul fleet.” … On January 1, 2015, the business is transferred to a new company Alitalia – Società Aerea Italiana SpA with private Italian capital and 49% (EUR 387.5 million) to Ethiad. The agreement provides for the restructuring of Alitalia with the loss of 2,000 jobs, or 16% of the total. This is at a time when the price of Brent crude oil falls to around $ 50, and the growth in 2017 coincides with the devaluation of the dollar. Even so, Alitalia’s net loss is -199 million euros in 2015 and -410 million euros in 2016, when the operating margin is -19%, whereas it should have been between 5% (Lufthansa Group) and 11% (IAG ). ). However, what follows is inseparable from the Italian political context, dominated by the growing political influence of two parties: the anti-systemic 5-Star movement Luigi Di Maio and the far-right La Liga, Matteo Salvini. Both are anti-European and are a source of instability for the Italian economy, which affects the euro and the European Union. And we are in Europe, where on June 23, 2016 the UK voted for Brexit 52% versus 48%.

And an insolvency scenario arises …

Insolvency begins around Christmas 2016, when Alitalia’s president asks the government for political support to keep the company’s shareholders from breaking the agreement that makes the company work. An agreement with trade unions cuts to 1,700 layoffs and an 8% cut in wages. April 24, 2017 “workers choose suicide and refuse to sacrifice.” And on May 2, Alitalia files for bankruptcy and continues to operate thanks to a € 600 million government bridging loan and does not notify the Commission. In this context, the tough and transparent intervention of the Directorate General for Competition would lead to the bankruptcy of Alitalia, which would increase anti-European sentiment and could destabilize the economy of one of the most important countries of the European Union.

As a result, it will be renationalized …

In May 2017, Alitalia is re-nationalized, in October 2017, the state provides a new bridging loan of 300 million euros and again does not notify the Commission. The government is postponing the sale of Alitalia until the legislative elections in March 2018. However, the European Commission receives several complaints against Alitalia and does not ignore the company’s history. Margaret Vestager eventually admitted that Alitalia has been under investigation since 2017. In particular, the Commission is concerned that the loan received in May 2017 will be repaid in December 2018, well above the six-month limit set by the current guidelines. It is in this context of complaints and secrets from Policinelo in January 2018 that Italy notifies the Commission of a € 900 million loan, but the Commission only reacts after the upcoming elections.

What will happen after the 2018 elections?

The 5-star Movement (32.6%) and La Liga (35.7%) win the elections on March 4, 2018. Outsiders Luigi Di Maio and Matteo Salvini become governors, and anti-European sentiment gains political expression in the majority. The coalition government does not bring political stability to the point that the two coalition parties vote against each other in parliament, but anti-European sentiment is still alive. The government is trying to sell Alitalia, but buyers, including easyJet, Delta, China Eastern, Lufthansa Group, are surrendering for several reasons, with a common ground: the political impossibility of restructuring Alitalia. On March 23, 2018, the Commission announces an “ in-depth investigation ” as to whether the € 900 million loan is government aid and meets European regulatory requirements on the matter. More than 10 months have passed since the first loan was issued, during which complaints from interested parties followed. Given the registration of Alitalia, this would be the simplest of the Commission’s investigations, but it will take almost three and a half years to confirm its illegality on September 10, 2021. The Commission makes a decision more than four years after the first loan was received and two and a half years later. about a “deep investigation” of a more than obvious case. Alitalia’s suit is an indelible stain on the independent reputation of the Directorate General for Competition and Commissioner Margaret Vestager.

How does ITA arise and how is it formed?

On September 5, 2019, Giuseppe Conte will remain prime minister, but from the executive coalition between the 5 Star Movement and the Democratic Party, more pro-European than the previous one. Anti-European sentiment diminished and eased even further when Giuseppe Conte replaced Mario Draghi on February 13, 2021. It is in this political context that on October 10, 2020, the Italian government decides that Alitalia will be reorganized into Italia Trasporto Aereo SpA. (ITA). We do not have access to information about the history of this decision. Margrethe Vestager announces that the Commission is analyzing the continuity between Alitalia and ITA, all taking place during the 2018 “deep investigation”. There appears to be political commitment on the part of the Commission, perhaps because it identifies the ITA as the least worrisome way to bring Alitalia to bankruptcy.

But conditions are being set …

The Commission Letter dated January 8, 2021 imposes two conditions on the ITA with numerous requirements for the business plan submitted by the Company. ITA is a restructuring of Alitalia, but with a split between the two companies. Among other conditions – much fewer planes, workers with “new employment contracts” and in “significantly reduced numbers”, the purchase of the Alitalia brand in an open tender, reduction of slots, control of growth until 2025, and so on. This shows that the ITA must comply with the Market Economy Operator Principle (MEOP), in short, it must assess whether a private investor operating in normal market conditions will make the same investment. Then it is necessary to allocate state capital (1,350 million euros), which should be rewarded as if it were a private investor.

What lessons can we learn from TAP?

First, it is practically impossible to transform the current restructuring of TAP into a new company marked by a break with TAP. And we will still have a new public company organized by Portuguese politicians and Commission officials. Alitalia benefits from the skewed application of European regulation, while TAP does not, but this could be the subject of a mediocre commitment to reality by the Commission, as is the case with the ITA between the January 8th letter and the September 10th Commission communiqué.

What can you expect?

Focus on the next decision of the Commission and its implications, as the state-owned and politicized company has created additional difficulties in the face of demand requirements in the open and competitive air transport market in Europe. The problem with the mediocre adherence to reality, mentioned above, is that it ultimately imposes new government aid on the restructured TAP, which is eliminated for ten years until 2031. More importantly, TAP has not been restructured, it has been effectively disrupted and its competitiveness is still undermined by untreated cancer.