Why Italian scheduled airlines always fail ?

Introduction

I have recently read an article (https://www.ttgitalia.com/whatsup ) by Roberto Gentile (blogger, editor, tourism expert, community-manager and head-hunter) about the reasons why it is quite impossible to manage an Italian airline in a profitable way. I almost completely agree with Roberto and I liked so much the topic of the article that inspired me to write this analysis. However, my article will have a different perspective, focusing more on the “technical angles” of the airline business and trying to explain the different reasons why Italian companies have almost never been successful in the airline industry.

Let’s start by saying that - according to ENAC (Italian Civil Aviation Authority) website - four air transport licenses are currently active in Italy (Air Dolomiti, Blue Panorama, Italia Trasporto Aereo/ITA and Neos) whereas four are suspended (Alitalia, Alitalia Cityliner, Air Italy and EGO Airways). For the purpose of the article I am not going to give in-depth details on each airline active in Italy at the moment because the focus will be more on the key issues of the air sector in the Italian market according to my point of view.

Without any doubt, there are both endogenous and exogenous causes - together to “structural” problems - that impacted and are impacting on the Italian airline industry. A key role in the sector’s lack of competitiveness has been played from the Italian Air Transport system and how it has been managed for decades.?

Many factors together have brought a clear impact on the Italian airlines although we do not have to forget the mistakes coming from the owners/shareholders and/or management teams of these airlines.

Before moving on the key points of the analysis, let me highlight four main factors that have contributed - in a negative way - to bringing the Italian airline industry to the current status, making very complicated to manage a profitable airline in Italy.

1. GOLDEN AGES OF AIR TRAVEL

The first golden age of air travel was between the 70s and 80s. The glorious days of Pan Am and TWA - when Boeing made the iconic 747 Jumbo Jet. This was a great period for Air travel and the years from?2014 to 2019 have been somewhat of a second golden age of Air travel.?

During the transition from the first to the second age, airline industry was completely changed and radically transformed. The starting point was the deregulation in the United States in 1978 - the same took place in Europe in a ten-year process in the wake of Single European Act of 1986 with three different packages: 1987, 1990 and 1992. The latter removed all remaining commercial restrictions for European airlines operating within the EU, establishing “de facto” the “Single European Aviation Market’. Other key factors of the “transition” - between the two periods - were also the introduction on the market of new aircraft models (Airbus 380 just to name one), the consolidation in Europe with the creation of three main legacy groups and the explosion of the low cost model that evolved also with the hybrid model.

Well, in all the these changes Italian airlines lost the train - better to say the plane - not adapting?the Italian airline industry to the new market scenario.?

2. SIZE

In continuation of the previous paragraph and confirming that, I add that the “size” in the airline industry is very important. Italian airlines have always been simply too small to compete -?especially today when hub carriers and low cost carriers beat you both in size and efficiency.?

To tell the truth Italy had its chance to be part of the new game but missed the appointment for political reasons. I refer to the Alitalia-KLM deal in the year 2000 with KLM when the merger was blocked due to the uncertainties of the privatisation of the group and the role of Milan Malpensa. At that time it would have been - undoubtedly - a large group with 300 planes and 40 million passengers a year.?

One time, an Italian politician Pierluigi Bersani said "Alitalia is too big to be small but it is too small to be big". Bersani was also the one that in somehow blocked the Malpensa hub project and consequently the merger with KLM.

However the story went on and Alitalia continued to be in trouble, the new part of the saga is now called ITA Airways.?

3. AVERAGE INCOME AND AVERAGE TRIPS PER PERSON

If we take the average income of the Italians and benchmark it with English, German and French people it is very simple to say that Italians have a lower purchasing power - for the same reason the number of average trips per person per year is lower than many other European countries, especially Germany, Nordics and UK.?

Furthermore, Italy has about 8.000 km of coastline and an innate maritime vocation that leads most Italians to spend their summer holidays in Italy even if summer destinations such as Croatia, Egypt, Greece, Malta and Spain are quite famous for Italian holidaymakers.?

However, the two factors above - average income and average trips per person - have clearly an impact on the Italian airline industry.

4. ITALIAN INDUSTRIAL SYSTEM?

Italy is made up of small and medium sized enterprises which represent 99,9% of the total companies in Italy. SMEs generate 70% of the turnaround of Italian companies and over 81% of the workers. This shows that it is not possible to compare Italy with countries such as Germany, France and the United Kingdom where the share of large companies share is greater. The economic soul of Italy is not made up of large companies but of small-medium businesses that survive and earn despite a controversial fiscal, legal and financial system.

All that to say that Italian business culture is made of SMEs that are unable to take a step forward and become big corporations due to the fact their DNA doesn’t match with the fundamental values of large companies. To make money it is essential that big firms implement key concepts such as planning, strategy and economy of scale - concepts that are not part (or just in a limited way) of the mentality and the culture of Italian small-medium enterprises. Of course, this is also reflected in the Italian airline industry.

The reasons because Italian airlines always fail

In addition to the above mentioned factors there are also other reasons that create obstacles for a profitable airline in Italy - I will try to analyse some of them below:

Lack of strategic vision: We Italians are very good in many sectors but not in the airline one, probably linked to the mentality of the Italian industrial system. For example, if we compare number of Italian airlines successful with Spanish ones, Italy has clearly a negative “gap”. We could do that game with other similar countries and the result would be the same.

Airline business is very appealing and capable of attracting many entrepreneurs - often very successful in other sectors - that decide to invest in the airline business only because it is fashion. So all good up to a certain point because they do not have expertise and know-how to run an airline with success. Aviation is a very complicated industry where experience and skills are absolutely necessary to run a profitable airline - vision, mission, strategy, core values and short/medium/long term goals are key concepts to target the profitability.

Skills: Italy doesn’t have a large number of talented and highly qualified people in the airline industry especially when it comes to C-Level, directors and managers - obviously there are exceptions, even if Italian pilots, engineers and technicians are considered among the best in the world.

The reasons are different, I try to list a few:?

• Italy has not been able to train a new generation of airline professionals in line with the current era/scenario of the airline industry.
• It has not been possible to transfer skills from previous generation to the new ones because old generation skills and experiences come from an old mindset (Alitalia for example) that is not in line with the current need of the sector.
• In other countries there has been an exchange of airline expertise between different business models, i.e. British Airways and easyJet, Iberia and Vueling, etc.
• Private airline owners have almost always placed people without the proper aviation experience in key areas because the airlines were/are managed as a “family” business.
• Alitalia has always been run as a public state company in the negative meaning of the management.
• No meritocracy.

Aviation leaders: Italy have never had great aviation leaders, I mean profiles of the calibre of Herb Kelleher, Richard Anderson, David Neeleman, Glen Tilton, Jeff Smisek, Oscar Munoz, Ben Baldanza, Thomas Horton, Wolfgang Mayrhuber, Micheal O’Leary, Carolyn McCall, Jozsef Varadi, Carsten Spohr, Pieter Elbers, Willie Walsh, Alex Cruz, Luis Gallego, etc.?

Probably only two are to be highlighted: Domenico Cempella - the man that was merging Alitalia and KLM - and Marco Sansavini - current Vueling CEO - with an experience in Alitalia even if it has been key in his career development the moving to Iberia with the possibility to work and breathe?in a large group as IAG with great managers, a lot of learnings for him.

Network strategy is one of the main things to run successful an airline. Unfortunately, in Italy no airline has been able to implement a network strategy in line with the needs of the market and the geographical position of the country. It is often said that it is the fault of the low cost carriers without mentioning that market segmentation of the low cost model is completely different from the regional or legacy business model. LCCs have created a new target of passengers that they did not fly before and it was possible with the implementation of a strategy based on load factor active yield passive that has been able to stimulate the demand. The key factors in this kind of strategy are cost efficiency and price - flying intra-EU has become a commodity and the price is the king.

Also, in my view, it is almost impossible for a traditional airline to compete against a low cost carrier because the internal processes and organisation are completely different, legacy carriers would have to completely change their business model and it doesn’t make any sense. What really makes sense to me is running an airline with a mixed business model - as long as you are able to manage it.

In Italy there is a common feeling that long haul is the miraculous water to be successful without considering the most profitable airlines in the world - in terms of margins - are low cost airlines. To be profitable and to be successful in the long-haul market with the hub and spoke strategy an important critical mass is required and Italian airlines haven’t ever had. Size is key, as demonstrated from the current market examples - you simply cannot achieve profitability with 100/130 aircraft unless you are part of a large airline group.

Stand alone strategy has been one of the biggest mistakes of the Italian airlines, in this case I am referring above all to Alitalia. It is true that Alitalia was in SkyTeam and had a profitable transatlantic joint-venture with Air France, KLM and Delta but a commercial partnership or a strategic alliance?don’t get the same scale of revenue benefits as you can get if you are part of the same group. Moving ahead to Italia Trasporto Aereo (ITA) it is clear that they have to move as soon as possible for finding an equity partner because there is no hope to survive with a stand alone strategy. ?

Market share issue is another weak point of the bad status of the Italian airline industry. In this regard, we consider only Alitalia and Air Italy for the scope of the analysis - with the respective hubs in Rome Fiumicino and Milan Malpensa without considering the other Italian airlines.

I immediately point out that it is improper to compare Alitalia and Air Italy because Alitalia had a real hub in Rome whereas Air Italy’s operation were really limited in Milan Malpensa. Well, almost no other European hub carrier has ever had a?lower market share than Alitalia and Air Italy both in own hub and at national level.?

With reference to Alitalia let’s analyse some figures:

2019

• Market share 2019 Italy: Alitalia was second in total number of passengers carried (domestic + international) although it is impressive to see that Ryanair (number one in the ranking) carried almost the double of Alitalia passengers in 2019 (Fig.1).

Fig.1 Total Air Traffic 2019 - Italy

• Market share 2019 Italy - Domestic flights: Alitalia number one with 18,5% market share and Ryanair in second place with 11,4% (Fig.2).

Fig.2 Domestic Air Passenger Traffic 2019 Italy

• Market share 2019 Italy - International flights: Alitalia’s market share for international passengers was only 7,79 % so it means that more than 92 % of the international passengers were carried to Italy by other airlines (Fig.3).

Fig.3 International Air Passenger Traffic 2019 Italy

• Market share 2019 Rome Fiumicino: Alitalia was first but with a market share of just 38,6 %, a dominant market share position in own hub should be at least?> 42 %.
• Market share 2019 Rome (Ciampino + Fiumicino): Alitalia had only 34% in 2019.

2020

• Market share 2020 Italy: Ryanair increasing the gap with Alitalia - the Irish low cost carrier with a market share of 23,2% whereas the old Italian flag carrier in second position with a market share of 12,3 % (Fig.4)

Fig.4 Total Air Traffic 2020 - Italy

• Market share 2020 Italy - Domestic flights: Alitalia number one with 17,5% market share and Ryanair in second place with 17,2% but with a strong growth compared to the previous year. Wizz Air operated for the first time domestic flights in Italy but with a low market share (Fig.5).

Fig.5 Domestic Air Passenger Traffic 2020 Italy

• Market share 2020 Italy - International flights: Ryanair leader with market share growth year on year, easyJet second and Alitalia third with market share slightly on decrease from 7,79% to 7,6% (Fig.6). Lufthansa Group market share stands at 9,1%.

Fig.6 International Air Passenger Traffic 2020 Italy

It is quite normal to be in trouble if you are not market leader in your hub and in your country. Also, the fact that your main hub is not slot-constrained airport puts additional difficulties because it means that there are no significant barriers for new entrants and the competitors.

To end the part about the market share let’s take a look at the current trends of the italian market:

• ITA Airways is currently shrinking compared to the old Alitalia, exactly 52 planes in 2021 and 77 in 2022 vs ~105 Alitalia planes in 2019 - number that ITA expects to reach only in 2025.
• Ryanair CEO said during a recent press interview that the Irish low cost carrier planned to increase the number of aircraft based in Italy this summer to 92 from 67 before the pandemic, reaching a market share around 40%.?
• Wizz Air is fast growing in the Italian market increasing to 22 aircraft based in 7 Italian airports, operating 270 routes (42 Domestic + 228 International) to 33 countries. Wizz Air had no base in Italy in 2019.

Considering the above it is clear that even in the future it will be difficult for any Italian airline to gain a dominant position in the Italian market.

Work design concept is central to most airlines and Delta, Ryanair and Southwest are very good examples, but - unfortunately - work design is almost completely unknown to most Italian airlines, so here we have another key issue. But what exactly is work design ? In this regard I fully agree with Parker’s definition that work design is about the?"content and organisation of one’s work tasks, activities, relationships, and responsibilities”. The main purpose of work design is to increase both employee motivation and productivity.

IT investments: as pointed out by several airline CEOs, the amount of investments in innovation and technology in the aviation sector is far below the average for other sectors - exactly at the bottom line. In Italy it is even worse and has obviously created a further obstacle to the development of a successful Italian airline. Regardless of the Italian market, I firmly believe that automation, biometrics and robotics are a must for the aviation industry of the future.

Data driven approach is the key to success for an airline but Italy has never had an airline with this approach. No Italian airline has ever had a digital approach to processes and systems, it has always been pure utopia and there have been only negative examples such as the case of Alitalia with Sabre cut-over.?

Data driven approach is a long process and it is not just a switch off/on, it starts with a multi-model database management system that needs to be tailored to your needs allowing you to implement in-house an online digitalisation process with big data coming from your internal processes. In addition, everything has to be perfectly synchronised and integrated with powerful external systems for revenue management, passenger services, aircraft maintenance, marketing activities, etc.?

This type of process takes years because historical data is needed and key to drive a data driven approach.

To be underlined that Covid-19 outbreak has changed this approach a bit, for example today we often hear about bionic revenue management.?

Italy is an incoming market with low unit revenue:? it seems that only foreign low cost carriers understood this as LCCs are able to be profitable both on domestic routes and international routes.?

I have always got the feeling that if you have RASK similar to low cost carriers and CASK similar to full service carriers like Alitalia, it means probably that you are in the wrong business model.

I strongly believe that you have to adapt to the market and not viceversa as many italian airlines believed/believe.?

Cost control management: connected to the previous point this is another weakness of the Italian airlines. It is impossible to be efficient if there is no cost control culture and you do not have a clear definition of the internal processes working together a digitalisation strategy and a work design.?

To be competitive in the current airline market landscape?you need to keep your unit cost down -?reducing your fleet unit cost and non-fleet related unit cost - unfortunately nothing of all it has never happened with the Italian airlines. The recipe is valid not only for LCCs but also for FSCs - Delta, British Airways and Aer Lingus are very good examples.

Someone might argue that it is not essential to have a modern fleet when the price of the fuel is low but sustainability must be a priority for all airlines in the world. Moreover, if you have an old fleet and you benefit from low fuel price you are still very exposed to fuel price volatility so it could be a very risky strategy.

Green fleets should be at the heart of any airline’s future strategy because fuel efficiency, noise reduction and emission reduction are key to safeguarding our planet.

Capital intensive business: Airline industry is a capital intensive business, if you don’t invest a lot of money you are simply a “viewer” unless you are part of a large group that takes advantages of the economies of scale and bargaining power. It is true that billions were squandered in Alitalia but at different times and not in a “one off” , cash injections were mainly necessary to repay debts and for capital increases and not for investments.

Italian Air Transport System is really limiting the Italian aviation due to two main factors:

• Double till model
• Council Tax called “Addizionale Comunale”

Double till model

The determination of airport charges is usually regulated in Europe by two main principles/models: single-till model and double-till model, the so-called mixed model also exists in some cases.

The majority of European countries?- including Italy - use the double-till model for airport charges which does not take into account - for the determination of the charges - the revenues coming from commercial activities (non-aeronautical revenues) However, it is evident that single-till principle would be the only way to regulate the airport charges effectively because it is the best mechanism to produce charges that are close to the competitive outcome.

The single till principle shows clearly the connection between aeronautical and non-aeronautical revenue and the interdependency between the passengers that airlines transport to airports and the non-aeronautical revenues that the same passengers generate at the airport.

Single till is the only mechanism that recognise the airport as a single business entity, by giving to the airport, with the right economic regulation, the possibility to?get an appropriate return on investment (ROI) across the whole airport activity while protecting airport users and passengers.

An indirect positive effect caused by the application of single till would also be the reduction of the airport incentives given to airlines from the airports because the net cost of the airport would be lower and consequently easier for the airlines to make routes profitable. It goes without saying that airport and marketing incentives will continue to exist but will be better balanced.

Council Tax

Italy’s Addizionale Comunale, translated as the Council Tax, was introduced in March 2012 by the italian government. This tax is levied on passengers departing on domestic and international flights, it was introduced with the aim of increasing tax revenue.?

The tax rate varies according to the airport from which the flight departs. The rates are as follows:?

€7.50 – Rome airports (FCO and CIA)?

€6.50 –All other Italian airports

Italian Council Tax is having a strong impact on the aviation and tourism sector because Italy is losing connectivity and competitiveness with its peers - I am referring in particular to direct competitors like Greece and Spain.

The removal of the Council tax would bring great benefits to the Aviation and Tourism sectors, main ones are:

• GDP increase.?
• Broader Aviation sector.
• Strong impact on the number of air passengers and on the growth of tourism.
• Increased employment in various sectors, including Aviation and Tourism.
• Positive impact on national tax income.?

Spain

I analysed Italian and Spanish passenger taxes (airport charges + aviation tax) of 39 Italian airports and 47 Spanish airports in 2020, the outcome is the following:

• There are 13 Italian airports that had higher passenger taxes than Madrid Barajas Airport -?which was the the fourth busiest airport in Europe in 2019 - and 6 out of 13 are Italian airports with less than 3 million passengers per year. The price difference is between € 2,63 and € 12,16 per passenger (Fig.7).
• 15 Italian airports had higher passengers taxes than Barcelona El Prat Airport which was the fifth busiest airport in Europe in 2019, the difference is in between € 3,15 and € 13,15 per passenger (Fig.7).
• If we exclude the first two Spanish airports (MAD &BCN) from the analysis we figure out that all 39 italian airports had higher passenger taxes than the other Spanish airports which ranked from 3rd place onwards in 2020 - those Spanish airports had passenger taxes ranging from € 7,06 to € 10,62 per pax whereas - at the cheapest Italian airport - a passenger departing from Italy paid € 11,62 for charges and taxes.
• Passenger taxes in Spain for airports below 1 million passengers were € 7,06 per pax in 2020 whereas in Italy the range was between € 13,40 and € 22,77 per pax.

From the analysis it is quite clear that Italy is not as competitive with Spain in terms of passenger taxes. Unfortunately, this partly influences airlines in their decisions to open new routes and/or add capacity because higher margins are easier to achieve when passenger taxes are low.

If Italy removed Council Tax only 1 italian airport would be more expensive than Madrid airport and two more expensive than Barcelona airport, in both cases with a very slight difference.

Fig.7 Passenger taxes 2019 Italian airports vs Barcellona and Madrid airport taxes 2019

Greece

The benchmark between Italian and Greek passenger taxes shows a slightly better overview for Italy (Fig.8) - compared the one with Spain. However, with the cancellation of the Council Tax, Italy would be in a much better position in its competition with Greek Islands, being able in that case to attract more tourists than Greece for holidays in the Mediterranean.

In a nutshell:

• The main Greek airport, Athens - 26th in the 2019 European ranking , had airport taxes in 2020 higher than all Italian airports except the number one airport in Italy which is Rome Fiumicino that stood at 11th position in Europe and had nearly 8 million more passengers than Athens airport in 2019 (Fig.8).
• Heraklion, the second busiest airport in Greece, had lower passenger taxes than all other Italian airports in 2020 - except one -?with a difference between € 1,10 and € 18,80 (Fig.8).
• Greece's top summer tourist destinations such as the Greek islands (Mykonos and Santorini) had passenger taxes lower than 29 italian airports in 2019 - included some Italian airports /areas in competition with Mykonos and Santorini for summer holidaymakers whereas the remaining 10 Italian airports of the analysis had lower passenger taxes between € 0,24 to € 3,6 but those areas/airports are not comparable in terms of tourist arrivals with Mykonos and Santorini (Fig.8).
• There are only 4 greek islands (Rhodes the largest of them) that had higher taxes than 25 italian airports (Fig.8).

Italy has a more balanced structure with Greece in terms of passenger taxes which could become a competitive advantage if the Italian state decides to remove the Council Tax. The cancellation of the aviation tax would lead to further arrivals and a positive impact on tourist flows to Italy.

Fig.8 Passenger taxes 2019 Italy vs Greece

Air Transport - Future strategy

For many reasons it is not possible to apply the Spanish model as it is almost exclusively managed by a single airport operator (AENA) but Italy could adopt some best practices of the Spanish model.

For a better future of the Italian airline industry the following actions should be taken in order to make the Italian Air Transport System competitive:

• Lower airport charges by introducing the single till principle for the determination of the airport charges
• Addizionale Comunale (Council Tax) cancellation
• New policy for routes with public service obligation (PSO) inspired by the Spanish model.

Conclusions

It goes without saying that the above reasons are not exhaustive and focus more on commercial, strategic and organisation angles, for example I only lightly touch operational issues.?

It is quite difficult to imagine in my opinion a profitable airline stand alone in Italy. The European aviation industry is in need of consolidation -?my advice for ITA Airways is to merge/be bought by a large airline group, as already recommended in my previous articles.?

Being part of a group means better commercial performances, revenue and cost synergies, bargaining power (fleet, maintenance, handling, spare parts, etc.), economies of scale (reduction of non-fleet unit cost).

The path is very clear and marked for running a profitable airline in the Italian market, so just follow it.

Comments and views are more than welcome?