Bill Emmott - International Author & Adviser

Article

Alitalia should go to Air France-KLM
Corriere della Sera - December 18th 2007

When the board of Alitalia meets today to consider the competing acquisition proposals from Air France-KLM and Air One, the air will be filled with distracting issues. Does the buyer’s nationality matter? Should an airline, one attached to the name of Italy, be in private hands or state ownership—and does it matter if the state that owns part of Alitalia is the French state rather than the Italian one? No doubt the debate will be long and difficult. But these issues really are distractions. They should be ignored. The only question the board should think about is the question of what will be the best solution for Alitalia in commercial terms.

            The reason to focus strictly on commercial arguments, on the likely effects on profitability, revenue, debt and customers’ satisfaction, is not an ideological one. It is a practical reason. In some parts of the transport sector, it still makes sense to manage companies according to public goals rather than commercial ones. Railways is the main example: it is hard to introduce effective competition on railways, as the failed privatisation of British Rail showed in the 1990s; and the environmental case for subsidising rail travel to help it compete with roads and airlines is strong. This is not true of airlines.

            Nowadays, the airline business is highly competitive. Britain has a successful airline that still carries the country’s name, British Airways, but it is privately owned and there are several other private competitors—Virgin Atlantic, British Midland (part-owned by Lufthansa), Easyjet, Flybe—as well as all the foreign carriers that land at British airports. Unlike with railways, there is no shortage of choice. Given the European Union’s open air transport market, and the recent open skies deal with the United States, aviation is now fiercely competitive. No airline can survive if it does not follow a strictly commercial path.

            That is what Alitalia’s losses prove. The non-commercial operation of the national airline has failed, is costly for the Italian taxpayer, is bringing constant tension with the European competition authorities, and cannot be sustained in the modern world of competitive, low-priced air travel.

            The French state retains a shareholding in Air France-KLM. But it is only 18.6%. Moreover, the reason why Air France-KLM is now Europe’s biggest airline and one of its most profitable is that in recent years it has been run in a firmly commercial way. No doubt, if it proposed to withdraw services from Charles de Gaulle airport in Paris or to cut thousands of French jobs, it would face a political storm. But within that limitation, it has succeeded in operating like a fully private company. And there has been no protest from the Dutch about the French state owning shares in KLM.

            With Alitalia, politics will always intervene, regardless of who owns the firm. Anyone who dreams of another outcome should simply look at Telecom Italia. But if political influences are to be kept under some restraint, then paradoxically a foreign, even state-owned, buyer might be the best solution. Distance, even between Paris, Rome and Milan, would help. Also, however, the ability of unions to hold Alitalia to ransom through strikes or threats of strikes would be more limited if it were part of a big firm like Air France-KLM than the smaller Air One: the French giant could withstand a long dispute, while Air One could not.

            The board should thus take its decision on commercial grounds, bearing in mind today’s intense competition in civil aviation. Those grounds should include the ability to withstand political pressures. If that reasoning is followed, then the decision should go to Air France-KLM.


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