Reviving Alitalia: Italy's Loss Making Airline

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Case Details:

Case Code : BSTR126
Case Length : 25 Pages
Period : 1995-2004
Organization : Alitalia
Pub Date : 2004
Teaching Note :Not Available
Countries : Europe, Italy
Industry : Airline

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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A Loss Making Company Contd...

To further complicate things, Alitalia's auditors - Deloitte & Touche (Deloitte) refused to certify the company's 2003 financial results unless the company took incisive and adequate measures to restore profitability. Deloitte expressed serious doubts over the company's future and expressed the opinion that liquidation might have to be considered if losses increased.

With huge accumulated losses, raising money from a public issue was ruled out. Another option, which was seeking equity from private investors, was also unviable as no investor could be expected to invest in company equity because of its poor financials. Analysts said Alitalia's state of affairs was mainly due to adverse macroeconomic factors apart from internal problems. The former included events such as the Iraq War, the SARS epidemic and the September 11, 2001 terrorist attacks in the US.

All these hit the performance of the global airline industry. Economic recession in Italy and other European countries and the fast- rising aviation fuel prices also led to the decline in performance of the airline industry. On the internal front, analysts felt Alitalia had not put in enough effort to improve efficiency. They felt the company could survive only if it modernized its fleet, reduced workforce by at least 1500, outsourced basic administrative tasks and back office operations and revamped its sales network. Though the European Commission (EC) granted a loan of € 400 mn to Alitalia in July 2004, analysts felt this could only avert imminent bankruptcy and was not a permanent measure.

Background Note

Aerolinee Italiane Internazionali (Alitalia) was established on September 16, 1946 in Italy, with an initial capital of 900 mn liras. The company commenced operations in May 1947 with four G-12 aircraft made by Fiat and rented from the Italian Air Force.

The British government also provided financial support to Alitalia by acquiring a 30% equity stake in the company through its national carrier - British European Airways (later renamed British Airways). On May 05, 1947, Alitalia's first G-12 flight took off from Turin, stopped en-route in Rome and went on to its destination, Catania. This marked the beginning of the passenger airline industry in Italy. In July 1947, Alitalia flew its first international flight from Rome to Oslo, Norway. In its first year, Alitalia carried 10,000 passengers. Over the next couple of years, the airline extended its network to several other European destinations, including a link between Milan and Buenos Aires, Argentina. This was Alitalia's longest service route at that time and the journey took 30 hours...

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