Acquisition of Alitalia from Etihad

Introduction

The economic recession affected competition levels in the air transport sector. As a result, national carriers prone to market shocks had to overhaul their business models as a survival technique. For example, Alitalia, an Italian national carrier, suffered significant financial losses over the past decade thereby prompting a consolidation process. Alitalia and Etihad have formed a large alliance through mergers and acquisitions strategy. At the same time, Etihad’s leadership plans to expand rapidly into European domestic market by via acquisition of stocks, specifically in national carriers facing bankruptcy (Summers, 2014). In this way, the Arabian airline redefines competition as it embraces globalization.

The research Question: Has Etihad Benefited from the Acquisition of 49% Alitalia stake?

Hypothesis: Etihad benefits from the acquisition of 49% Alitalia stake

Research Objectives

            The study uncovers the bailout deal between Etihad Airways and Alitalia and how it is mutually beneficial. In addition, the researcher studies the reasons behind Etihad’s acquisition and the long-term consequences to the EU, UAE, and Italian citizens. Besides, the research reviews Etihad’s business model and its characterization of rapid growth. It is also imperative to consider the potential risks of owning a near-majority stake in a foreign firm. In particular, there is a likelihood that the plan affects competition not only in the country but also regionally.

            Looking into the future, the research proposes ways that the Italian government can reverse the acquisition to restore confidence in the national flag carrier and to minimize the fallout damage. Notably, the Etihad’s ownership of Alitalia is not an isolated case. It has absorbed numerous other airlines and business organizations for influence and control. Therefore, the research investigates the long-term impact of this growing trend, especially to the state-owned organizations.

Data Collection

            The research is extensive and requires information from numerous sources. In the case of primary sources, the researcher interviewed business experts to understand the market dynamics in the airline industry. In addition, he observed the current economic conditions in the market while comparing it to the secondary data on Italy’s economy before and after the recession.  The data gathered is important since it is useable in deducing the reasons for Alitalia’s bankruptcy and subsequent sale of its stake to a Gulf airline.

Research Methodology

The researcher constructs the study on four elements including choices, strategies, techniques, and approaches. When they are combined together, these research aspects contribute to the validity and reliability of the research by establishing a strong anatomy. The paper aims at establishing a flow of logic for a comprehensive understanding of this thesis. There are two approaches for common sense flow of information. In an inductive research, a scholar retrieves the theoretical framework empirically. Contrastingly, a deductive research concludes the study by providing proven outcome.

Literary Work

Alitalia Air is a national airline and flag carrier of Italy. It is headquartered at Fiumicino, Italy although the airline has a hub at Leonardo da Vinci Airport in Rome. As Italy’s biggest airline, the harsh economic conditions in EU resulted in its bankruptcy in 2013. Consequently, most of the firm’s partners (for instance the fuel supplier) withdrew their support. On the other hand, the Italian Civil Authority threatened to ground it if the management cannot find an immediate support. Three months later, Alitalia announced a $510 million rescue plan.

Alitalia FleetNumber of hulls 2014

Aircraft	In Service	In Storage	On Order*
Total:	112	16	0
Airbus A319-100	22	0	0
Airbus A320-200	47	1	0
Airbus A321-100	21	0	0
Airbus A330-200	12	0	0
Boeing 767-300ER	0	1	0
Boeing 777-200ER	10	0	0
Boeing/McDonnell Douglas MD-82	0	14	0

On the other hand, Etihad Airways was established in the year 2003. It initiated operations domestically in Abu Dhabi, UAE’s capital. Today, it still has headquarters at the same location, despite establishing a global presence and dominating European Airspace. In the year 2007 (when Alitalia braced for a financial crunch), Etihad had more than6 million clients worldwide. In addition, it had more than 8000 employees working as flight attendants, sales managers, pilots, and marketers. The merger and acquisition of numerous airlines have solidified Etihad’s presence in India, North America, Middle East, Oceania, and Africa. Notwithstanding, its main hub is Abu Dhabi International Airport (Dunn, 2015). It is a representative carrier of the Gulf States in view of the fact that it provides both cargo and customer transport services. Abu Dhabi Emirate government is the only shareholder of Etihad. Hence, its acquisition of a near-majority stake of Alitalia means an Islamic government has a significant leverage over Italian flag carrier.  

            During late 2014, Alitalia and Etihad Airways signed an agreement worth nearly $1 billion. Etihad’s investment reinvigorates Alitalia for sustainability, competitiveness, and profitability. For instance, the firm invests the funds in a comprehensive business expansion program to support new long-haul routes from Milan and Rome. In addition, the Arabian national carrier’s stake acquisition revitalizes the Italian brand by focusing on trade promotion and tourism. In turn, the Italians will enjoy global connections and destinations. Consequently, the inbound tourism will grow dramatically.

            Etihad Airways provides 560 million dollars through asset purchases, equity injections, and funding agreements for the restructuring of Alitalia’s balance sheet. Further, the firm complements this deal with $300 million equity investment from its stakeholders like UniCredit, Polo, and Pirelli. Besides, the bank’s shareholders and numerous financial institutions across the country provide upwards of 599 million US dollars for the restructuring of short and medium-term debt. Eventually, Etihad’s shareholding in Alitalia amounts to $388 million. It also invests $110 million for a 75% stake in Alitalia Loyalty Spa (Buyck, 2015). However, the Italian flag carrier must fulfill various preconditions and regulatory approvals prior to equity investment.

For Etihad Airways, the investment is strategic and suitable in the long run since the shareholders are determined to revive competitiveness and sustainability in Southern Europe’s air travel market. Etihad’s CEO is convinced that Alitalia is an excellent brand with potential. In fact, it requires an effective strategic business plan and an optimal capitalization level. Considering the new intervention measures, business analysts predict that the airline will turn around and reposition itself as an international brand (Coleman, 2015). Alitalia is a global ambassador for Italy. It epitomizes the country’s fashion, culture, and food. Still, the firm’s ultimate plan is to resume sustainable profitability from the year 2018.

Ahead of the new investment, Alitalia’s leadership and stakeholders took numerous steps to ensure business stabilization. While Alitalia can grow and succeed as it once did, the management recognizes the need to rebuild from a solid foundation. Therefore, it is critically important for the new investors to focus on business plan implementation. At the same time, both the international and local travelers will experience new routes, competitiveness, and better service delivery. Not only is the short-haul routes maintained but also, the organization implements the new network plan for profitable Millan Malpensa and Rome Fiumicino long-haul flights. Within the next five years, it will entail flights to other new destinations as the frequency rise in the current markets. Besides, the improved networking strategy with Abu Dhabi boosts the growing traffic between The United Arab Emirates and Italy. Through the merger, Etihad Airways grants Alitalia’s passengers a seamless access to its global network, hence eliminating hiccups that characterize flight connections.

During winter 2014, Alitalia its frequency between Abu Dhabi and Rome Fiumicino from five trips a week to a daily service. In addition, a new daily service from Abu Dhabi to Milan Malpensa commenced meeting the rising demand for air travel as the Gulf State’s economies grow. In early 2015, the Italian national carrier started the implementation process for connection of flights between local cities and Abu Dhabi. Some of the direct flights on the pipeline include those from domestic markets such as Bologna and Venice to global destinations. If Alitalia keeps up with the current growth pace, Rome Fiumicino is poised as one of Europe’s intercontinental hubs within the next three years. Further, the carrier adds five more routes to Milan Malpensa, thus doubling the direct long-haul flights to 25 per week. Etihad’s investment in Alitalia expands the fleet by a third.

The agreement between the two carriers bears a condition of rightsizing the narrow body fleet to meet the new network plan requirements. Consequently, MilleMigla frequent flier program members ‘earn and burn’ on Etihad and its partners as the plans are underway for a future merger. Undoubtedly, the network optimization and integration earns a substantial income growth for Alitalia. At the same time, the common cost synergies in partnerships provide unique opportunities for exploration in the near future, for instance, joint aircraft procurement, rejuvenated hub operations and effective ground-handling. Partnerships such as these pave way for automation and redesign processes as per business best practices and information technology requirements.

Etihad Airways is aware that providing a better service to Italian cargo market (the second largest in Europe) necessitates a re-launch and expansion of Alitalia’s cargo operations. Therefore, it is establishing a center for excellence in North Eastern Italy. It also collaborates with the financial institutions to invest in handling capabilities at one of Europe’s largest air travel hubs. Lastly, Etihad optimizes the integrated cargo network operations as it awaits the government’s decision. Truly, Italy is a significant market for UAE’s national carrier, especially considering the age-old tourism and trade relations. Similarly, Italy is one of EU’s top trading partners in North Africa, Asia, and Middle East region.  The number of Italian multinationals in UAE surpassed 300 and there are 10, 000 Italians in the country.

Alitalia Problems

For nearly a decade, Alitalia lost large sums of money due to the management’s issues with crew members and pilots. In addition, the corporation suffered political meddling and government interference which complicated the labor relations and numerous attempts to resolve the outstanding matters. The year 1998 was the only time when Alitalia made a sizeable annual profit. Since then, the organization has been a subject of bailouts government loans and rescues by private financial institutions. Rather than solving the endemic problems, the assistance plunged Alitalia deeper into a crisis.

By the year 2004, the organization’s financial difficulties were so extreme that it failed to meet its regular obligations like paying salaries or fuelling its fleet. Eventually, Alitalia lay off approximately 5000 employees to minimize the operation cost (Dutton, 2015). Furthermore, the CEO split the organization into two for easier management and efficiency in service delivery. Despite the restructuring, it continued its negative growth. Mainly, the leadership focused on keeping off bankruptcy and liquidation. Therefore, they signed an agreement with trade unions that allowed it to receive bridging loans from regional governments. The move backfired in 2006 when the Italian government failed to honor its promises, thus prompting the release of a public notification calling for a sale of 30% stake. The conditions were the new buyer must guarantee job security of more tha17, 000 Italians, retention of Italian identity, and domestic routes.  

The Theory of Integration

Horizontal integration refers to the organization’s increase of product and service delivery using one supply chain network. In the case of Etihad Airways, it occurs in form of internal expansion, acquisition, and merger. Although this move can result in monopolization of airline market, it is recommendable to ensure the survival if ailing firms such as Alitalia. Besides, thus business strategy is mutually beneficial and results in quality service to customers.

Mergers and acquisition refer to a corporate strategy for the division, purchase, and the combination of rivaling firms for a rapid growth and expansion to uncharted territories. Despite the European Airlines’ dominance of the domestic market, the EU’s flight licensing and regulation board shoot down requests by international corporations to operate in the region. However, under exceptional circumstances, such as the acquisition of stake to salvage an ailing carrier, the regulator may grant operations as was the case for Etihad Airways. Initially, Alitalia’s weakness became an opportunity for UAE’s carrier to push its agenda in the EU. It has largely succeeded since Etihad has acquired 49% shares to enable it to influence Italian market dynamics and prospects. Mergers and acquisitions are effective responses to deregulation and a better strategy in combating low-cost airlines’ rivalry.

Market Review of Airlines in Italy

Currently, the Italian airline market is in flux state. Since 2014, the industry has grown for two consecutive years to signal healthy economic prospects. However, it is yet to recover fully after a two-year contraction period in 2013 and 2012. Studies show that Alitalia (the main flag carrier) is stabilizing its total seat capacity. It is in response to Etihad’s stake acquisition in 2014. Despite the success, there are other rapidly growing domestic airlines that compete fiercely with the former market leader. They include easyJet, LCCs-Ryanair, Wizz Air, and Vueling.

In addition, the dominant airlines venture into the remote parts of the country to exploit the new market. At the beginning of 2016, easyJet wound up its operations in Rome Fiumicino to focus on Naples and Millan Malpensa. In this case, Alitalia has a chance to expand the market share in Rome Fiumicino, due to its regional influence. As competitors exit the market, the firm must reassert its dominance through customer reassurance techniques and lower the domestic flights’ cost per passenger. It is important for a resurgent airline corporation to focus the resources on a specific area of strength. Once there is stability and a sustained growth, the management may review the plans to venture into regional and international sectors but since Alitalia was already an established brand prior to bankruptcy, its ascension to former glory is relatively easy when compared to new airlines. In 2013, Alitalia lost its top position to Ryanair as the largest airline by seat capacity and destinations. Since it currently has a support of numerous stakeholders, Alitalia can reclaim its spot if it implements the reforms as proposed.

Financial and Non-Financial Benefits of Merger

Financial

In 2014, Etihad Air attained one of the strongest financial outcomes. It posted approximately74 million US dollars in annual profit. The total revenue for the same period was 7.7 billion dollars. In comparison to the previous year (before it acquired owned Alitalia), the profit increase was 53% while revenue soared by 27%. Clearly, the merger restored investors’ confidence and the organization earned customer’s confidence.

            The increased revenue is attributable to a record number of customers and cargo volumes. In fact, revenue growth and passenger demand that outperforms the capacity intake informs the organization’s decision to invest in Alitalia. Besides, the earnings before amortization, tax, interest, rentals, and depreciation rose by 17% whereas earnings before tax and interest spiked by 33% prior to and after the acquisition (Cornetto, 2015).

Further, the strategy to partner with other corporations in EU and the Middle East strengthened the performance, given that the partnership revenue registered an increment of 39.6% to 1.2 billion US dollars. It represented a record 25% of all the passenger revenues. In 2015, Etihad Cargo became a billion dollar organization because its mail and freight volumes increased from 480, 000 in the year 2013 to 652, 000 in 2015. Essentially, the company exceeded its ambitious year-on-year financial target, even after fears of poor performance due to the acquisition of 49% shares in an ailing Alitalia.

According to Etihad’s CEO, the positive outcome after merger reveals that the shareholder has a clear mandate to improve the organizational performance and confirm its status as a global brand. He affirms that the airline’s mandate is to sustain growth and profitability. Of keen to note is that the organization has registered profitability for four consecutive years beginning 2011 despite heavy investments in large aircraft, mergers, acquisitions, new routes, and modern infrastructure.

Indeed, its financial performance in 2015 cements its position as profitable best-in-business-class international airways.  As the organization expands its global presence, it earns an international reputation while boosting its periodic performance. In addition, the airline evolves through diversification to other industries such as hotel, tourism, and aviation. In this way, it minimizes the risk of overreliance on one source of income. Interestingly, the firm achieves success through a unique strategy combining organic growth and formations of alliances with like-minded partners. In turn, this has earned it minority equities in European and Middle-Eastern flag carriers such as Alitalia.

Etihad transported 15 million passengers to different destinations in 2015, an increase of 23% from the past two years. RPKs (Revenue Passenger Kilometres) increased by 24% to 69 billion. On the other hand, the ASK (Available Seat Kilometers) rose by 28% to 87 billion. As the airline’s global network strengthened in the previous year, the passenger numbers rose steadily. Besides, Etihad Airways launched 12 new destinations including Medina and Rome. When the year was winding up, the firm posted a seat load factor of 79 as compared to 76 in 2013.

Kurt Lewin’s Force Field

Etihad Airways attributes code-sharing, minority equity investments, and partnership strategies as three of the most fundamental drivers of success and expansion into Europe. Furthermore, these effective strategies hasten network expansion more than any other Middle Eastern brand. It is also important to consider that over the past decade, the firm has invested heavily in improving marketing opportunities in strategic European markets. As if not enough, it has ensured cost savings through the introduction of remarkable business synergies.

In the year 2014, Air Serbia approved 49% investment to Etihad. Besides, Etihadt remitted $560 million as part of a business deal to own 49% shareholding in Alitalia. Furthermore, it acquired 76% interest in MilleMigla Alitalia Loyalty and EUMC (European Commission Merger Clearance) endorsed the plans by the end of 2014 (Schiavottiello, 2016).

When clearing Etihad’s acquisition of stake under EU regulations, EUMC considered its effects on competition in the region. In the end, the commission concluded that other than the Belgrade-Rome route, the deal posed minimal danger to the local industry and if it happens, it will not be due to a competitive pressure from foreign carriers. While conducting the investigation, the commissioners considered the needs and plans of Etihad as it extends its reach into the European economic zone. Yet, they raised an alarm that the deal may undermine competition on the Belgrade-Rome routes since Air Serbia and Alitalia operate this route and Etihad partially owns both. To eliminate this restraining force, Etihad committed its staff to provide two of slots in Rome-Belgrade any market entrant.

Etihad’s investment to rescue a sinking organization takes more than fresh finances and infusion of money. Specifically, Alitalia’s success, in the long-run, hinges on blending the two brands from different cultural background and collaborations. Therefore, Etihad’s management needs a careful coordination between them for harmonization of different histories. For example, Italians regard their firm as a flag carrier while Etihad Airways is a modern firm with minimal nationalistic history.

The rise of Etihad Airways is a product of quick and effective establishment of associations through uncensored investments in luxury service provision and diversification. However, the new strategy to absorb other brands does not meet the demands of Alitalia as a western air transport provider.

Driving forces                                                                                Restraining forces

 

                                                                                                     

                                                                                                                

 

Limitations of Italian Airline Market

Italy has shaded of more than 10% of its economy since the 2008 financial crisis. Further, the country is in a slow depression and is projected to continue for more than a decade unless the government introduces reforms. It is a similar scenario with the airline industry. In fact, the shrinking number of middle-income earners in the country threatens the airline market. A few people afford airline tickets as the economy worsens. Besides, the overall unemployment is approximately 13%. Italy is not alone. Several countries in the EU experience the same plight, although other countries such as Germany and France have pulled out of recession. It is a hard time for domestic airlines because the number of passengers has dropped significantly. Even worse, the government is reluctant to eliminate barriers to privatization and foreign ownership. For example, there were strict preconditions that Etihad had to fulfill prior to investing in the country. Although Italy is a democratic capitalist economy, the government owns most of the institutions.

The Italian geographic and economic make-up and its cultural cities make it harder for a single air travel hub to meet the demands of all the passengers in the country. Corporations with years of experience went through significant challenges that will still affect the New Alitalia. It means that the government is yet to eliminate the challenges that hinder the development of other transport hubs in minor cities as is the case with France and England. There is a dispersion of people in Italy. While Malpensa and Rome have reputable international airports, the regional airline's markets are only interested in operating a spoke to the hub and establishing long-haul services (Buyck, 2015). Most airline operators in Italy want to venture into different sectors rather than specializing and delivering the best service to the customers.

Chances are that Italy will not have one dominant market player, given the European Integration and the flooding of Airline firms to the domestic market. Even in the long run, a single airline such as Alitalia cannot cover the entire market. Considering this, the regional operators should consolidate and form alliances improve the future prospects of this Italian industry. 

References

Buyck, C. (2015). New Beginnings: Etihad Airways has Big Plans for Eternally Loss-Making Alitalia. Aviation Week & Space Technology.

Coleman, M. (2015). Regulatory Responses to the Challenges Facing Large European Carriers in the New Global Market. The Air and Space Lawyer,28(1), 1.

Cornetto Bourlot, G. (2015). Alitalia and Etihad Merger. London: Oxford Publishers.

Dunn, G. (2015). Alitalia Eyeing Path to Profit as Etihad Chief Flies the Flag: Hogan says Three-Year Rebuild of Struggling Carrier is on Target, Despite Boardroom Upheaval. Flight International.

Dutton, J. (2015). The Rebirth of Alitalia. Airfinance Journal.

Schiavottiello, F. (2016). Maintenance and Reinforcement of Competition in the EU Aviation Sector: The Etihad Alitalia Merger.

Summers, M. (2010). Etihad Airways: Staying the Course. The Gulf Business News and Analysis.