In the last few months, two European Union airlines have been forced to enter into shotgun weddings even if the media depicted these alliances as marriages made in heaven.
In the last decade, Alitalia, the Italian national airline, underwent various restructuring programmes to satisfy EU regulations on State aid in the context of mounting operational losses. Cyprus Airways was never a brilliant performer, but the near bankruptcy of Cyprus and Greece meant that this legacy airline needed to be rescued to avoid a slow death.
The European airline market is very competitive and is characterised by overcapacity and fragmentation. The low-cost airlines took on the mighty legacy airlines that are mainly state- owned and carved for themselves profitable chunks of the market leaving the national airlines dependent on state aid.
Governments were often only too keen to support their national airlines party in defence of their national pride and partly out of a genuine concern to protect their economy from depending on private airlines for an effective communications infrastructure.
The EU has very strict rules on state aid to airlines mainly because the more powerful European airlines have already restructured at a great cost to employees and shareholders. The likes of Lufthansa and British Airways will not tolerate unfair completion through state aid being given by stealth to those airlines that have still not restructured their operations successfully.
So now Alitalia has entered into an agreement with Etihad Airways of Abu Dhabi who by the end of this year will own 49 per cent of the Italian airline.
The terms of the deal are still not well known but it seems that as many as 3,000 jobs from Alitalia’s workforce of about 14,000 will be lost. Apparently, the most contentious element of the agreement was the write-down of up to €565 million of the airlines more that €800 million of outstanding debt with banks. The bank’s reluctance to write off debt led to Air France-KLM pulling out of a rescue package last year.
The €500 million that Alitalia received in the government-led bailout of last year is still under investigation by the EU state-aid mandarins. The investment by Etihad is unlikely to appease the regulators as Lufthansa is arguing that ‘the purchase of shares in Alitalia whether via European states or by state companies outside the EU would constitute state aid. The German airline is urging the antitrust authorities in Brussels to block the Alitalia deal.
Italian politicians and Alitalia’s business leaders described the deal with Etihad as an important strategic development.
In the cruel world of business, strategic partnerships are rarely the stuff that political dreams are made of
Quite honestly, Etihad will certainly gain more from this deal as it will enhance its strategic ambition to become a major international airline by gaining access to a major hub in Europe. For Alitalia this deal will mean that it will continue to survive in the cutthroat airlines market in Europe and beyond.
Perhaps more relevant to us is the experience of the restructuring of Cyprus Airways. This relatively small airline was never a shining example of good management. But when Cyprus and Greece collapsed economically in the last few years, the Cypriot airline came under increasing scrutiny from EU antitrust authorities.
Cyprus Airways is being investigated ‘over possible violations of State-aid rules in a €31 million capital increase by the Cypriot government and a €73 million state bailout over the past two-years’.
The Cypriot government has issued a request for proposal from potential ‘strategic partners’ to take over the 94 per cent shareholding it owns in Cyprus Airways. This request attracted 15 potential ‘strategic’ partners including Ryanair, the Greek Aegian Airlines, Romania’s Blue Air, and Israel’s Arkia Israeli Airlines – hardly a glamorous list of ‘reputable strategic partners’.
Not surprisingly Ryanair is the favourite to strike the deal with the Cypriot government to take over Cyprus Airways. To rub salt in the already-sore Cypriot wounds, the undiplomatic Ryanair CEO Michael O’Leary travelled to Cyprus and said: “Ryanair submitted an expression of interest, principally because the Cypriot government asked us to. But Ryaniar is not particularly interested in Cyprus Airways.”
In my book this is not quite the right mindset to start a strategic business relationship. The Cypriot government made some mild conditions including a requirement for ‘Cyprus to remain the airline’s base and for as many staff as possible to retain their jobs.’
In the cruel world of business, strategic partnerships are rarely the stuff that political dreams are made of.
johncassarwhite@yahoo.com