My Big Fat Airline Merger

You might be forgiven for mistaking the pending privatization of Alitalia for the plot of a new romantic comedy–say, My Big Fat Italian Wedding. All the elements are there: the clumsy, unattractive bride to be, the parents desperate to marry her off to any suitor who can come up with a suitable dowry, the relatives anxious to make sure the dowry is large enough, the handful of frustrated suitors and the doddering grandfather who won’t let the bride marry a handsome foreigner.

Last week, Alitalia’s unions failed to come to terms with a bid for the airline by Air France–KLM. The $1.17 billion bid had been approved by Alitalia’s board and the Italian government. After weeks of negotiation and many concessions, Air France–KLM gave up and withdrew its bid. Stirring in trouble was former Italian prime minister Silvio Berlusconi, who decried the notion of “giving our national airline to the French.” Berlusconi’s opinion matters, because in elections next week, the coalition he leads is ahead in the polls.

Alitalia has long been the basket case of European airlines. Since its founding in 1946, it has had only one profitable year. State owned, Alitalia is subject to frequent political intervention. The ever-changing Italian government (prime ministers have averaged only 20 months in office since 1946) has kept the airline from pursuing a consistent business strategy. The historic Italian friendliness to labor meant that like other transport modes, Alitalia often fell victim to strikes. Of course, whenever Alitalia was losing money, it could count on being bailed out by its largest shareholder–the Republic of Italy.

The guaranteed bailouts ended under European Union rules that prohibit them. With mounting debts and only 180 million euros in cash on hand, Alitalia needs to find a buyer for the government’s 49.9% share. It began the process in 2006 by soliciting bids from private equity groups, individuals and other airlines. The government put so many restrictions on bids–no layoffs, few route changes–that all the potential candidates dropped out.

A second round occurred, and in December 2007, the two finalists were announced: small Italian airline Air One and Air France–KLM. Air One’s proposal was to pay very little for the shares but spend a lot on improving the airline while maintaining Italian ownership. Air France–KLM proposed to buy shares at less of a discount and to eliminate Alitalia’s Milan hub and focus flying into and out of Rome.

Alitalia’s board and government chose Air France’s bid, but not before some members of the government had their say. According to the deputy prime minister, “Alitalia must propose the best partner, but the government also has a responsibility. . . . [T]he interest of the country is at stake. Where will our children, our firms leave from to go to China or India? Will they have to fly from Paris, or even Frankfurt, or will they be able to leave from Milan or Rome?”

As Brett Snyder, author of the popular “Cranky Flier” blog (which includes a regular feature entitled “Alitalia: Worst Airline Ever”), writes: “Somebody get this guy an economics textbook. If there’s demand for flights between Rome and China or India, you know there will be nonstop flights there regardless of who owns the airline. . . . If you do a good job of making your country a center for commerce and tourism, people will go to and from there.”

And now Air France–KLM has withdrawn its bid and Alitalia’s chairman has resigned in frustration. The unions seem to have grasped a moment too late the looming bankruptcy, and their leaders are making conciliatory noises. But the airline is still hemorrhaging cash and will be in stasis until the election. Berlusconi had promised to withdraw the government’s support for the Air France–KLM bid, probably sealing Alitalia’s fate.

Even though Berlusconi has called for a homegrown bid and claims that an Italian group will emerge to buy the airline, no one has stepped forward publicly. But he seems likely to stick to his nationalist guns. “Even Greece and Portugal have a national airline,” he said. “One can’t just give up Alitalia.”

For those who think Berlusconi is a free marketeer, these comments may ring false. But as AEI’s Jurgen Reinhoudt shows, despite a strong mandate (by Italian standards), Berlusconi’s results never matched his rhetoric. In the April elections, center-left leader Walter Veltroni is running on a platform of sensible reforms, such as making Italy’s electoral system more stable, making it easier to start businesses and slashing public spending–the kind of reforms that Reinhoudt argues are easier for the left to enact. Veltroni also supported the Air France–KLM bid.

Sentiments like Berlusconi’s are nothing new in aviation. “For most of the first century of powered aviation, the traveler was expected to subsidize a hopelessly inefficient industry,” writes Simon Calder, travel editor of the Independent. “Aviation grew as an adjunct to individual governments, a symbol of nationhood as crucial as a flag and an anthem–though considerably more expensive.” But there’s no reason beyond mere sentiment to tie aviation to nationhood.

Still, good feelings won’t pay Alitalia’s bill, and with Berlusconi’s impending government likely to hobble Alitalia’s chances of being acquired, bankruptcy does seems inevitable.

Time is running out for bride-to-be Alitalia. Only Alitalia’s unions and Italy’s new government can decide if My Big Fat Italian Wedding will be a romantic comedy–or a ridiculous farce.

This article was originally published on on April 9, 2008.