Evaluation of the Current Status of Alitalia - Essay Example

In Autumn 2013 Etihad Airways Started To Examine the Possibility to Buy a Majority/Total Stake in Alitalia, The Italian Struggling Airline Table of Contents Introduction 2 Evaluation of the Current Status of Alitalia 2 The Advantages and Disadvantages of Developing a Partnership with Alitalia 5 5 Advantages 6 Disadvantages 7 A Recommendation about Whether It Is Sensible For Etihad Airways to Go Ahead With the Negotiations 7 Conclusion 8 References 9 Introduction Over the last ten years, there has been a considerable increase in the number of alliances in the global airline industry. It is worth mentioning that airline alliance generally signifies partnership, joint venture, marketing alliance, cooperative agreement or code sharing agreement amid two or more companies. Nonetheless, intercontinental alliance in the form of code sharing agreement is among the rapidly increasing strategic alliance that is being widely apparent in the current globalised world. Besides, the growing number of joint venture as a medium of strategic alliance is also seen in the global airline industry (Wang and Evans 2002). Correspondingly, this report intends to examine the prospects of Etihad Airways which has started to examine the possibility to buy a majority/total stake in Alitalia, the Italian struggling airline. Evaluation of the Current Status of Alitalia Alitalia is a prominent Italian based airline group and one of the leading players in the European airline industry. The group operates under the brand name of Alitalia and offers an assortment of premium services at all levels including the purview of domestic, international and intercontinental destinations. Air One is a subsidiary of Alitalia Group that provides low cost flights to domestic and international routes. Alitalia is a privately owned group and 75% of its ownership is retained by Italian entrepreneurial and financial world while the remaining 25% is acquired by the biggest European airline, Air France-KLM. The group is also the member of SkyTeam alliance and has opened transatlantic joint venture with Air France KLM, and Delta. The group over the years has been able to secure and distinguish its position amid its customers particularly due to its superior service quality, maintenance and passenger care. The pool of well-trained employees along with effective operational management has established it as the most punctual airline across Europe. At the same time, the extensive and ambitious investment plan to make its fleet modernise has tremendously facilitated it with attaining greater customer confidence and trust. Apart from transportation of passengers, the company also operates in cargo sector. It has been able to meet the customers’ shipping requirements through effective arrangement of cargo charter flights (Alitalia n.d.). Moreover, it has the most modern fleet of 132 aircrafts. The company’s financial health during the 2012 was worst affected with increasing loss and augmenting debt. However, amid this sluggish performance, the market share of the group across all routes continued to stay stable at around 22.6% (Alitalia 2013). The introduction of SaltaSu airfares by the company during the year 2014 has facilitated it to increase its market share which has provided some relief to it (Alitalia 2014). Despite its commendable performance in the past, the company in the recent years has been facing numerous challenges which have overtly influenced its performance burdened with increasing debt. During the year 2012, the company suffered from heavy loss of EUR280 million, totalling to a net loss of EUR843 million after the creation of ‘new Alitalia’ in 2009.  The cash reserve of the company was almost evaporated during the beginning of the year 2013. Consequently, the company in order to meet its funding requirements had to seek EUR150 million of loan from its shareholders for operating its business. Due to the dismal performance of the company during the year 2012, the chief executive officer (CEO) of the company Andrea Ragnetti also resigned from his position. Surrounded by the continuous loss, the company’s net debt has shown massive and steady growth amounting to more than EUR1.0 billion from 2009 to 2012. The liquidity position of the company has also been observed to be worsened particularly due to the inadequate flow of operating cash. The deteriorating financial health accompanied with liquidity crisis along with steadily growing loss has manifested significant challenges for its survival (CAPA 2013). Fig 1: Alitalia Revenues, Net Profit and Operating Profit (EUR million) 2009 to 2012 Source: (CAPA 2013) Fig 2: Alitalia Development of Net Debt and Cash 2009-2012 Source: (CAPA 2013) The Advantages and Disadvantages of Developing a Partnership with Alitalia Etihad Airways which commenced its commercial operations prior to ten years only is a national airline of the United Arab Emirates. Within this short span of time, it has been able to establish itself as one of the leading airways across the globe (Etihad Airways 2014). Recently, the company has shown its interest in acquiring 49 per cent of equity stake in Alitalia which has been struggling for its survival in the airline industry (Jones 2014). Etihad Airways has already entered into negotiation with Alitalia and it is expected to wrap up this negotiation with opening strategic alliance with Alitalia. However, prior to making any decision on strategic alliance with Alitalia, it is crucial for Etihad Airways to closely evaluate the advantages and the disadvantages associated with developing a partnership with Alitalia. Correspondingly, the following sections will highlight the potential advantages and disadvantages for Etihad associated with developing a partnership with Alitalia. Advantages Although it can be argued that Alitalia is going through tough time that burdened it with large sum of debts and declining market share but Etihad Airways partnering with it may gain certain imperative advantages that may benefit both the companies. In this regard, one of the potential benefits for Etihad Airways can be associated with the significant expansion opportunities. It is possible that the partnership between the two airways may facilitate Etihad to expand its network across Europe and America as well as draw considerable traffic to its hub in Abu Dhabi (Jones 2014). Moreover, with this partnership, Etihad will be able to acquire access to the vast European as well as trans-Atlantic networks of Alitalia (Clark 2014). Additionally, Alitalia transports huge number of passengers annually. Responding to this, Etihad can take advantages of this large customer base and can accord significant benefit from the existing market share of Alitalia ( Flak 2014). It has been observed that the level of competition in the European aviation industry is relatively low despite being de-regulated (Lin 2008). Thus, it can be stated that Etihad with the strategic alliance with Alitalia can attain greater competitive advantages. Alitalia also has the most modern fleet of 132 aircrafts which would facilitate Etihad to build strong competitive position across the European as well as trans-Atlantic networks. Besides, it is also expected that this strategic alliance will promote Etihad to attain economies of scale in its operations (Czipura and Jolly 2007; Flores 1998). Disadvantages There are also certain disadvantages that can be associated with the partnership between Etihad and Alitalia. Subsequently, Alitalia is burdened with a huge sum of debts which would require Etihad to inject a large sum of money to restructure the debts owed by Alitalia. This may reduce the ability to focus on its own operations reducing its capability to meet is own debts structure. Besides, there also exist certain risks that despite the injection of a large sum of money to Alitalia, it may not be able to return credible profit in the later years which can be disastrous from the perspective of Etihad (Mathews n.d.). Moreover, this partnership may also create a conflict of interest between the two companies (Gulati 1998). Since Etihad has sought for casting off of employees working in the Italian airline; it may lead towards receiving half-hearted services from the existing employees along with creating extra bureaucracy (Sparks et al. 2001). A Recommendation about Whether It Is Sensible For Etihad Airways to Go Ahead With the Negotiations Based on the analysis conducted, it can be firmly stated that there lays both advantages as well as disadvantages for Etihad partnering with Alitalia. However, it has been determined from the above analysis that partnerships between the two will have greater advantages for Etihad than the potential disadvantages. It has been measured that Etihad will be offered with significant opportunities to expand its business across the European and trans-Atlantic networks as well as it will be able to take the advantages of available resources of Alitalia which would render the company with increased benefits in the long-run. However, the major drawback with this partnership is the large sum of debt owned by Alitalia. Correspondingly, Etihad is a rapidly growing airline which continues to increase its revenue. Hence, it would be wise to inject money in Alitalia with focusing on long-term benefits rather than short-term consequences. Overall, it would be sensible for Etihad Airways to go ahead with the negotiations and wrap up it with opening strategic alliance with Alitalia. Conclusion It has been observed from the foregoing discussion that Alitalia is suffering from augmenting loss and increasing debts which have resulted in creating challenges for its survival in the airline industry. Correspondingly, Etihad Airways has shown its interest in investing a considerable sum of money for buying equity stake in Alitalia. Etihad has already entered into negotiation with Alitalia revealing its interest. The evaluation of the prospects for Etihad Airways associated with its interest to establish a partnership with Alitalia has demonstrated that there lays significant advantages for Etihad if it completes the strategic alliance with Alitalia while only a few disadvantages have been identified. Correspondingly, it has been recommended to Etihad to continue its negotiation with Alitalia to establish a partnership between the two. References Alitalia No Date. Fleet. http://corporate.alitalia.it/en/company/fleet/index.html,12/05/14. Alitalia No Date. Profile. http://corporate.alitalia.it/en/company/profile/profile.html,12/05/14. Alitalia 2014. 2014 Summer Season Alitalia Group News. http://corporate.alitalia.it/en/media/press-releases/13-02-2014-bis.html,12/05/14. Alitalia 2013. 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