FOXTROTS

Fox – sly.  Trots – left-leaning (Trotsky) plus its more insalubrious meaning. 

Foxtrots – leading the industry in a dance.

July 21 2010

 

New Alitalia. New Milan plan.

 

T

HE Alitalia group has introduced a three-year development plan for service at two of Milan’s three airports. The essentials are:

[] Alitalia so-called premium service from Linate. It forecasts an increase in seat sales from 5.4mn in 2009 to 6mn in 2012 – an undemanding 3.6% growth annually.

[] Launch of a new business-plan, in 2011, for Air One flights from Malpensa. ‘Smart Carrier Air One’ flights to 14 domestic and international points (including Budapest, Istanbul, Munich, Sofia, Warsaw) at low base fares – US$35 (at US$1 to €0.72) for domestic destinations and US$100 for international.

Alitalia says that AO passengers will get seat assignment, baggage transfers, frequent-flyer miles, airport check-in, and tickets available through call centres and travel agencies as well as internet.

Management has misunderstood the LFA (low-fare-airline) business model.

If this is a decision by AO management and not Alitalia management, then it fits earlier patterns – AO management made the same mistake when AO was an independent airline. Although generally considered a success, AO was actually failing badly just before it became an Alitalia subsidiary, running unsustainable seat factors in the 50%-range.

If management from Alitalia or its partner Air France are running AO’s Milan operation, then they have so fare shown no understanding of the LFA model – beyond the requirement to offer ‘low fares’.

Of course passengers would like frills, apparently at no cost to them, but an LFA cannot afford to offer them at no cost. If AO sticks with those low fares noted above, along with the ‘frills’ such as frequent-flyer miles, then the Alitalia group will lose money on this venture, unless it can maintain average seat factors in the mid-90s. But much also depends on the sales model – the rate of fare increases up to the day of the flight, and the level (dishonourable) fare-supplement that most LFAs list under ‘fees’. The market usually reacts quickly to any abuse there – but it depends on competition.

AO is a good move, however, in that it will likely compete on some routes with the more-costly new Lufthansa division based on Milan. Ironically, AO was an LH affiliate before merging into Alitalia.

The other possible positive development is that Alitalia is in a good position to use AO to copy the newish Qantas/Jetstar business model – what I call the ‘J-Plan’. Under this, Qantas-owned lower-cost Jetstar reduces operating costs in the Qantas group by taking over some Qantas routes, or starting new ones that might otherwise be operated by Qantas at higher costs.

Alitalia has an urgent need to reduce its operating costs, but finds it difficult because unions do not want to allow flexibility or cutbacks. If the group follows the J-Plan, parent Alitalia airline would stop growing, and so hold back profitless increase in costs, and AO would grow the group at lower costs.

The AO move in Milan might actually be the same as a J-Plan, but wrapped in a pseudo-LFA cover to attract passengers. Those frills – frequent-flyer-miles etc – indicate that in reality AO-Milan is a lower-cost regular airline, and not an LFA.

[] Objectives 2010-12. Alitalia forecasts that it will double seat sales at Malpensa, from 1.5mn in 2009 to 3mn in 2012. It says growth this year has already been 20% – although I calculate that it needs an annual 26% growth to reach that 2012 target.

Overall, destinations from Milan will increase from 39 in 2009 to 47 in 2012 and seat sales from 6.9mn to 9mn – an annual 9% growth.

These targets need to be seen against the company’s sizeable decline in recent years – a 15% fall in 2009, 26% in 2008, and flat in 2007 and 2006. Its peak was 31mn seats sold (including traffic from then-independent AO) in 2007; it counted just over 21mn in 2009. Planned growth in Milan will recover only 20% of that loss.

The Fox