Will it fly???

Draghi’s latest coup could be making money out of Italy’s state airline

Rome may book a profit on the airline born out of the demise of Alitalia, after burning through billions to keep the old company afloat.

BY PIETRO LOMBARDI

Super Mario might be about to pull off one of his most impressive triumphs yet: turning a profit out of Italy's state airline.

Alitalia was once the pride of Italy and a symbol of style and innovation. It's also been a money pit for decades and a thorn in the side of many Italian governments.

But now the sale process of Alitalia's successor airline, ITA Airways, is moving forward, with several parties interested in the company. Drawing a line under one of Italy's most painful corporate sagas would be a resounding success for the government led by Mario Draghi. Even more stunning would be booking a gain on the capital Rome invested to get the new state-backed airline off the ground, experts say.

“Given the history of Alitalia, making money out of the privatization of ITA would be nothing short of historic,” said Andrea Giuricin, head of strategic consultancy firm TRA Consulting.

German carrier Lufthansa and shipping giant MSC have teamed up to bid for a majority stake in ITA Airways. They put forward an initial offer of between €1.2 billion and €1.5 billion, two people familiar with the matter told POLITICO.

The government, which controls the airline via the finance ministry, also received two other expressions of interest, the people familiar with the matter said. One bid is from private equity firm Certares in partnership with Air France-KLM and is for a minority stake in ITA; the other potential offer is from another U.S. private equity group, Indigo Partners, which invests in low-cost carriers such as Wizz Air.

The MSC-Lufthansa duo seems to be the front-runner. Their approach — a bid for a stake of 70 percent to 80 percent with a minority holding retained by the government — is more consistent than the other approaches with Rome’s ambitions and is more detailed, one of the people said. The government decree on the sale process includes a strategic goal of reaching “partnerships and integrations with European subjects in the framework of global alliances,” as well as Rome’s intention to keep a minority stake. The bid also has another upside: It would allow the government to post a profit on its investment in ITA.

Under a European Commission decision, the Italian government can inject up to €1.35 billion in ITA through 2023: €700 million in 2021, €400 million this year and the remaining €250 million next year. The check for this year should be written by the end of this month, but that could change depending on the how the sale process goes.

The three bidders should get access to ITA’s detailed financial data in the coming days, paving the way for potential binding offers in early May and an initial agreement in June. This timeline could allow Rome to avoid the 2023 capital injection of €250 million.

There are many moving parts and MSC-Lufthansa’s offer isn’t binding, so it is hard to estimate the potential return for the government. One of the people familiar with the matter said it could be around 20 percent to 40 percent of the capital Rome invested.

MSC and Lufthansa didn’t reply to a request for comment. MSC said in January that its interest “derives from the possibility of activating positive synergies” for both companies in the cargo and passenger sectors. In March, Lufthansa Chief Executive Carsten Spohr ruled out taking a majority stake in the airline but stressed that while Lufthansa would have never invested in Alitalia, in the case of ITA “it’s worth to have a look.” Spohr said: “We know what we are doing in Italy, don’t worry.”

A spokesperson for Draghi declined to comment.

This may seem no big deal for Super Mario, who is credited with saving the euro as president of the European Central Bank and pulling together a national unity government that is pushing through an ambitious reform package in Italy. But Alitalia has flummoxed a succession of Italian leaders. The carrier’s history in recent decades is rife with strategic mistakes, failed rescues and vast losses.

Since it was launched after the Second World War, Alitalia has burned through more than €12 billion in funds from taxpayers and investors and most of it since 2008, according to estimates by Ugo Arrigo, associate professor at Bicocca University in Milan.

“Alitalia is a metaphor of our country and its trajectory, from its post-war recovery and growth to its decline at the turn of the century,” said Arrigo.

Alitalia was grounded for good last October, replaced by ITA, which took off on October 15 as a much smaller company than its predecessor. ITA has 52 aircraft and around 2,500 staff, less than a quarter of Alitalia. Its takeoff was already a big win for Draghi, whose government was able to convince EU competition czar Margrethe Vestager that the ailing carrier and its successor were separate entities.

That spared ITA from paying back illegal state subsidies given to its predecessor. Instead, Brussels ordered the old Alitalia to pay back €900 million of illegal state aid granted in 2017, a sum Rome is highly unlikely to get back since the company has no money. Another EU state-aid investigation, into a €400 million loan granted in 2019, is still pending.

Many saw the “Draghi factor” in action in the negotiations with Brussels. The initial plan to launch a new flag carrier, which included €3 billion in support funds, had been drafted by the previous Italian government led by the 5Stars group's Giuseppe Conte. Competition regulators at the European Commission weren’t happy about it, but, when Draghi took over, Rome and Brussels quickly managed to find common ground.

ITA has faced a lot of turbulence in its first months: fierce competition in a domestic market dominated by low-cost carriers, the coronavirus pandemic still curbing travel and the impact of the war in Ukraine. It posted an operating loss of €170 million in the first two and a half months of activity, in line with its original plan. Despite the headwinds, its revised business plan forecast an operating breakeven by June next year, three months earlier than envisioned in the original business plan.

Given the challenges, some experts see the €1.2 billion-€1.5 billion offer to be optimistic.

Even in a best-case scenario, the coming years will be difficult, said Arrigo, adding that the financial performance of ITA until a potential deal is clinched will play a key role in how much it can fetch.

“While the government can manage to get through the privatization, I’m very skeptical that the company could turn a profit, even as part of a big group,” he said.

“The most the government can accomplish is to stop pouring money into it.”

The company’s top brass has made clear that it wants to clinch a deal by June. Their sense of urgency is justified, experts say.

“Politicians just cannot keep their hands off the company,” said John Strickland, director of transport consultancy JLS Consulting. “This has been a historic problem with Alitalia.”

“If there is a political willingness for a deal right now to no longer put state money in, the management would be naturally keen to pursue that quickly.”