ALITALIA: RESTRUCTURING PLAN CLOSE TO APPROVAL

UNCLAS ROME 003832

SIPDIS


SENSITIVE

E.O. 12958: N/A
TAGS: EAIR ELAB EU IT KPRV PGOV FAA AVIATION
SUBJECT: ALITALIA: RESTRUCTURING PLAN CLOSE TO APPROVAL

REF: A. ROME 2119

B. ROME 1734

C. ROME 1080

Sensitive but Unclassified. Please protect accordingly, not
for Internet publication.


1. (U) Summary: Alitalia, the Italian government, and labor
unions are expected to sign a final agreement soon on the
restructuring of Italy's flag carrier. The airline will be
split into two companies, one to continue the core flight
operations, the other to take over Alitalia's ground
services. Eventually both companies will be privatized,
though, at least initially, most "private" investment will
likely come from state-controlled holding companies and
financial institutions. The unions successfully limited
layoffs to under 3,700 (from an initial management proposal
of 5,000) but otherwise made significant concessions on
productivity. The Italian government will likely approve
unemployment payments to those who lose their jobs, with
Alitalia covering at least some of the costs. One Embassy
contact at Alitalia headquarters believes the savings will be
enough to return the company to profitability, possibly in
preparation for a merger with Air France-KLM. However, the
airline still faces major hurdles, including a shrinking
slice of Italy's domestic market and costly airport services.
End summary.

-------------- --------------
Alitalia to Split Flight Operations, Ground Services
-------------- --------------


2. (U) Alitalia, the GOI, and most of Alitalia's unions are
expected to sign a final agreement to restructure Italy's
flag carrier. Once the plan is finalized, Alitalia will
receive a Euro 400 million ($480 million)
government-guaranteed bridge loan. According to the
agreement, in early 2005 Alitalia's core flight operations
will be taken over by a new company "AzFly," which will
continue to use the Alitalia brand name. Meanwhile,
Alitalia's ground service operations will be placed in a
second company, "AzService." Alitalia/AzFly will initially
keep 51 percent of AzService, while the remaining 49 percent
will be transferred to Fintecna, a holding-company 100
percent controlled by the Ministry of Economy and Finance.
Alitalia/AzFly will keep its 51 percent stake of AzService up
until privatization of AzFly, which is expected in June 2005.



3. (U) Under the plan, AzFly's recapitalization and
privatization process will begin in March 2005. The Ministry
of Economy and Finance will lower its ownership of AzFly from
the current 62 percent to 30 percent. The Ministry,
according to some news accounts, plans to remain the
controlling shareholder even after it gives up its majority
stake. Moreover, the privatization will likely be limited to
government-affiliated institutional investors, at least until
the company recovers enough to attract market-based buyers.
According to press reports, Cassa Depositi and Prestiti,
S.p.A. (CDP),a government-controlled joint-stock company
connected to Italy's postal savings system, is a possible
investor in a "privatized" AzFly.


4. (U) Emboffs recently spoke with representatives of
Alitalia's major labor unions and an Alitalia executive to
understand their respective views of the restructuring plan.

-------------- --
Unions Meet Some of Their Goals, Limit Layoffs
-------------- --


5. (U) Representatives of the three major union groups
(CGIL, CSIL and UIL),which negotiated both new labor
contracts and the final restructuring and financing of
Alitalia into AzFly and AzService, expressed satisfaction, if
not great enthusiasm, over the deal. On September 18, the
unions approved the last of three labor contracts for pilots,
flight attendants and ground crews. On September 24, eight
of the nine unions representing 22,000 Alitalia workers
signed off on the quasi-privatization of the company. One
independent union representing attendants and ground crews,
SULT, remains unhappy with both the lack of employment
guarantees and the new company structure, but it is unlikely
that SULT will be able to block final agreement. Union
leaders are still discussing how to present the deal to union
members. They will organize either a referendum or
consultations witin the next few weeks and expect their
memberhips to approve the agreement.


6. (U) The unions had three primary goals: to minimize the
number of overall layoffs; to prevent the government from
privatizing AzService; and to win public support for finding
other government jobs for the fired workers. Faced with
impending bankruptcy and management's demands for greater
labor productivity, they had mixed success in meeting these
goals. Alitalia's President, Giancarlo Cimoli, initially
predicted the company would need to fire 5,000 workers.
Under the final agreement, 3,679 workers will lose their jobs
resulting in a 315 million Euro reduction in labor costs; the
majority of the losses will be in Lazio, Milan and some
airports in the south. Because the new labor contract for
pilots alters the formula for basic salary vs. incentives on
productivity, Alitalia pilots will have to fly more hours to
maintain current salary levels.

--------------
State Control Remains, For Now
--------------


7. (U) During the last week of negotiations, unions were
focused on maintaining a high degree of government control
over Fintecna in the hopes that political pressure could
prevent further privatization and job loss. Under the deal,
Fintecna, a public-owned company, will acquire 49% of
AzService shares. However, Fintecna likely will restructure
AzService and sell it to Finmeccanica, another state-owned
company, but one that is due to be privatized shortly. The
final agreemnt does not provide specifics on the ultimate
fate of AzService, but Cimoli has stated that he wants to
separate the activities of AzService and AzFly. AzFly's need
for additional cash after 2005 will likely lead to the
eventual privatization of AzService, an outcome which the
unions fear will lead to additional job losses. Union leaders
are also worried that AzService will be saddled with the bulk
of Alitalia's debt, a charge the company denies. The deal
received an initial nod from EU authorities, when EU
Transport Commissioner Loyola de Palacio said on September
21, "the arrangement and agreement are a good sign."

--------------
Government Will Help 3,700 Laid-off Workers
--------------


8. (U) The agreement on unemployment benefits and training
for dismissed workers will be signed by government, company
and union representatives. Although UIL continues to press
the government to hire the newly unemployed in other
government jobs, the September agreement provides no such
guarantees. In outlining the deal to Embassy officers, UIL
negotiators said their members were resigned but hardly
"singing for joy." Although there are fears over upcoming
layoffs, unions expect their rank and file to accept some job
cuts as a necessary condition to save the company. UIL
representatives, who tend to be less dogmatic than CGIL or
CISL advocates, expect that many of Alitalia's skilled
workers will find new employment regardless of how the
company is restructured. UIL is presenting the restructuring
agreement as evidence of union flexibility in adapting to
economic realities. In fact, the unions are concerned that
management of a newly privatized AzService will exploit
recently enacted labor market reforms that permit greater
management flexibility in hiring part-timers and using lease
contracts that may employ more people but with lower wages
and fewer benefits.

-------------- --------------
Management: Government Step-Aside Made Deal Possible
-------------- --------------


9. (SBU) According to Olivier Jankovec, Director of
Institutional Relations for Alitalia, the airline was able to
win concessions from the unions because, unlike in the past,
the Berlusconi government refused the unions' request to
participate in a three-way negotiation, a format that has
traditionally strengthened labor's hand. Jankovec said the
GOI did pressure the company to adopt a softer line with the
unions in early 2004, which led to the collapse of talks, an
April strike by Alitalia workers that further damaged the
company's bottom line, and the resignation of Managing
Director Marco Zanichelli. Jankovec said the government was
able to adopt a hands-off approach in September because the
June 2004 EU Parliamentary elections had passed and because,
as time wore on, more Italian political leaders realized that
Alitalia was teetering on insolvency.


10. (SBU) Jankovec expected the government to formally
designate the air transport sector as a "crisis industry," a
move which would allow the government to pay unemployment
benefits to the laid off workers (though Alitalia will likely
have to pick up some of these costs). Politically, Jankovec
added, the rescue plan has a greater chance of succeeding
because of the reduced hostility of Labor and Social Welfare
Minister Roberto Maroni. Maroni is a member of the Northern
League, a coalition partner that has traditionally opposed
state aid to Alitalia, which the League views as a typically
wasteful state enterprise designed to spread jobs and
patronage to Italy's South. The League's change of heart, he
said, is due to the financial difficulties of another Italian
airline, Volare, which is based in the League stronghold of
Vicenza. Volare, Jankovec explained, will probably need to
conduct its own restructuring, and any plan given to Alitalia
workers must be extended sector-wide.

--------------
"Savings Enough to Turn Alitalia Around"
--------------


11. (SBU) Jankovec expressed optimism that the new union
contracts will result in enough savings to return Alitalia to
profitability. He said the deal with the pilots union, which
would raise the maximum number of hours pilots could fly per
year to over 900 (on a par with Lufthansa),is the most
significant. Alitalia also intends to eliminate backup
pilots on many trans-Atlantic flights, a practice long
adopted by most of its competitors. The airline will also
cut back on perks such as free home-to-airport transportation
and will eliminate a policy of allowing Alitalia crews to
live in one city yet fly out of another, a system which
forces the Airline to provide 11,000 free seats per year to
shuttle employees from home to their duty stations. Finally,
Jankovec said, Alitalia will need to work with local
governments and airport authorities to reduce the costs of
airport services. Jankovec commented that jet fuel typically
costs 20 to 30 percent more in Italy than in other European
countries because fuel distribution in Italy is an
inefficient and highly-protected industry.

--------------
Goal #1: Regain Domestic Market Share
--------------


12. (SBU) Jankovec said Alitalia's main priority is to regain
its once-dominant position in the Italian market. The
airline's domestic market share has dropped 16 percent since
2000 and is currently hovering around 43-44 percent.
However, Jankovec remarked, Alitalia's ultimate goal remains
an eventual merger with another major European carrier. Air
France-KLM has expressed interest in merging with Alitalia if
it ever manages to get on a sound financial footing.

--------------
Comment
--------------


13. (SBU) Breaking Alitalia in two and selling the pieces to
state-controlled holding companies and institutional
investors hardly amounts to a true privatization, yet it may
be the best option for a government trying to sell a bankrupt
state carrier while maintaining as many jobs as possible.
The nearly 3,700 in staff cuts is significant, but is far shy
YQQ8QQ9Qr oof the 10,000 layoffs some outside observers believe will be
necessary to make the airline truly viable (ref A).
Nevertheless, Jankovec believes that this "Italian
privatization" will at least offer some degree of insulation
from the kind of direct political interference that over the
years has contributed to Alitalia's bloated payroll and
inefficient operations.


14. (U) Overall, the Alitalia deal is a blow to Italian
unions, which for the last 30 years provided their members
with a steady increase in wages and benefits. UIL
negotiators bristled at the question of whether the
concessions contained in the agreement may be the wave of the
future. They preferred to consider the agreement as a
reflection of the global problems facing the airline industry
and were not unhappy to be in the company of U.S. workers
with troubled carriers like U.S. Airways. However, the fact
that the unions were willing to negotiate on the premise of

job cuts and required improvements in labor productivity
could mark a significant change for labor-management
negotiations in other Italian industry sectors in the future.
Certainly, the Berlusconi government is pleased with the
deal, which, while hardly freeing the government of its
near-term obligations to Alitalia, opens the way for further
privatization.


SEMBLER


NNNN
2004ROME03832 - Classification: UNCLASSIFIED