US embassy cable - 04ROME3832

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. 
 
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Alitalia to Split Flight Operations, Ground Services 
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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. 
 
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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." 
 
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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. 
 
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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. 
 
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"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. 
 
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Comment 
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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 
 
 
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2004ROME03832 - Classification: UNCLASSIFIED