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Italian Airline Goes on Charm Offensive

ALITALIA

Redesigned fleets, nicer employees are part of legacy carrier’s push for a comeback

BY MANUELA MESCO

ROME—During the past year, about 80% of SpA employees have gone through formal training at a new center here, the carrier’s first such classes in two decades. Flight attendants learn how to strike a more welcoming tone of voice and to refer to passengers as “guests.”

The change, a culture shock for an airline long known for its surly service, comes as Alitalia’s controlling shareholder, , is spending hundreds of millions of dollars to bring the carrier back to its glory days—and leaving no stone unturned.

Since it acquired effective control of a near-bankrupt Alitalia in the summer of 2014, - based Etihad expanded the Italian carrier’s routes, redesigned the interiors of its aging fleet and revamped its in-flight menu.

“Alitalia is an aviation icon,” Etihad CEO James Hogan said in an interview. “We had to once and for all re-establish this business properly.”

In the 1960s, Alitalia was Europe’s No. 3 airline, and it basked in the glamour of Italy’s postwar boom. Businessmen from Gulf countries traveling to the U.S. flew Alitalia, as did Hollywood celebrities such as Rock Hudson and Ingrid Bergman. But a decade later, the oil crisis and battles with unions took their toll, while the privatization of other state carriers such as created fierce competition for an airline that remained state-owned.

Political interference and disastrous management deepened its woes. One judicial investigation found the airline wasted hundreds of millions on consultancy fees and management bonuses. It also neglected intercontinental routes in favor of domestic ones, sometimes at the behest of politicians.

As losses mounted, Alitalia raised €3 billion ($3.4 billion) through capital increases between 1998 and 2005. It

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Women flight attendants wear new uniforms that recall the 1950s and are required to wear bright red lipstick, above. In an April 28, 1948, photograph, below, Alitalia’s first intercontinental flight traveled from Rome to Buenos Aires.

FABIO FRUSTACI/EIDON PRESS/ZUMA PRESS

ALITALIA

burned through the cash and declared bankruptcy in 2008, before being bailed out by a group of Italian businessmen. But its decline continued, with the loss of the monopoly on the lucrative Milan- Rome route and the arrival of lowcost carriers such as Ryanair Holdings PLC, today the market- share leader in Italy.

In-flight service became evermore surly. “If you asked for something, like a glass of water, they seemed annoyed,” recalls Paola Ricci, CEO of Best Tours, a high-end tour operator that sharply cut back on using Alitalia because of poor service. “It was awful.”

In 2014, Alitalia risked having to ground its fleet for lack of money to pay for fuel. Etihad scooped up a 49% stake in the carrier in 2014 for less than €400 million.

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For Etihad, the deal was the centerpiece of its broader strategy of buying stakes in eight airlines—including PLC and India’s Ltd.—to knit together a global network to feed its Abu Dhabi hub. Alitalia, Etihad’s biggest deal to date, gave the carrier an important foothold in Europe.

Turning around Alitalia could squelch questions about Etihad’s strategy of buying stakes in unprofitable airlines. Air Berlin, for instance, has continued to hemorrhage money, despite repeated financial injections from Abu Dhabi.

New management ripped out the dirty and aging interiors of Alitalia’s fleet—some lacked modern entertainment systems—and replaced them with sleek, leather seats from Milan design group Poltrona Frau. Wi-Fi and Bulgari amenity kits are available on intercontinental flights.

Newly refurbished airport lounges offer three different blends of Lavazza coffee and feature pizza ovens and on-site chefs. Sleek, new uniforms recall 1950s silhouettes. Female flight attendants are now required to wear bright red lipstick—and are tutored in makeup application.

Best Tours’ Ms. Ricci says she has returned to the airline.

Alitalia has expanded more profitable long-haul routes, in part by exploiting Etihad’s Abu Dhabi hub.

Last year, Alitalia cut its loss to €200 million from €580 million in 2014, and plans to break even by 2017. It hasn’t posted a full-year profit since 1998.

“[This is] a new Alitalia,” said Chairman Luca Cordero di Montezemolo. “It still has a long way ahead, but it has started well.”

However, much of the improvement came through slimming down the bloated airline rather than increasing revenues, which were up just 4% last year compared with 2014.

Alitalia’s load factor—or the percentage of seats filled—was 76% last year. “That is not acceptable,” said CEO Cramer Ball, the airline’s first chief executive with air-transport experience in 16 years. “We are targeting 80% or above.”

Ryanair’s load factor is around 93%.

The brush with bankruptcy helped labor relations and put an end to the frequent strikes that plagued Alitalia.

When the airline’s fate hung by a thread in summer of 2014, unions accepted a pay cut, more than 2,000 job cuts and longer shifts as part of the Etihad deal. Joint procurement with other Etihad partner airlines saved Alitalia nearly €14 million last year.

Significant challenges remain, particularly in growing revenues. Under the terms of a joint venture with and Delta, Alitalia can’t open new routes to North America without their agreement, sharply limiting its growth on a critical region. It lost part of its business to London when it sold slots in Heathrow during its cash crunch, while it has yet to cut unprofitable domestic flights. A fire last year at Fiumicino, its Rome hub, also cost it €80 million.

The recent tailwinds that have helped the whole industry— rock-bottom fuel costs and a record- breaking year for the airline industry—may not last, making further progress tough.

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Pope Francis before he boarded an Alitalia flight in 2014.

TELENEWS/EUROPEAN PRESSPHOTO AGENCY

Monday, 06/13/2016 Pag.B001 Copyright (c)2016 Dow Jones & Company, Inc. All Rights Reserved. 6/13/2016

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