With Alitalia announcing another restructuring Tom Bacon considers the demands of dynamic and competitive marketplace
To begin 2017 Alitalia announced another restructuring with a revamped network, new labour initiatives. Critics dismiss this as more of the same. But continuous ‘restructuring’ is not unusual for airlines in highly competitive environments – and often only such persistence can ultimately be successful.
Frontier Airlines in the US, for example, has had many such restructurings and is now among the country’s most profitable airlines. Rather than call each of the restructurings failures, I would argue that the industry marketplace is so dynamic and competition so fluid, that ‘the answer’ wasn’t so obvious, nor even practical, until more recently. And although Frontier is successful today, its performance still isn’t guaranteed – they must be open to yet another ‘restructuring’ when the marketplace demands it.
Frontier Airlines, a regional airline focused on Denver operations, pursued a major restructuring in 2006. The new plan included ordering new regional jets, to be operated by one of the largest regional operators, Republic Airlines; and adding new Mexico/Latin America flying from across the US, thus capitalising on Frontier’s strength in leisure markets.
This plan was abruptly terminated in less than two years when fuel prices skyrocketed and its credit card processor abruptly raised its reserve requirement. It opted for Chapter 11 bankruptcy protection and a new restructuring. The new restructuring included hunkering down in Denver and replacing the RJ deal with a lower cost Q400 operation, operated by its own regional subsidiary.
The new restructuring, however, was viewed to some extent as a short-term plan given Southwest Airline’s rapid growth at Denver. Denver, as a single hub operation, was not considered viable longer term. And so, once Frontier emerged from bankruptcy in 2009 it was immediately merged by the new owner into Midwest Airlines (another smaller airline that faced similar single-hub prospects in Milwaukee - MKE). The Q400 operation was closed down and regional jets, to be operated at both DEN and MKE, were resurrected.
The two-hub strategy was abandoned quickly. A new, more radical strategy was required for survival versus a newly merged United/Continental and a continually growing Southwest. The MKE hub was closed and a form of the Ultra Low Cost Carrier (ULCC) strategy was slowly put in place over the course of the next few years. This new positioning, including a much smaller presence at Denver, fewer connecting flights, heavy reliance on ancillary fees and no regional aircraft operations, made the airline less vulnerable to both United and Southwest and repositioned it into the growing ULCC segment in the industry. As such, it became attractive to the premier ULCC investor, Indigo, which purchased Frontier in 2013.
The ULCC strategy today has made Frontier into a highly profitable, growing carrier. The strategy largely abandons some of its biggest strengths of ten years ago – a low cost hub, ‘friendlier’ service than its principle competitor, United, and a loyal customer base in Denver. But now its costs as a point-to-point flying ULCC are far lower and its margins far higher.
Alitalia faces some of the same market and competitive dynamics as Frontier has, including fast-growing low cost competition in key markets. In addition, as Etihad, its major investor, has pointed out, it continues to face resistance to change from both labor and governmental entities. It has obviously not yet arrived on the successful, sustainable business model it seeks. Thus, the continued change is both necessary and constructive to ultimately finding that solution. Potentially, as in the case of Frontier, through ‘continuous’ restructuring, they can find a more dramatic solution that is both successful and sustainable.
Tom Bacon has been in the business for 25 years as an airline veteran and now industry consultant in revenue optimisation. He leads audit teams for airline commercial activities including revenue management, scheduling and fleet planning. Email Tom or visit his website