AD HOC ANNOUNCEMENT/ Disclosure according to Article 17 MAR
For Immediate Release 15 March 2017
Alitalia Board approves 2017-2021 business plan
- €1 billion cost reductions by 2019
- Revenue to increase 30 per cent by 2019
- Profitability by 2019
- Fleet reduced by 20 narrow-body aircraft
- New competitive proposition for short and medium-haul aircraft fleet
Public disclosure of information that qualifies or may have qualified as inside information within the meaning of Article 7(1) of the Market Abuse Regulation.
Rome, 15 March 2017 - Alitalia’s Board of Directors today approved the airline’s turnaround business plan which includes a range of radical and necessary measures across the whole of the company to stabilise it and secure its long-term sustainability.
The plan’s funding by the company’s shareholders is subject to Alitalia’s trade unions agreeing to a new collective works agreement and headcount-related measures.
Airline management will soon present the board-approved plan to the Italian government and then meet with trade unions to explain the details of the business plan, headcount-related measures and resume talks on a new collective labour agreement.
Alitalia said it will reduce costs by €1 billion in the first three years of the plan by 2019 with reductions in operating costs and manpower. Alitalia will increase revenues, in the same timeframe to 2019, by 30 per cent from €2.9 billion to €3.7 billion.
These financial performance indicators are judged to be realistic and achievable by independent advisors and the projected figures would turn Alitalia into a profitable business by 2019.
The business plan actions are supported by ‘four pillars of change’; a recalibrated business model, costs reductions and enhanced productivity, optimisation of network and partnership, and develop commercial initiatives by utilising technology investments to drive revenue.
Cramer Ball, Alitalia CEO, said: “With the approval today by the Board of Directors of the second phase of our business plan we can now accelerate our actions towards turning around Alitalia.
We re-built our brand in the first phase and invested heavily in staff training and technology so we are now able to move ahead and implement wide-ranging changes.
The aviation industry is ferociously competitive and never stands still. Only through radical change will Alitalia’s fortunes be turned around.
We must transform this business into a dynamic entity that is attractive to customers who have plenty of choice for their air travel needs.
Consumers’ buying habits have been shaped by how low cost carriers sell their products. I am confident that the next phase of the industrial plan will represent the step forward needed, provided that all interested parties play their part.
The radical and necessary measures across the entire airline will secure our long-term sustainability which will only materialise if the airline is the right size, the right shape and with the right productivity and cost base.
We must do this, especially in our short and medium haul business in order to provide a platform to grow our profitable long-haul business further in the future.
This is a critical aspect because most of our customers fly on our short and medium-haul planes to connect onto our long-haul services.
If we can’t compete throughout Italy and Europe against low-cost carriers then we lose air travellers that connect onto intercontinental flights. Put simply, there is absolutely no alternative.”
Details of the four pillars of Alitalia’s second phase of its business plan are:
- A recalibrated business model
Narrow body planes for the short and medium haul will see an increase in utilisation, extra seats are being fitted, buy-on-board and ancillaries services and more attractive air fares will be introduced in a concerted drive towards increasing revenue while stripping out existing costs.
Mr Ball said: “In the short and medium-haul markets – domestic flying in Italy and throughout Europe – passengers will be able to personalise their journey. We will simplify air fares and offer customers the opportunity to purchase products such as seat selection, checked-in luggage and priority boarding throughout the booking process, and all the way up to the airport gate. On flights that are four hours or less we will introduce the buy-on-board concept that is not only commonplace with low-cost carriers but is happening more and more at traditional, network airlines. We will offer our customers a choice of ‘made in Italy’ hot and cold food, snacks and drinks at competitive prices.”
Alitalia’s wide-body intercontinental flights will be based on a full-service model and maintain an intense focus on costs and efficiency. In addition to Alitalia’s A330 fleet, the carrier’s Boeing 777s will be fitted with new in-flight entertainment and Wi-Fi. Alitalia’s new flagship aircraft, a 382 seater Boeing 777-300ER, will join the long-haul fleet in August 2017
- Cost reductions and increased productivity
Low cost carriers currently represent 47 per cent of the Italian air travel market, the highest market penetration in Europe.
Talks are already underway with a number of the airline’s suppliers to renegotiate contracts and drive down costs to levels comparable with the competition. Target companies are in sectors such as aircraft leasing, global distribution, in-flight catering, airport ground handling and airports themselves.
- Network and partnership optimisation
Alitalia will rebalance its fleet of aircraft by 2018, reducing its narrow-body fleet by 20. The airline will increase aircraft utilisation with a particular focus on short and medium-haul aircraft. Alitalia plans to grow its number of flights from Italy to the Americas – one of its most underserved markets – and build its presence at Milan Linate, Sicily and Sardinia. The airline will re-evaluate its transatlantic options to try and fly more often on existing routes and to add new cities in the Americas.
- Develop new commercial initiatives by utilising technology investments to drive revenue
Alitalia has invested €200 million in the last two years on new technology and it will now use the investment to improve efficiency and productivity to drive further revenue opportunities.
Mr Ball said: “Our investment in technology will enable us to develop new sales channels and this will contribute to increasing our revenue by 30 per cent by 2019. Consumers use tablet devices and mobile phones more than ever to manage their travel experiences, and we will make it easier for them to interact with the airline. About 20 per cent of our customers already use on-line ways to book their flights and we aim to increase that figure to more than 50 per cent. Our customers will continue to notice our enhancements and realise that Alitalia has become a different airline from the past.”
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Financial details of the Business Plan
The Plan highlights that in 2016:
- 50% of the traffic served by Alitalia is point-to-point, local traffic, while the remaining 50% connects in the hub
- This is particularly relevant for the Long-Haul traffic, for which the share of connecting traffic rises to 80%
- Almost all connecting long-haul (76% out of 80%) is enabled by the short/medium haul network
- Almost 75% of all Alitalia traffic travels on the short / medium haul network, which is in direct competition against low-cost carriers.
- LCCs have better values for almost all economic and operational performance indicators than Alitalia. Regaining competitiveness against these carriers is critical for the future of Alitalia, and is the focus of the Plan
The Plan envisages, as main actions, the adoption of A) a cost improvement program focused on the short/medium haul network, B) the disciplined increase of long haul traffic and C) the improvement of productivity through the implementation of a 4-banks network structure in Summer 2018.
A - Cost improvement program
The main levers for cost repositioning will be:
- A review of the marketing and product strategy, adopting many features typical of LCCs and other European carriers (simplified fare structure, focus on direct distribution, buy-on board etc.), aimed towards increasing value and choice for the passenger and eliminating unnecessary costs for the airline
- A deep-reaching cost improvement program, aimed towards the achievement of a sustainable competitive cost base. This program will touch practically all cost elements of the airline, from the leasing contracts for the planes, to MRO and other external suppliers, as well as the internal structure costs of Alitalia
B - Long haul traffic
Alitalia remains committed to the development of its long haul network, building on
- A disciplined deployment of long-haul capacity, with the specific intent to better serve and regain market share on the Italian market
- A cost-efficient feed and de-feed of short/medium-haul network, recognized as qualifying factor to be competitive in the long-haul sector
C - 4 banks structure
The Plan also includes the implementation of a new 4-banks network structure in Fiumicino, which will enable the airline to achieve:
- an improved fleet utlization, with fewer aircraft needed to serve the same network and more productive deployment of the crews
- fewer overnights out of the base for both aircraft and crews, improving efficiency and flexibility
The 4-banks structure builds on an extension of operating times in the FCO hub, and a smoothening of the operations profile during the day
Key financial figures
The implementation of the above mentioned strategy will result in an ongoing improvement of the revenues over the next 3 years (€m 3.061, €m 3.381 and €m 3.776 in 2017, 2018 and 2019 - €m 2.902 estimated in 2016), of the EBITDAR margin (2.3%, 10.3% and 13.0% in 2017, 2018 and 2019, from a -1.7% estimated in 2016), and a positive EBIT (-12.1%, -2.0% and 1.6% in 2017, 2018 and 2019, from a -18.3% in 2016).
These revenue improvements will be achieved through a steady increase of the Load Factor (rising from 78.7% in 2016 to 84.4% in 2019), offsetting an expected decrease in yield over the Plan period (-1% CAGR between 2017 and 2019), and a renewed focus on ancillary revenues, which are expected to reach approximately €14.6/passenger in 2019.
The cost improvement program (covering both operating costs and manpower) will result in a bottom line effect of approximately €218 million in 2017, €388 million in 2018 and €428 million in 2019, respectively, bringing the CASK to €6.62 cts.
- MRO is expected to witness a cost reduction from contract renegotiation and efficiencies of approx. €32 million in 2017, €39 million in 2018 and €41 million in 2019
- Ground handling will benefit from a volume reduction, following the implementation of the new service concept for the short and medium haul, and from the renegotiation of the existing contracts, for total savings of approx. €10 million in 2017, €44 million in 2018 and €46 in 2019
- The renegotiation of lease agreements is expected to bring an additional €56 million in 2017, €63 million in 2018 and €68 million in 2019.
Most of the effects from contract renegotiation are expected to materialize in the second/third quarter of 2017, with many actions being implemented retroactively from the beginning of the calendar year.
The implementation of the 4-banks network is expected to be complete and to start to generate operational savings as early as Summer 2018.
Part of the cost improvement program will be set off by one-off costs associated with its implementation, for approximately €102 million in 2017.
Risks in timing changes
The cost improvement program is subject to a range of execution risks:
- Stakeholders may take longer than planned in agreeing to the restructuring plan
- Negotiations with Union representatives for implementation of staff measures may take longer than planned;
- Strikes may lead to interruption of daily business with consequent impact on costs and present / future bookings;
- Execution delays may lead to an overall postponement of the implementation due to business needs (if affecting the summer season);
Alitalia estimates an EBIT impact of approximately €50 million for each quarter delay in the implementation of the cost improvement program
Required support from all stakeholders
For the successful implementation of the Plan the Company requires the financial support of the shareholders. Such support is conditional to agreement with workforce and Unions on the terms and conditions of a new Collective Labour Agreement. Alitalia is also seeking the support of the Italian government in the definition of social measures to reduce the impact on the employees of the cost improvement program.
Alitalia – Società Aerea Italiana S.p.A.
Via A. Nasetti
Pal. Alfa S.N.C.
00054 Fiumicino (Rome)
ISINs: XS1263964576 (Irish Stock Exchange), IT0005137002 (Vienna Stock Exchange), IT0005158099 (Vienna Stock Exchange)
Stock Exchanges: Irish Stock Exchange, Regulated Market, and Vienna Stock Exchange, Third Market
To the kind attention of Mr. Matteo Mancinelli
Phone number: +39 06 6563 5125
Email address: Matteo.Mancinelli@alitalia.com