Nova workboard

a blog from young economists at Nova SBE


WHY ITALIAN TAX PAYERS SHOULD NOT LIKE ALITALIA

At the end of 2007 Alitalia, Italian flag carrier airline, with 49.9% of share State-owned, was close to bankruptcy (in 2001 the company already received a restructuring aid and in 2004 a rescue aid). It had around 2.9 billion of euro debts summing up debt towards supplier with liabilities and only 700-800 million euro assets. I say around 2.9 million because no official number was made public. In compliance with “legge Marzano” (law n. 39/2004), the company was put under special administration; Augusto Fantozzi was responsible to find an investor to save the company from bankrupting. This law is especially applicable for “big companies” failing: with more than 500 employees and 300 million of euro debt. At the time, Romano Prodi’s Government approved a loan of 300 million euro in order to guarantee the continuity of the service. Consequently, Ryanair asked European Commission to intervene considering this bridging loan a State Aid and the European investigation division started working on the case.  

In Italy, was time for elections and Silvio Berlusconi electoral campaign explicitly referred to Alitalia situation, claiming the necessity to defend the “italianità” of the firm, wishing therefore, an Italian investor. Air France-KLM’s offer of paying 300 million euro and assume all the debt obligations was not really taken into consideration. After the formation of Berlusconi’s government the law n.39/2004 was modified: the possibility of limiting competition for three years in some markets – suspending the authority of the Antitrust – and of slicing the original company and attributing parts a proportion of the workers. From a broaden point of view, this provision:

1)      Assumes by law the presence of public interest when relevant national firms are involved, condition for which competition policy can be put apart (as in art 107(2) of TFEU).    

2)      Leaves space to “legal” State aids trough the separation of a failing company in different parts. In fact the worst parts could stay public while the debt-free ones could be sold to private agents. This way the State is somehow buying the liabilities of a bad company. The procedure has been declared legal by the European Commission, since the assets have been sold on market terms[1].

In 2008 a group of Italian entrepreneurs stepped in for buying the good part of the old Alitalia, conditional to the increase of social capital for 1 billion euro and the permanence in the company board for at least 5 years. AirFrance-KLM became partners of the new good company and a monopoly was created in the Milan-Rome route (only Alitalia could serve the route up to 2013).

What is the moral of the story? Competition failed. The 300 million loan was considered a State Aid by the EC in November 2008[2], and the fine was paid by Italian taxpayers. A welfare loss incurred due to the establishment of a legal monopoly on the Milano-Rome connection and the dismissal of 7.000 workers (more than how many French plan was including). The only one maybe benefitting are the Italian “heroes” who rescued (?) the airline in 2008, but it is not for sure either. In fact the privatized Alitalia still has financial troubles… problems were just postponed and the story is not finished yet!

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