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The Likely Alitalia Bankruptcy: the Devastating Effects of Protectionism

 5 min read / 

At 4pm on Monday 24th, the referendum posed by unions to Alitalia staff were closed with a 67% victory for the no. The staff were asked to give their approval to the terms agreed by the unions with the government. The terms involved 980 employees be suspended with two years guaranteed of 80% their salary and the possibility of being reintegrated later if things got better. They also included an 8% reduction in pay for flight staff, and that rest days decrease from 120 to 108. Over 12,500 employees of Alitalia were called to vote, and the result would determine the fate of the company. If a ‘yes’ vote won a majority, they would receive financing from current investors of 2 billion to allow for a new development plan, whereas a ‘no’ would lead to an Alitialia bankruptcy.

A Typical Scene in Modern Italy

The results outline an irrational and very clear picture of the challenges that Italy is facing today. Firstly, the ‘no’ voters show their misalignment with the unions that should be their representatives. Secondly, they believe in a state intervention, allowing them to maintain their current jobs and benefits.

And it is understandable that these expectations by the workers exist when for decades the government has intervened with billions of taxpayer money to keep the company alive. And this is exactly the problem that the Alitalia situation exposes; a fragile country that several times over the years has chosen to support its dying and uncompetitive companies with the taxpayer money, instead of investing it in driving competition and growth.

Alitalia is just one of the many companies. Government funds saving companies from liquidity has created a vicious circle in trying to protect the country’s workforce. Now understandably the loss of thousands of jobs is something that the state should be sensitive to in an effort to sustain struggling families. But, is pouring money into their employers, with a terrible track record of managing it, the best government policy possible? And can it be sustainable long term?

Alitalia’s History of Failures

Alitalia is not new to failure, the county’s’ flagship airline company, born in 1946, started to suffer in the early 2000s due to the global airline crisis and in 2006 an effort was made to attract private investments. That led to bankruptcy in late 2008 after the unions could not agree to the terms of an Air France-KLM 100% acquisition deal. The newly reborn company in December 2008, after an operation with Compagnia Aerea Italiana, in the end, cost the Italian government 1.7 billion in missed equity due to a sale to Air France. With 1.2 billion in bad debt and 300 million for a guaranteed bridge loan in 2008, brought the total government intervention money from the 70s to today to be an estimated 7.4 billion euros.

With over fifteen years of struggling to compete with a changing landscape in the airline market and strong growth of low cost airlines, the company has not managed to find the best plan to reach profitability and is now losing over 10 milion euros a day to keep its operations open. And even in a country where tourism is one of the major assets, Alitalia has not managed to find its place.

Today should be the moment that the government acknowledges that there is no possibility to keep Alitalia afloat. Instead, it should use the two billion of intervention funds assumed to be necessary to revamp the company, for real policies that are focused on key areas of growth like technology and trade.

Italy Must Change Its Status Quo

Italy’s struggling economy, with unemployment at 12% and youth unemployment shy of 40%, is also suffering from bad government decisions. These decisions have focused on the short term benefits of existing workers, protected by their unions, instead of a long term efforts to promote investments by its small to medium enterprise market, the real fabric of the country in generating jobs. Unions and the government continue to protect the status quo of employees that already have jobs with long term employment contracts, and crazy expectations that an 8% reduction of salary and 12 more days of work on a total of nearly four months of rest is unacceptable. Instead they should be looking at the younger 40% of the country that is struggling to even find a part-time, low-paid opportunity, with real brave policies that are focused on newly created jobs for a generation of newly skilled workers.

With the fast paced advancement in technology and robotics, these myopic policies focused on patching up existing jobs through protectionism will fail dramatically as demand is rapidly shifting. Gentiloni’s government and ones to come, must have the courage to take drastic measures to allow for an immediate loss of jobs in exchange for a long term plan to create new ones through investment in new education, skills and a new technology revolution.

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Companies

Whatsapp Launches New Venture Aimed at Businesses

 1 min read / 

whatsapp business

Whatsapp has launched a new app targeted at businesses, called the Whatsapp Business App, which they claim will enable companies to “communicate more efficiently” with present and potential customers.

This forms part of Whatsapp’s wider strategy to branch out into the corporate world. It plans to use the app to generate new revenue by charging businesses for using the extra communication tools that will enable them to better connect with their customers.

Although the app is set for worldwide release, at present it will only be available in Indonesia, Italy, Mexico, the UK and US. It includes a feature which indicates a business is authentic with a green tick badge next to their name.

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Companies

Amex: Troubled Credit Card Company Reports $1.2bn Net Loss

 2 min read / 

Amex annual report

On Thursday, American Express, or Amex, reported a net loss of $1,197m in the fourth quarter, the first net loss the company has experienced for 26 years.

Although the company stated that revenue from interest expenses was up 10% to $8.8bn, Amex said recent reforms to the US tax code meant the company incurred extra costs, including a repatriation cost on its foreign assets as well as a devaluation of its deferred tax assets. It estimates total costs amounted to $2.6m.

For the full year, net income was $2.7bn compared with $5.4bn the company earned in 2017. However, even with the estimated $2.6m the company claims it incurred from the recent tax charge, net earnings were still $5.3bn, $100m lower compared to last year.

In New York, American Express shares (AXP) took a near 1% tumble at the beginning of trade with shares finishing the day on $99.90.  JPMorgan Chase and Goldman Sachs anticipate greater earnings for 2018.

“Overall, we believe the Tax Act will be a positive development for both the U.S. economy and American Express” said CEO and chairman Kenneth Chenault. Chenault also said he will be leaving Amex in “very strong hands” when his successor, Steve Squeri takes over next month.

American Express has suffered from an ever-reducing share in the credit card market and ended its 14-year relationship with American warehouse chain Costco who in 2016 made an agreement with the market leader, Visa.

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Companies

Tencent Extends Facebook Lead

Tencent Facebook

Tencent has shot past Facebook to become the world’s most valuable social network.

Editor’s Remarks: Although Tencent briefly overtook Facebook in terms of market cap in November, the recent selloff of Facebook shares prompted the Chinese tech titan to regain the lead. Facebook investors responded negatively to news that Mark Zuckerberg’s plans to highlight family and friend-based content on the newsfeed would reduce the amount of time people spent on the site. Shares in Facebook have fallen 5% since that announcement, enabling Tencent to gain a $19bn lead over the US company. Tencent’s growth has been spurred on by its diversification away from its flagship messaging app, WeChat, and into video games.

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