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Cost Cutting Alitalia Style (Int'l. Edition)


Business Week International International Business: ITALY

COST-CUTTING ALITALIA STYLE (int'l. edition)

Passengers boarding Alitalia flight 614 from Boston to Rome may be in for a little culture shock. The crew on board Alitalia's shiny, new Boeing 767 will probably greet travelers with a "G'day" rather than a "Buon giorno." That's because nearly the entire crew, like the plane, is Australian, not Italian. Since Feb. 1, both are on lease from Australia's Ansett Worldwide Aviation Services, the Down Under aircraft-leasing operation controlled by media magnate Rupert Murdoch.

The Ansett deal--the first of its kind by a major European airline--is one phase of Alitalia's turnaround effort. But it is enraging Alitalia's 1,800 pilots, who see the lease as a sneaky ploy to circumvent costly union contracts. "Management has declared war on pilots, on technicians, on flight personnel," says Captain Marzio Tiezzi, an Alitalia pilot and official of the ANPAC pilots' union.

BLUSTER. The unions are fighting back. Tiezzi and other union members tried to occupy the Alitalia flight to Boston on Feb. 1, delaying departure by several hours. ANPAC has also called for 72 hours of strike action. That would be a further blow to the airline, which lost an estimated $172 million last year.

The union bluster, for now, doesn't faze Alitalia's no-nonsense chief executive, Roberto Schisano. "We're doing this with Ansett to demonstrate that we can and we must operate at lower costs," says Schisano, who managed Texas Instruments Inc. in Europe before joining the Italian flag carrier early last year. The logic is compelling: Operating costs on the two leased Ansett planes are as much as 35% less than on Alitalia's own 114-plane fleet.

Schisano's battle is part of a much larger confrontation spreading through the Old World. As regulatory barriers come down, the managers of long-protected industries are all moving to end the cosseted work conditions enjoyed by the Continent's highly paid labor elite. The pressure is especially intense among Europe's flag-carrier airlines, which face a U.S.-style deregulation in 1997. "Pilots have much to lose," says Bertrand d'Yvoire of Paris-based consultants Consultair. "Either they will lose a lot of wages and perks--or they will lose their jobs."

Alitalia's problem is not so much high wages as low productivity. Although the pretax income of around $100,000 earned by Alitalia pilots is not too far off the Continental norm, they work less than pilots in many other countries (chart). Ansett's two-man cockpit crew flies to Boston or Chicago and returns to Italy the next day. On an Alitalia 747, though, the cockpit crew flying the North Atlantic is five strong--and these pilots and navigators enjoy a costly two-day stopover in the U.S.

MUST-WIN. Alitalia pilots are willing to work up to four hours more a week, but they want a $14,000 raise in compensation. Sorry, says Schisano: "We're just not in a position to grant anybody a salary increase." Schisano also points out that his predecessor swapped handsome pay boosts for better productivity, only to see the deal backfire. According to Alitalia's management, pilot salaries have soared by 96%, but productivity has risen only 25% since 1989.

For the Alitalia chief, it's a must-win showdown. He needs a cost-cutting deal so he can tap the markets this year for a capital increase of $940 million, most of which would come from Alitalia's main shareholder, the Italian government. Schisano is hoping that Rome won't follow the usual script, pressuring Alitalia to cave in to union demands.

There is a growing sense among Italian politicians that something must change. The Treasury, now all but empty, cannot afford a union payoff. And new Prime Minister Lamberto Dini doesn't need to win elections soon. Thanks to cost-cutting, Schisano can also argue that he reduced Alitalia's losses last year by 25% and needs concessions to finish the turnaround.

Although the Italian pilots' union is talking tough, many in government quietly expect it to come to an agreement on more flexible work rules. And elsewhere in Europe, unions see the writing on the wall. "We've seen what happened in the U.S. after deregulation," says Benno Baksteen, the head of VNV, the Dutch pilots' union. "Cutbacks are inevitable, since we're way out of bounds in Europe on costs."

With full deregulation just 26 months away, any low-cost carrier can set up in Italy or France to begin taking traffic away from flag carriers, Alitalia included. So accepting a handful of Aussie pilots and crews now may be better than not having a job at all.By John Rossant in Rome


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