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Travel

The effects of Alitalia's woes

By Nick Easen for CNN

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Appealing to the EU consumer in an era dominated by low-cost carriers is the main question for Alitalia.
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(CNN) -- With Italy's state-owned airline Alitalia struggling to survive, the question on business travelers minds is how it will affect them.

Consolidation in Europe has already changed flying patterns with the merger of Air France and KLM. Earlier this year there were talks of Alitalia joining as well.

And on the back of Alitalia's woes, no-frills airline Ryanair says it will fly five new international routes from Rome early next year.

The shake up in Europe's skies is primarily due to the rise of the low-cost carrier.

"If Alitalia were to fold, people will shift quickly to other players," one London-based travel agent told CNN.

"There will always be someone else who will be able to offer those routes."

Fliers do not have to worry about their air miles if Alitalia no longer exists.

These could be redeemed on other SkyTeam alliance carriers -- including Air France, Delta Airlines, Korean Air, AeroMexico and Czech Airlines.

"You are not going to get people beating the door to the Italians to buy into (Alitalia), on the basis that the airline is basically bankrupt," says Chris Partridge, airline analyst at Deutsche Bank.

"In its current guise (Alitalia does) not really have a viable future. So, nobody is going to be pumping dollars in there."

Cutting ticket prices, costs and staff is the new blueprint for survival in Europe's competitive market place. It has happened elsewhere, now Alitalia is telling its unions that it also has to happen in Italy.

"We have worked very hard on efficiency and productivity (so) we can put lower fares in the market place, give customers better value for money and make money," says Martin George, commercial director at British Airways.

"We believe fundamentally that the market should consolidate. The strong should get stronger and the weak should go to the wall, and the market should determine that."

In the past three years, the fabric of Europe's airline business has changed rapidly. And is set to change again with higher fuel prices.

Ireland's Aer Lingus nearly went under after the September 11, 2001 attacks in the United States, it then reinvented itself into a low cost carrier. Belgium carrier Sabena and Swissair both failed and were reborn as new airlines.

Many European airlines still have substantial scope to reduce costs. A number of these plans have the potential to affect the business traveler.

A significant number of airlines have been reducing direct sales costs by increasing their use of the Internet for ticket purchases and lowering travel agency commissions.

Realigning routes and collaborating with other airlines to avoid duplication is another plan -- this was part of the Air France-KLM merger. There is also an opportunity to reduce costs by collaborating with other airlines for maintenance and repairs.

For Alitalia, reforms have yet to be put in place. Already weak overseas, it has been hammered at home, and its once-dominant domestic market share has fallen to 45 percent.

"They have to change or die," says Deutsche Bank's Partridge. "If that means getting rid of significant numbers of employees and reshaping (their) business to fit the new environment, that is what (they) have to do."

The European Commission has approved a $500 million loan from the Italian government, but Alitalia says it is only enough cash to run until February next year.

Alitalia says it will not touch the loan until unions agree to job cuts. Alitalia lost $600 million last year; its collapse would put an end to 30,000 jobs.

Restructuring plans could involve splitting the carrier into two parts -- AZ Fly for the air travel business and AZ Service for support operations.

Either way, the Commission wants Italy's 62-percent stake in the airline to fall below 50 percent within a year.


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