Meridiana Fly Considering Merger

Meridiana Fly, the airline born from the merger of Meridiana and Eurofly one year ago, is becoming the potential prey of either Alitalia or Lufthansa.

Meridiana, which is listed at the Milan stock exchange, has formally denied that any decision has been taken, but has confirmed that discussions are ongoing. The strategy is consistent with the course CEO Massimo Chieli, who has been steering the privately owned airline since May 2010, has been on while discussing commercial or strategic alliances or integration with other groups. This is also in line with the current consolidation trend of medium-sized airlines.

The Chieli approach has brought some improvement; results at the end of September showed not a revenue jump to almost €500 million ($674.9 million) in the first nine months of the year, with 3.7 million passengers carried. The final financial result was still in the red by €16 million and both the EBIT and the EBITDA remained negative.

The company during this time spun off its maintenance division, creating Meridiana Maintenance, and Chieli last month announced further reductions are coming to employee numbers, perhaps as many has 910 cuts to its 2,032 workforce.

The airline also is looking to outsource any activities not deemed as part of its core business, and may also see a fleet rationalization. Meridiana Fly has a fleet of 35 aircraft, including 17 Boeing MD-82s, 2 ATR-72s, 4 Airbus A319s, 9 A320s and 3 A330s. All the aircraft are leased, except for 10 MD-82s.

Chieli wants to reduce the MD-80 fleet during the year because these aircraft have fairly high operating costs, eventually eliminating them from the fleet. It also is possible the airline will standardize its Airbus types or introduce a more efficient regional jet, but those decisions are unlikely to be taken at this time.

Meridiana Fly also has an unusual business model, operating scheduled flights in Italy and nearby European countries, plus some long-range routes and charters.

And while the new Meridiana Fly is improving its performance and holds valuable slots in Milan, it is still carrying almost €200 million worth of debt.

The airline has a 16% share of the Italian domestic traffic, and would be a great asset for Lufthansa, which has already a strong foothold in Italy with the fully owned Air Dolomiti and Lufthansa Italia. The latter so far has brought mixed results. This is one of the reasons why Lufthansa has replaced its Italian boss, Heike Birlenbach, with Air Dolomiti CEO Michael Kraus.

A merger with Lufthansa would create a real competitive threat to Alitalia, which is controlling no more than 50% of the domestic market, contrary to what is the case for Lufthansa or Air France/KLM in their own domestic markets.

Alitalia in the past has attempted to acquire Meridiana, the first time in 2003 and again in 2008. But because Meridiana Fly is traded and controlled by the Aga Khan through Meridiana Company, which owns 79%, such a deal would be complex—the Aga Khan in order to sell the control would need to de-list Meridiana Fly after first acquiring its traded shares.