Air Dolomiti Thrives as Lufthansa’s Link to Italy
The debt crisis in Italy has certainly taken its toll on a wide cross-section of the country’s economy, and Verona-based regional airline Air Dolomiti hasn’t enjoyed special immunity from the effects. What CEO Michael Kraus called a brilliant period of expansion from 2005 to 2010 has not only ended, but passenger counts have actually fallen over the past two years in the Italian air transport market. Happily for Kraus and his airline’s 550 employees, its status as a 100-percent owned subsidiary of Lufthansa has helped the airline maintain its financial viability and, indeed, its standing as one of central Europe’s most strategically important regional airlines.
The only one of five Lufthansa regionals that still operates under its own identity, Air Dolomiti connects 14 Italian cities with its hub in Munich as well as Verona with Frankfurt. Kraus called Munich an “inverse hub” in which most of the airline’s 10 Embraer E195s originate in various Italian cities each morning, running between two and six round trips daily, and returning to Italy in the evening. Consequently, more than 50 percent of its passengers carry Italian passports, one reason Lufthansa has chosen to keep the Air Dolomiti operating identity.
“So it’s better that you speak Italian on board, you have Italian food, Italian catering, Italian wine, Italian atmosphere, and the beautiful thing is that the Germans, especially the south Germans, are loving Italy,” said Kraus. “So you have the pride of the Italian people, and you have the great sympathy of the German and international customers.”
Bought by Lufthansa in its entirety in July 2003, Air Dolomiti at that time became what Kraus characterized as a feeder carrier to the major airline’s second hub in Munich, flying 21 aircraft, mostly ATR turboprops, carrying an average of 55 seats. Once low-fare competition took hold in earnest, however, Lufthansa saw little choice but to “re-fleet” Air Dolomiti with large regional jets. All of Air Dolomiti’s E195s fly with 120 seats in a two-class configuration.
“That was inevitable,” said Kraus in reference to the decision to move to an all-E195 fleet. “It was a hard decision because you typically try to grow in terms of numbers of aircraft rather than in seats per aircraft. But the whole regional environment in Europe in general and in Italy changed dramatically due to the influence of the low-cost carriers. So you had to adapt to lower prices. It was impossible to operate a 50-seater or even a 70-seater. We were very happy all the time with ATR, it’s also a nice manufacturer, the people are very cooperative, but economically it makes no sense anymore, particularly in central Europe.”
Although the E195s cannot match the unit cost of Boeing 737-800s, for example, they compete effectively on a per-flight basis in Air Dolomiti’s high-frequency operating environment, said Kraus, who noted the value of the Brazilian jets’ spacious, four-abreast seating configuration and the speed they offer over the ATRs. Kraus said the E195s allow one or two flights more per day on a typical Air Dolomiti route because they fly 20 percent faster than an ATR. However, he called the Embraers “extremely expensive” in terms of capital cost. In fact, he said, at some €180,000 to €190,000 a month, the lease rates compare with a two- or three-year-old Boeing 737.
Although the influence of low-fare carriers has spread throughout Europe, said Kraus, the farther south one looks, the more the phenomenon becomes apparent in the sense that earnings per available seat kilometer progressively fall. In Italy, low-fare carriers now control 40 percent of the market. “Ryanair is the big winner,” said Kraus. “It has been fighting for two years with Alitalia over the question of who carries more passengers to, from and within Italy—the national carrier or Ryanair. We think it will take another six months before Ryanair will surpass Alitalia.”
In the case of Air Dolimiti, flying as an independently owned carrier operating origin-and-destination routes became unsustainable, forcing the eventual transition to a wholly owned, all-feeder operation. “Air Dolomiti would not have survived if Lufthansa had not bought it,” concluded Kraus.
Today, Air Dolomiti thrives despite some uniquely European challenges such as the EU’s emissions trading scheme (ETS) and “interesting” new taxes, as Kraus put it, from various countries and even regional jurisdictions within Italy. “There’s one example, which is the noise tax in the region of Lazio in Italy, where there was a basic frame law [in which] every region could introduce its own taxes,” explained Kraus. “There have been rational people in some regions who said, OK, €15 or €20 per flight, whereas Lazio introduced €200 per flight…Those tax issues could get crazy, I would say.”