Under siege by Italian regs, Gandalf digs in at Bergamo

 - May 21, 2008, 8:02 AM

An unknown municipium in the Roman days, the city of Bergamo, Italy, was sacked and set on fire in the early Middle Ages. In the 12th century the town became a free city and blossomed to a network of umber stone buildings, alleys and tidy squares of the Upper Bergamo. Along the traficanti (trader’s road) traced five centuries ago on the eastern slopes of the Seriana Valley is strung a series of fortified “halting places” (streets with arcades), designed to shelter stage coaches.

Today, the Orio al Serio Airport at Bergamo is marketing a new type of shelter, this one for the modern stage coach. Regional airline Gandalf is based at Bergamo, which in some ways is not as free a city as it was at its Medieval height. The Italian ministry of transport has placed Gandalf under a regulatory siege that rivals the onslaught of the fiercest stone catapult.

“We established an airline two years ago under a decree that mandated Linate be closed,” lamented network planning manager Fabio Marco Moltani. “We want to invest in Orio al Serio, but we are now at a disadvantage to Linate, which is growing into a hub.” Gandalf dug in at Bergamo following the ministry’s announced plan to phase out Linate, and is now resigned to competing with the airport at which it would have preferred to base.

Ministry decrees in 1997 to 1999 mandated Linate to be phased out, limiting it to accommodate a Rome shuttle service. Consequently, Gandalf launched in Bergamo, its second choice some 22 mi to the northeast, assuming the decrees would establish a predictable environment for Milan’s airports. Yet in a new decree that became effective April 19 last year, the land rush returned to Linate.

“We passed from the Linate shuttle decree to the point where today you can fly to any European hub,” said Moltani. The decree allowed one flight per day to destinations with an annual throughput of 350,000 passengers as measured in 1999 volume, with increasing numbers of daily flights allowed in staggered increments for each segment: two daily flights for 350,000 to 700,000 passengers; three for 700,000 to 1.4 million passengers; and more for routes yielding 1.4 million to 2.8 million enplanements and as many as needed for routes fielding greater than 2.8 million.

Some of the most popular city pairs, such as Milan to Munich, were locked out because in 1999 they accommodated only 220,000 passengers. Today, with European hubs fair game for at least one daily flight, Lufthansa has pounced on the Linate to Berlin route and majors are scrambling to feed from the popular field to Paris, Frankfurt and London.

Nonetheless, the Linate infrastructure is aging while ministry initiatives favor Malpensa, 28 mi to the west. “Malpensa is in the middle of nowhere but the political pressure is to invest there only for the facilities, and the ground and rail support,” said Moltani. “Orio al Serio Airport is trying to make it as a regional hub but Linate is the favorite of customers because it is so close to the city.” He argued that the backbone origin and destination market will evolve to Orio al Serio. “You can’t have a real point-to-point system from Linate.”

Yet Gandalf has reluctantly drained energy from its Bergamo hub to install staff at Linate and initiate two weekday flights per day to Paris Charles de Gaulle. “If everyone else is flying from Linate, you need to be there,” said Gandalf’s ground postholder, Gino Mancuso. Gandalf still dominates service from Orio al Serio along with its new strategic partner Air France, its sole code-share alliance as of February, capturing 60 percent of market share in the Milan and Lombardy region as far as Verona.

Former code-share partner Swissair initiated a break with Gandalf as its own troubles worsened and Gandalf bled cash, partly from the mixed airport investment strategy. Moltani calls the ultimate split a mutual decision, required to release Gandalf assets for the Air France alliance. The new code-share is predicted to raise Gandalf’s 2000 total of 35,000 passengers between Orio al Serio and Paris to 300,000 this year. By summer peak, Gandalf expected to operate more than 500 flights per week feeding partner Air France.

Despite splitting its energy between Orio al Serio and Linate, Gandalf grew its sales 300 percent in its first two years and its passenger base rose 350 percent. Chairman Luciano di Fazio said the alliance will mark the beginning of a turnaround, but will nonetheless leave Gandalf with a loss this year. Air France code-sharing began on March 25, but “results will not manifest themselves in full this year.”

Financial Hurdles

Gandalf has been operating in the red since its startup in June 1999, when it launched two Fairchild turboprops on routes to Munich and Stuttgart. The regional racked up $4.3 million in losses its first year, and $3.7 million more through July last year, when it doubled its capital base with a 100-percent capital share floated on the Italian stock exchange, Nuovo Mercato.

Fazio used the cash to invest in the new Air France routes and order two additional Fairchild Dornier 328JETs, which by year-end will bring the fleet total to nine 328JETs and four 328 turboprops. The acquisition makes Gandalf the second-largest regional in Italy following Air Dolomiti, but it widened last year’s losses to $12.6 million.

That means Gandalf is poised for strong returns if growth continues, but not this year. In an unusual accounting move, Gandalf did not capitalize its startup investments for the new Air France code share, but instead expensed them to current-year revenue, virtually guaranteeing an additional deep loss this year.

If traffic develops as forecast, though, the expensed items may poise the regional for rapid and fat returns. Senior management must break even next year and they are banking on that tidal accounting gain, participating in a stock option plan launched year-end 1999 exercisable in 36 months if growth targets are met. Enplaning 194,626 passengers last year on 15,903 flights to 16 destinations, Gandalf’s goal this year is 260,000 passengers with an equivalent rise next year.

But despite building new routes and adding equipment, passengers may not come. So last quarter Gandalf hedged its risk, opening a retail shop at Orio al Serio Airport via its subsidiary Gandalf Store & Services (GSS) under its new Even G7 holding company. In addition to merchandise sales, including its cuddly Gandalf bears, GSS provides ground-handling services at Bergamo and under contract to Air France at Linate. Its GSS Travel Office also is targeting corporate executive needs, offering expense tracking in addition to turnkey travel arrangements.

Chairman Fazio has urged shareholder patience, citing the pending boom in traffic from the code share, the new business lines and efficiencies from consolidation after the missteps with Swissair. Gandalf is using its Even G7 group to invest in an expected Italian rebound in general aviation, with its charter calling for shares in airport management and airport service companies of strategic importance to Gandalf’s expansion.

The company hopes its name branding and independent stance on investment helps it keep an arm’s length from Air France, despite the meld of routes and ad campaigns including cooperation in the Air France tag line, “Fly-Style.” “We are still independent, we are not just a franchisee,” said Moltani. “But we keep in mind that Air France is the big one and we mind its needs.” Gandalf hopes to become a big player both as an airline and as a local employer, recently swelling to 260 staff members.

In February Gandalf was certified to JAR OPS 145 in maintenance, but it is still considering some outsourcing. In staffing its priority is passenger handling. “Growth is huge in Europe, so specialized people are hard to find, such as in maintenance,” said Mancuso. “We are mainly filling jobs like cabin attendants since they are easier to fill. We have undertaken a six-week summer program with the local trade schools to lead to possible hires in technical areas.”

Mancuso called the 328JET “not such a common aircraft. It is more difficult to find flight crews, but our hiring budget has not been a problem until now.” He declined to give a more precise account, saying only that Gandalf pays at “the top end of the market,” relative to an Italian rule for civil aviation employees.

Gandalf’s plans depend on increased loads, as well as squeezing every efficiency from the Fairchild Dornier aircraft. Now with seven 328JETs and four turboprops, and ordering two more 328JETs, training, maintenance, catering and servicing procedures are common on all routes. “We are looking at equipment in the 50- to 100-seat range for Paris or London routes,” said Moltani, but Gandalf is not predicting any near-term purchases.

Mancuso said Gandalf can turn the 328JET in 20 min via its aft service door for catering, and refresh by using its auxiliary power unit, while the 32 passengers load quickly. He cites customer satisfaction with the wide aisles (18 in.),  6-ft, 2-in. center aisle height and 31-in. seat pitch. “It flies like an executive jet,” added Moltani. “Quite an impressive experience.” Its range of 920 nm with 32 passengers (FL 310, ISA and JAA reserves) perfectly matches Gandalf’s route structure of an average stage between 60 and 90 min.

Passenger load is another matter, though Moltani cited the 328JET’s efficiency and the relatively low loads necessary to run in the black. Load factor fleet-wide is 42 percent but is predicted to mirror most comparable European numbers next year, according to Moltani. “It’s just a matter of telling customers that our service is here,” he said.

The route from Parma, Italy, to Barcelona, Spain, is profitable at any point past 45-percent load factors, and the route regularly achieves just under 50 percent. The route to Stuttgart makes money at 31-percent load factors and is also performing up to par. Core routes in support of Air France are solid, but domestic Italian city pairs are a challenge, requiring a 70-percent load for a return. Though Parma to Rome is also well established, running a 75-percent load factor even before Gandalf’s code share with Air France on the route.

Moltani is less confident about a possible return to London City Airport (LCY), a route Gandalf abandoned because it couldn’t make a profit using turboprops. He expects LCY’s steep approach to be open to the 328JET within six months, but nonetheless, given the new competition from Linate, Gandalf is unlikely to reinitiate the route. “Passengers like flying into Heathrow and commuting from there, because the total connection time is shorter using the combination of a jet flight and ground transportation than taking a turboprop into LCY. Now it’s more convenient to fly from Linate to Heathrow on a Boeing 757, maybe in one hour 50 minutes, than from Orio al Serio to LCY on a turboprop taking at least a half-hour longer.”

Both Mancuso and Moltani figure the chief advantage of Orio al Serio, despite its distance from Milan’s center, is the total connection time from passenger origin through loading. Mancuso, who lives near the Swiss border northwest of Milan, commutes past the logjam to Malpensa each morning. “The roads to Bergamo from eastern Lombardy are about 25 minutes closer than Malpensa. The walk from parking to the check-in is five minutes and that check-in averages 15 minutes versus 50 at Malpensa. The gate is a few hundred meters from there.” He pointed to Lombardy’s resident base of some five million and predicts their migration to Gandalf.

Gandalf takes pride in its rapid expansion, regardless of whether it has yet produced a profit. “There are no other European airlines I see that went from two aircraft to 13 in this short a time,” said Mancuso, speaking in terms of a local company making the big leagues despite bullying from its own ministry of transport.

Gandalf is one of the few Milan-based aviation companies to directly poll its end customers about service, issuing a satisfaction survey printed in Italian and English covering more than 20 categories of operation. In September last year the company won the customer satisfaction award given by Arthur Andersen and the Sole 24 Ore.