Unlike in some regions of the world, airlines based within the European Union are banned from receiving government subsidies and other state aid. In fact, in 2015, Cyprus Airlines was forced to shut down when the EU ruled the airline would have to pay back €65 million in what the European Commission determined were illegal state subsidies for the largely government-owned carrier.
There is, though, one big exception for this ban on subsidies and they are known as Public Service Obligations or PSO’s for short. A PSO applies to air routes that “are vital for the economic development of the region they serve” but that airlines aren’t necessarily interested in serving because, commercially, the route just wouldn’t make any money.
In that case, European government’s are allowed to pay compensation to airlines that win a tender to operate a PSO route. There are a fair few PSO routes dotted throughout Europe including between Sardinia and Milan and Rome.
For many years, Air Italy – or as it was known Meridiana – has operated the PSO routes from Sardinia to mainland Italy on behalf of the federal Italian government and Sardinian regional government. That arrangement made sense considering that Meridiana was a long established airline based in Sardinia with hundreds of employees who lived and worked on the island.
Meridiana knew Sardinia and was closely linked with Sardinia – call it nepotism but it did make sense that a locally-owned business with a vested interest in the success of the island would be awarded these subsidies.
That all changed earlier this year – Under EU-rules, PSO routes have to be put out to tender and this year the tender for the Sardinian routes from Olbia to Rome and from Olbia to Linate were awarded to Alitalia instead of Air Italy. The decision follows Air Italy’s rebranding and move to open up a major hub in Milan.
Could the Italian government be trying to put pressure on Air Italy? And could this be linked to the fact that Qatar Airways has a 49% stake in Air Italy or that Akbar Al Baker has hinted that he wants Air Italy to be the country’s number one airline?
There’s been quite a few developments since the government initially awarded the tender to Alitalia including one potential deal that would have seen Alitalia and Air Italy share the PSO routes. At one point, Air Italy even said it would operate the routes without compensation – saying they were willing to accept a “significant financial loss” in order to keep on serving Sardinia and secure the livelihoods of some 500 Air Italy employees based on the island.
After all the negotiations though, the authorities have decided that Alitalia will operate all the routes.
“We are disillusioned and extremely disappointed with how this situation has been handled by the Regione Sardinia and the Government,” Air Italy said in a statement.
“As it stands, this is the end of the road for us, and we are now forced to cancel the two Olbia routes. There is nothing more that we can do at this time. We have been holding aircraft waiting for a resolution, but unfortunately now those aircraft are being released and all related agreements will be cancelled.”
Air Italy says the fate of its staff in Sardinia now hangs in the balance and is calling on the Sardinian regional government to find a “suitable solution”. The airline also says it might seek compensation and is considering making a formal complaint to the European Union.
This is just the latest in a series of headaches facing Air Italy since it launched its new strategy under the stewardship of ex-Qatar Airways executive Rossen Dimitrov.
- Routes to Mumbai, Dehli and Bangkok have already been cancelled.
- The airline closed reservations for its new route to Chicago before it even started operating.
- It has been forced to ground its three Boeing 737 MAX aircraft.
- Air Italy was due to receive Boeing 787 Dreamliners but will now be given second-hand Airbus A330’s from Qatar Airways.
- There is a potential investigation by the U.S. government in the works over Air Italy’s ownership
- The airline had to clarify that certain routes were only ever meant to be seasonal
This decision could be all about Air Italy or it could be all about Alitalia – after all, Alitalia is in special administration after going into insolvency in 2017. Alitalia is being kept afloat by the Italian taxpayer as the authorities (very slowly) look for a buyer for the airline. The deadline keeps getting pushed back and so far no potential investor wants to touch Alitalia on the terms being laid down by the nationalist government.
The awarding of PSO contracts to Alitalia could simply be a way of funnelling more money into the loss-making airline rather than a political statement on Air Italy. Or it could be a combination of the two. Whether Air Italy decides to exit Sardinia altogether now remians to be seen but it’s certainly a headache that the airline sure didn’t need right now.