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Ailing Airline Auctions

http://www.bbc.com/news/business-41636582

In Europe’s airline industry, the competition is fierce. With rising fuel prices and terror attacks in popular tourist destinations, airlines are struggling to keep up. Now as the Italian airline company Alitalia continues to struggle, it has received numerous offers for parts of the company. As of Monday, Alitalia announced that it had received seven offers and is now assessing these options. Larger companies such as Lufthansa want to create a new Alitalia to try and rebuild the company. As Alitalia loses millions per day, other airlines have called for them to cut costs before they invest in the company. As a result, Alitalia has been laying off staff, cutting wages and reducing the number of planes.¬†Other budget airlines such as an Irish budget airline, Ryanair had expressed interest before but are now dropping out. Now with diminishing interest and the government refusing to bail out Alitalia, administrators must decide whether or not they can save the company.

As Alitalia assesses these options, each of these companies bids are almost like a first price auction. Each company is bidding for Alitalia but they do not know what other companies are offering. So in this case, each company may want to bid slightly less than their true value. In this way, they can get be the highest bid and still pay less than their own true value. When Lufthansa bids for planes, air runways and air crew, Alitalia must also assess whether they value their assets more than what they are being offered. Even if this is the case, from the other airlines point of view, this auction is still a first price auction since Alitalia’s own evaluation can be seen as just another bid. In this case, multiple parts of the company are being auctioned so the auction may vary from what was discussed in class. Now multiple companies are all trying to buy bits and pieces of the company and are each placing their own valuations. As Alitalia continues to struggle, and other budget airlines such as Monach and Air Berlin have failed in recent weeks, Alitalia may need to decide quickly on who is going to win the auction.

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