SAVING MALPENSA - THE AIRPORT AFTER ALITALIA

UNCLAS SECTION 01 OF 03 MILAN 000273

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EUR/WE, EB/TRA/OTP, EB/TRA/AN, EB/TRA DAS BYERLY

E.O. 12958: N/A
TAGS: EAIR ECON ELAB ETRD IT KPRV
SUBJECT: SAVING MALPENSA - THE AIRPORT AFTER ALITALIA

REF: 06 ROME 3330

MILAN 00000273 001.4 OF 003


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Summary
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1. (SBU) Alitalia's cost-cutting rescue plan includes deep
cuts in service to and from Milan's Malpensa airport,
primarily decreasing intercontinental flights. The
Lombardy Region (home to Malpensa airport) fears these cuts
will change Malpensa from a European hub to regional
airport, dooming area businessmen to an extra connection
through London, Paris or Frankfurt for long haul flights.
Despite pleas from the Regional President, Alitalia will go
ahead with the cuts. The Region is looking past
substantial offers from short-trip, low-cost carriers to
try to recruit a carrier to provide long-haul,
intercontinental service. The Region is keenly interested
in increased service from U.S. airlines and U.S. investment
in a new Italian carrier. With major players waiting to
see the fate of Alitalia, the Region is unlikely to find a
quick replacement for Alitalia's abandoned routes at
Malpensa. End summary.

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The Problem - Disappearing Destinations
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2. (SBU) After the recent disintegration of privatization
talks, Alitalia proposed a rescue plan to cut its 450
million euro annual operating loss. By cutting more than
150 flights from Malpensa and refocusing on Rome's
Fiumicino as its sole hub, Alitalia would save
approximately 200 million euro. Alitalia proposes
recovering the other 250 million euro through increased
efficiency and reductions in baggage handling and personnel
costs. (Note: Previous attempts to reduce personnel costs
were stymied by the unions. End note.) Alitalia has not
announced which specific flights will be cut. According to
the Lombardy Region, Alitalia will primarily cut
intercontinental routes, eliminating 14 out of 17 of
Alitalia's intercontinental (international, non-European)
destinations. The Region fears that Alitalia will pass its
vacated slots to Alitalia-controlled low-cost carrier
VolareGroup (VolareWeb and Air Europe) for national
flights, effectively replacing Milan-Tokyo flights with
Milan-Palermo flights. The Region speculates that this
rescue plan is geared towards the eventual purchase of
Alitalia by a European carrier, such as Air France. By
reducing the intercontinental flights from Malpensa, Milan
traffic could be rerouted to another European hub such as
Paris for intercontinental flights. The Region sees
Malpensa as a major intercontinental hub for Europe,
ranking behind only London, Paris and Frankfurt in number
of intercontinental destinations. The loss of Alitalia's
intercontinental service would reduce Malpensa to regional
airport status.

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The Region Steps In
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3. (SBU) On September 18, the Lombardy Regional Council
overwhelmingly approved a proposal to empower the Regional
President Formigoni to engage the central government on the
status of Malpensa. The proposal asked the GOI to
reconsider the Alitalia rescue plan. It also called for
Formigoni to participate in GOI Cabinet meetings related to
Alitalia, to have a say in the distribution of
Alitalia-vacated slots at Malpensa, and to actively engage
other carriers in negotiations to increase service at
Malpensa. Both center-right and center-left delegates
joined to pass the proposal with the exception of the
Northern League (Northern Italy-based, far-right
secessionist party) members. (Comment: This rare show of
bipartisan support between the center-right and center-left
delegates illustrates the pragmatic character of Northern
Italy politicians. Where there is an overriding community
concern, local politicians in Northern Italy can come
together to "get it done" despite acrimony between the
parties at the national level. End comment.)


MILAN 00000273 002.4 OF 003



4. (SBU) Lombardy Region President Formigoni and Regional
Transportation Commissioner Cattaneo met with Alitalia
Managing Director Prato on September 19. Lombardy
officials asked Alitalia to maintain the intercontinental
flights at Malpensa until other airlines can be found to
fill slots that would be vacated by Alitalia or until
Alitalia is sold. Formigoni argued that the cuts at
Malpensa would save money in the short-term, but would
ultimately be lost revenue in any sale of Alitalia as slots
at Malpensa are valuable to prospective buyers. Alitalia
replied that they would move forward with the cuts,
announcing specific flight cancellations within two weeks.
Formigoni cited press reports indicating that Alitalia
would hold its slots even though the flights were canceled
and asked Alitalia to pull out decisively so Malpensa could
seek new service. Prato agreed not to resist the
reassignment of its slots to other airlines but noted that
the slots would be taken by whichever airlines request them
(i.e. slots will not be held for similar services; slots
vacated by intercontinental service cancellations would be
available for domestic or intra-European flights and vice
versa). The Region is reviewing Italian and EU law to find
grounds to sue to keep slots open for intercontinental
service.

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Prospects for New Service
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5. (U) RyanAir and EasyJet both offered to drastically
increase their service into and out of Malpensa. RyanAir
would invest almost USD one billion to add eighty flights.
EasyJet would likewise increase service worth 600 million
euro and add more than 200 jobs. Still, both carriers work
on the low-cost business model, generally limiting service
to flights of two hours or less. Other private Italian
airlines such as Air One and Blue Panorama are reportedly
interested, but these are small and service primarily
tourist destinations. None would replace the full range of
intercontinental service for business travelers provided by
Alitalia.

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Keen Interest in U.S. Investment
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6. (SBU) The Lombardy Region is keenly interested in U.S.
investment in Malpensa. Regional Transportation
Commissioner Cattaneo asked the Consulate to help identify
U.S. airlines interested in increased service from Malpensa
and U.S. investors interested in a partnership with Italian
investors to form a new Italian airline to operate
intercontinental service. The Region would be pleased if
U.S. carriers took over dropped Alitalia service to the
U.S., but emphasized that the most critical loss would be
service to intercontinental destinations only operated
currently by Alitalia. Hence, the Region is looking to
replace direct service to destinations such as China, India
and Brazil. While the Region understands these routes
could not be directly operated by U.S. carriers, they hope
U.S. investors might be interested in funding an Italian
airline that could reach those destinations.

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Background - Malpensa Market
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7. (U) To bolster its efforts to preserve Malpensa as an
international hub, the Region solicited economic analyses
on Malpensa's market from Bocconi University and other
economic research institutes. In 2006, Malpensa served
21.67 million passengers, 86 percent heading to
international destinations. 70 percent of business
travelers on Alitalia flights originated from Malpensa.
One study likened Malpensa's service area to London's,
citing major cities such as Turin and Genoa within easy
transit distance to the airport. Further, infrastructure
upgrades from now to 2015 will increase public
transportation access, including a high-speed rail
connection with Turin. The Milan Chamber of Commerce
calculated that the withdrawal of Alitalia from Malpensa
would result in 800,000 fewer tourists (or 540 million

MILAN 00000273 003.4 OF 003


euros of lost tourism revenue). A report by the Ambrosetti
group calculated that the withdrawal would cost area
businesses 1.3 billion euro, calculating that on average 3
million business travelers would each have five hours of
additional travel time (flight connections and layovers)
for intercontinental destinations at an average of 85 euros
per hour.

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Comment - The Future of Malpensa
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8. (SBU) The future of Malpensa will ultimately depend on
whoever takes over Alitalia. If Air France or Lufthansa
(the two favorites in press speculation) buys Alitalia,
Malpensa is likely to become a feeder for Paris or
Frankfurt with increased service from low-cost carriers to
other European destinations. If an institutional investor
(such as the Texas Pacific Group - a bidder in the previous
round of Alitalia privatization negotiations) takes over, a
revamped Alitalia could possibly restart intercontinental
service from Milan to capture the business travel market.
In either case, major airlines will likely wait to see what
happens to Alitalia before significantly increasing service
at Malpensa. The Region is unlikely to find a quick fix to
replace the lost Alitalia intercontinental service. End
comment.

WEYGANDT