SLOVAKIA'S CIVIL AVIATION HITS BOTTOM, FAILS TO BOUNCE

UNCLAS SECTION 01 OF 03 BRATISLAVA 000485

SIPDIS

STATE FOR CA/OCS R. DOWELL
STATE FOR EEB/TRA J. BYERLY AND M. FINSTON
STATE PASS DEPT OF TRANSPORTATION FOR STEPHEN HATLEY
STATE FOR EUR/CE J. MOORE
AMEMBASSY PRAGUE FOR B. ROCKWELL
USEU/BRUSSELS FOR M. CATON
AMCONSUL FRANKFURT FOR FAA

E.O. 12958: N/A
TAGS: EAIR ECON PGOV LO
SUBJECT: SLOVAKIA'S CIVIL AVIATION HITS BOTTOM, FAILS TO BOUNCE

REF: BRATISLAVA 388

BRATISLAVA 00000485 001.3 OF 003



1. (SBU) SUMMARY: A toxic brew of incompetence, economic
recession and predatory airlines has left Slovakia's airports
largely empty and on the verge of financial collapse. Following
the failure of discount airline SkyEurope this fall (reftel),
Bratislava's airport has watched its passenger levels fall 60%
from their peak a year ago, even as it builds a new terminal
that will double capacity. Ryanair is the only realistic hope
to increase traffic in Bratislava in the near-term, but the
low-cost carrier is playing hardball in its negotiations to
establish a regional hub. Industry sources believe that the
country's other major airport, in the eastern city of Kosice, is
in danger of being shut down by its Austrian majority owner.
Passenger levels in Kosice are currently less than half what
they were a year ago, and airlines have lately been shifting
routes to the cheaper Poprad-Tatry airport in northern Slovakia.
END SUMMARY.


A BLEAK OUTLOOK FOR BRATISLAVA AIRPORT


2. (SBU) Two years ago, with Slovakia's "economic miracle"
boasting double-digit growth and a new highway linking
Bratislava and Vienna nearing completion, the government-owned
Bratislava Airport decided to double its capacity by building a
new passenger terminal at a cost of 100 million euros. The
airport, whose volume had grown six-fold since 2002, saw an
opportunity to position itself as a low-cost competitor to
Vienna's airport, reasoning that Vienna residents would be
willing to drive an extra 45 minutes for lower fares. According
to Zdenek Schraml, CEO and Chairman of the airport's Board of
Directors, this hasn't happened. Schraml told us that "very
few" Austrians fly out of Bratislava and there is little
likelihood that this will change anytime soon, adding that he
believes the Slovak government should give up its "unrealistic
dream" of Bratislava becoming an international air hub.


3. (SBU) Schraml presented an astonishingly bleak outlook for
the airport, which in recent months has seen its first and
third-largest tenants--SkyEurope and Seagle Air--cease flying.
Although numerous airlines announced the intention to add
Bratislava routes in the weeks after SkyEurope's failure,
Schraml told us that Ryanair is his only remaining hope.
Budapest-based Wizz Air had appeared likely to take over many of
SkyEurope's routes, but Schraml told us that they suddenly and
without explanation withdrew their interest last month. The
airline went even further just yesterday, announcing that it
will cease to operate out of Bratislava entirely. Several
knowledgeable industry sources have told us that Ryanair and
Wizz Air, which reportedly have some common investors, have
agreed not to compete against each other in Bratislava.


4. (SBU) Further complicating matters for the airport, its
outdated facilities leave it completely unable to attract cargo
or long-haul flights. Schraml told us the Slovak government
failed to realize that the expanded capacity of the new terminal
would also require increased apron and hangar space, along with
other infrastructure improvements. The airport's longest
runway, at 3200 meters, is too short for most cargo flights,
leaving it unable to compete with Vienna's airport for this
lucrative sector. Schraml claimed that the airport needs 300
million Euros in capital improvements--above and beyond the new
passenger terminal--and there is currently no financing
available for any of this, either from the Slovak government or
the EU. Even worse, Vienna is building a new terminal of its
own (although construction has been stalled since the summer)
that would vastly increase the airport's capacity when
completed, further weakening Bratislava's position.


5. (SBU) According to Schraml, Ryanair has taken full advantage
of its dominant bargaining position. He told us that while the
airline is clearly interested in establishing a hub in
Bratislava, their negotiating strategy has been to keep the
airport off-balance by saying contradictory things and remaining
silent for months at a time. Ryanair has yet to respond to the
airport's three-month-old letter asking what airfield
improvements it would need in order to establish a base in
Bratislava--but the airline did find time a few weeks ago to
negotiate through the local media by planting news articles
apparently intended to pressure the airport to cut its landing
fees by as much as 70%. Schraml told us that he is unable to
negotiate effectively with Ryanair because he doesn't even know

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what they want.


GROWTH IN AN UNLIKELY PLACE


6. (SBU) The one bright spot for Slovak aviation has been the
expansion of local airline Danube Wings into some of the markets
previously served by SkyEurope. Interestingly, the upstart
airline has largely ignored the Bratislava and Kosice airports,
instead concentrating its operations at the much smaller
government-owned Poprad-Tatry regional airport, located in
northern Slovakia at the base of the Tatra mountains. Many in
the aviation sector are skeptical that the Danube Wings business
model can work. Tomas Kika, former Spokesman for SkyEurope,
told us that the planes flying Danube Wings' longer routes, such
as Poprad-Manchester, are largely empty, and the company
survives only because it is being subsidized by Eurofunds.
Arpad Agocz, the Commercial Director of Danube Wings, admitted
to us that the airline receives support from "regional" sources,
but he declined to tell from whom or how much.


7. (SBU) A former SkyEurope pilot who remains active in the
domestic aviation sector told us that Danube Wings cut its
salaries by 30% several weeks ago, and he expressed doubt that
the airline would survive the winter, even though this is
presumably its high season. Agocz, on the other hand, was very
upbeat about the company's outlook, although it should be noted
that much of Danube Wings' strategy as he presented it seems to
rely on a partnership with Czech Air, a company with more than
its own share of problems.


8. (SBU) Schraml, who was formerly Director of Privatization at
the Ministry of Transport, told us that privatization of
Bratislava Airport is "probably the only answer," although he
added that there is no indication that the government is willing
to do this. Kosice's airport, for its part, has had a
disastrous experience since being partially privatized several
years ago. It relied far too heavily on SkyEurope, which at the
beginning of this year accounted for 2/3 of the airport's
passenger traffic. Already ill-equipped to deal with
SkyEurope's failure, the Kosice airport was dealt a further blow
when around the same time Poprad-Tatry slashed its landing fees
and began to compete for the remaining carriers serving the
Slovak market. Poprad, a dingy town about two hours by car from
Kosice that serves as the gateway to the Tatra ski resorts, is
the only other viable commercial airport in the area. By all
accounts, the Kosice airport has been very slow to respond, and
Profit Magazine air industry analyst Jan Blazej told us that it
is quite possible it will be forced to close.


COMMENT


9. (SBU) It seems almost inevitable that Slovakia's aviation
sector will soon be dominated by Ryanair, which is clearly
biding its time while domestic pressure builds and the
government becomes desperate to bring traffic to the gleaming
new terminal in Bratislava. The irony for PM Robert Fico is
that by halting the planned privatization of the airport several
years ago, he has actually weakened its bargaining
position--Ryanair undoubtedly realizes that it can make
expensive and onerous demands of the Slovak government to which
a private owner could never afford to agree. The government has
already taken considerable criticism for renewing SkyEurope's
license shortly before it shut down, a decision which allowed
the airline to book flights through the spring of 2010,
ultimately leaving customers holding 280,000 worthless tickets.
Given all the pressures on the government, it seems likely that
it will ultimately accede to whatever Ryanair demands, and
Slovakia will once again enjoy a full slate of international
routes from Bratislava--although only at great hidden cost to
Slovak taxpayers.


10. (SBU) As for the Kosice airport: should the worst come to
pass, it seems unlikely the Slovak government would allow it to
remain closed for long--in fact, Fico may secretly hope that it
will go out of business so that it might be renationalized and
reopened under government control. Eastern Slovakia has largely
been left out of the Slovak economic miracle, in no small part
because of its problematic transportation ties with western
Slovakia and Europe beyond. The loss of its commercial air
links would make the situation far worse, and it is unlikely

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that Fico would allow that to happen.
EDDINS