IS THERE A FUTURE FOR MALPENSA?

UNCLAS SECTION 01 OF 03 MILAN 000031

SENSITIVE
SIPDIS

STATE FOR DOT

E.O. 12958: N/A
TAGS: EAIR ECON PGOV IT
SUBJECT: IS THERE A FUTURE FOR MALPENSA?

REF: 08 MILAN 15

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1. (SBU) Summary: Doomsday scenarios abound in Milan
following the decision by Alitalia to partner with Air France
and decisively choose Rome as its sole hub. Predictions of
immediate economic pain to the region are overstated, but
certainly possible is an atrophying of the area's
attractiveness to investors should Milan remain long without
a genuine international hub. Regardless of Alitalia's future
decisions regarding Malpensa, however, the airport suffers
from fundamental flaws (its location and cannibalization by
other regional airports in particular) that will continue to
impact its appeal. A refocused Malpensa is the most likely
route to its survival, with more cargo, flights to the Middle
East and Asia, and/or an increased presence of Lufthansa
possible scenarios. However, it's unclear whether Malpensa
can reinvent itself in time to head off lasting economic
damage to the region and be ready for Milan's hosting of the
Expo in 2015. End summary.

A Business Center With No Hub?


2. (SBU) The final decision of the re-invented Alitalia )
with its Air France partner ) to make Rome's Fiumincino its
only international hub (after initial promises to make
Malpensa an equal partner) has sparked hand wringing,
recriminations, and gallons of ink spilled in the local press
about the &devastating8 economic impact on Milan and
Lombardy. Indeed, Malpensa airport is now a shadow of its
former self ) and of the image local and national
politicians had for the airport when it opened in October

1998. The airport lost four million passengers (from 23 to
19 million) and 20 percent of its total traffic in 2008. For
the moment, Alitalia (which had 1,238 weekly flights from
Malpensa as late as March 2007) has 201 weekly flights from
the airport with only three intercontinental destinations
offered (New York, San Paolo, and Tokyo).


3. (SBU) However, the reality is that the immediate impact on
the Milan region is more ego than euro. Alitalia eliminated
the lion's share of its flights from Malpensa ) with the
commensurate cuts in airport staffing ) in April 2007, with
some additional cuts in November 2008. In fact the final
number of 201 weekly flights is an increase of 56. According
to regional officials and a noted local transport researcher,
the closing of this latest chapter in Alitalia,s tortured
history should not lead ) as many press articles have
claimed ) to hundreds or thousands of additional layoffs in
the immediate term.


4. (SBU) This is not to say that the hollowing out of
Malpensa has not and will not take its toll on the local
economy. According to a study done by Milan's Bocconi
business school, Malpensa's &connectivity index8 (a measure
of an airport's linkages and thus attractiveness for
international travelers, with Heathrow the benchmark) dropped
from 35.1 to 22.6 in 2008 ) around the same level as
Helsinki or Budapest. Furthermore, according to a study done
by Milan's Chamber of Commerce, the &de-hubbing8 of
Malpensa will cost Lombardy 10 billion euro and 45,000 jobs
between now and 2020. Though an academic with whom we spoke
would not comment on the Chamber's numbers, he did say that
within a year or two Lombardy's economy would start to wither
without a genuine international hub as existing international
investors and Italian exporters move and new investors avoid
Milan because of its poor transport links. He pointed out
that the record shows that the existence of a &Class A8
international hub is essential to compete for foreign
investment.

&Roma Ladrone8 or &Linate Cannibale8?


5. (SBU) Even our soberest contacts have been very critical
of the decision making process that brought Alitalia and Air
France together and made Rome the country's sole hub for the
time being. The most charitable explanation we heard was
that the new Rome-based Alitalia wants to develop one hub at
a time and thus logically would start close to home.
However, most thought the politically potent unions, Alitalia
bureaucracy, and by some accounts Air France itself brought
too much pressure to bear on the government and Alitalia,s
new owners (a consortium of mostly northern businesspeople),
which had to agree de-emphasize Malpensa despite the economic
peril.


6. (SBU) On paper it is odd that the national carrier would

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essentially abandon an airport serving a region that accounts
for nearly 50 percent of Italy's GDP and the majority of its
exports. However, there are some fundamental problems that
hurt Malpensa beyond hazy domestic politics and the
&single-hubbing8 strategy of Air France. A key issue is
management, with Malpensa's owner (SEA) reportedly refusing
to offer any incentives to attract new carriers or routes,
choosing instead to raise existing fees to make up the
current deficit. Another major problem is location. One
journalist with whom we spoke asserted that because Malpensa
is so far from Milan and so poorly connected with its most
likely customer base outside the city, it was hard to imagine
the airport ever really becoming world-class. Capitalizing
on this weakness, the number of competing regional airports
) with notable and expanding international airports in
nearby industrial centers of Bergamo, Verona, and Turin )
cannibalize flights and passengers that might otherwise
choose Malpensa.


7. (SBU) Along these lines, the giant thorn in Malpensa's
side is Milan's competing international airport Linate. This
airport ) the Reagan to Malpensa's Dulles ) is smaller, has
a runway that doesn't accommodate the largest jets, and is
more expensive to fly from. However, it is 15-minutes from
the city's business center, rather than an hour or more.
Also, Linate is the hub of the profitable Rome-Milan shuttle
(255 weekly flights vs. 35 from Malpensa) and is Alitalia,s
Milan center for intra-EU flights to the most important
European hubs (Alitalia flies to London, Frankfurt, and
Amsterdam from Linate, for instance, but not from Malpensa).
The new Alitalia management on February 9 issued an ultimatum
that Linate had to be closed to all flights besides the
(Alitalia-dominated) Rome shuttle before they could consider
expanding at Malpensa. Our non-political contacts agree that
Malpensa is not competitive with Linate as is, but not a
single local politician is willing to publicly suggest
closing Linate or eliminating flights. Even regional
political figures who in the past supported Malpensa over
Linate are now afraid to call for Linate to shut down as it
has become the only game in town for the moment. The fact
that the same company, linked politically and financially
with the city of Milan, owns both Linate and Malpensa (as
well as a portion of competitor Bergamo) also complicates
matters.

From Whence Salvation?


8. (SBU) With Alitalia clearly preferring Rome and Linate,
rescue is unlikely to come from that direction. Neither will
it come in the short term from American carriers ) despite
their rights under Open Skies and an abundance of vacant
slots (though perhaps not many at prime times due to the
unclear fate of the slots apparently to be vacated by the new
Alitalia). They tell us that because of the U.S. economic
crisis and priorities elsewhere in the region they were
unlikely, at this point, to add any additional routes or
frequencies.


9. (SBU) There is some encouraging news. Cargo (down 14.5
percent in 2008 because of Alitalia,s exit) is making a
comeback with Cathay cargo and Luxemburg-based Cargolux
announcing several new frequencies this year and additional
cargo coming with new frequencies added recently by Emirates
and Etihad Airways. These new Middle Eastern flights could
also be part of a trend, our contacts say, of increasing
attention by Middle Eastern and Asian carriers wanting to add
long-distance Malpensa flights. Another hopeful trend,
according to observers, is the expansion of Lufthansa (which
launched this month six new European routes using its newly
formed Lufthansa Italia subsidiary). Though Lufthansa did
not get (or even publicly bid for) Alitalia, there's still
some thought locally that the German carrier will gradually
make Malpensa a semi-official hub for flights to Europe and,
perhaps, beyond. Lufthansa, through its affiliate Air
Dolomiti, already plays a major role in the region's other
airports, ferrying passengers to Frankfurt or Munich for
onward flights.

Comment: Can Help Arrive in Time?


10. (SBU) The Malpensa of today is not a viable airport. It
is currently an oversized hub for discount carriers )
arrival and departure screens are filled with EasyJet,
Volare, and a host of other low-costs. Though there are
glimmers of hope, they may not be short-term solutions.
Expanded Middle Eastern or Asian traffic will in many cases

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require amendments to existing bilateral air accords,
something that will take time. Meaningful Lufthansa
expansion into Malpensa will likely hinge on the success of
its Lufthansa Italia experiment and also fair access to slots
no longer being used by Alitalia. The basic question, then,
is whether Malpensa's new shape can take form before it's too
late for the local economy or for the Expo which will come to
Milan in 2015.
WEYGANDT