VZCZCXYZ0001
RR RUEHWEB

DE RUEHRO #1231/01 2771558
ZNY CCCCC ZZH
R 031558Z OCT 08
FM AMEMBASSY ROME
TO RUEHC/SECSTATE WASHDC 0977
INFO RUEHRL/AMEMBASSY BERLIN 1849
RUEHFR/AMEMBASSY PARIS 2445
RUEHBS/USEU BRUSSELS 4667

C O N F I D E N T I A L ROME 001231

SIPDIS

STATE FOR BYERLY IN EEB/TRA

E.O. 12958: DECL: 10/01/2018
TAGS: EAIR ECON IT PGOV
SUBJECT: ALITALIA STILL FLIES UNDER THE ITALIAN FLAG BUT AT
A HIGH COST TO ITALY

Classified By: Economic Mi...

SUBJECT: ALITALIA STILL FLIES UNDER THE ITALIAN FLAG BUT AT
A HIGH COST TO ITALY

Classified By: Economic Minister Counselor Tom Delare
for reasons 1.4 (b, d)

¶1. (C) Summary: Prime Minister Berlusconi appears to have
achieved his campaign promise to save Alitalia and keep it
Italian. On September 29 the last of Alitalia's nine unions
signed onto a deal for a consortium of Italian business to
purchase the carrier.  This signals an end to the almost
two-year struggle to save the dying airline, but it remains
to be seen whether the deal will benefit Italian travelers.
The new airline will hold a defacto monopoly on intra-Italy
routes, and the debts and liabilities of Alitalia will now
become part of a ""bad company,"" headed for liquidation but
still owned by the government.  As the business of
reorganizing the company begins, the new Alitalia, now known
as Cai (Compagnia Aerea Italiana), still faces an uphill
battle to return to profitability and to convince ordinary
Italians and opposition politicians that the cost was worth
it. The saga is a reminder of the many problems that bedevil
Italy's business environment. End Summary.

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""ITALIANITA"" SUCCEEDS, BUT WAS IT GOOD BUSINESS?
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¶2.  (U) During the spring 2008 election campaign,
then-candidate Berlusconi weighed in on the Alitalia sale
declaring that the airline should remain ""Italian.""  Unions
immediately saw a chance to get a better deal than that being
offered by Air France-KLM, which was at that point
considering a buyout. The Air France-KLM deal collapsed in
the wake of Berlusconi's pronouncements and union opposition.
 Having scuttled the deal, PM Berlusconi was under obvious
political pressure to somehow save Alitalia.  Among
government officials, only the Minister of the Interior
publicly admitted that losing a flag carrier wouldn't have
been a tragedy, but Berlusconi remained opposed to anything
but an Italian buyer.

¶3. (U) To provide his Italian solution, Berlusconi used his
personal and political skill to convince a group of wealthy
Italian businessmen to commit to ""rescuing"" the airline and
preserving Italy's flagship carrier. The group of 16
investors formed Cai(Compagnia Aerea Italiana) and determined
to follow a plan of purchase designed by Intesa Sanpaolo, one
of Italy's largest banks (and also a Cai investor).

¶4.  (U) To make Cai into a profitable company, they'll have
help from recent tailor-made changes to Italian bankruptcy
law that will allow the company to be split into two, with
the liabilities and debts of 1 billion Euros remaining in the
""bad company,"" which will be the responsibility of the GOI.
Cai will keep the profitable portions and will also be
allowed to hold a defacto monopoly on the profitable
Rome-Milan route, as well as other intra-Italy routes.
Alitalia previously competed with Air One on these routes,
but Air One will be folded into Alitalia as part of Cai's
purchase deal.  Competition for Cai could come in the form of
the new high-speed train running between Rome and Milan, set
to start in 2009. It could also come from foreign carriers
operating under the Open Skies agreement.

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THE INVESTORS OF CAI - CAPITALISTS OR CRONIES?
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¶5. (SBU) Cai is made up of 16 Italian investors, among them
top names of Italian business such as Gilberto Benetton, of
the fashion company; Roberto Colaninno, chairman and CEO of
scooter maker Piaggio; and Emilio Riva, whose business is
steel.  The Benetton family is investing in Alitalia through
the toll-road company Atlantia, which its investment firm
controls. The Benettons also hold a controlling interest in
the company that runs Rome's airports.  Another Cai investor
already has business interests at Milan's two airports.
Roberto Colaninno and Rocco Sabelli, two key players at Cai,
come from Piaggio.  Colaninno leads the investor group and
will be Chairman of Cai. Sabelli, his right-hand man, will be
CEO. They are known for a successful turnaround of the
scooter company. Other investors are in businesses ranging
from cruise ships to steel to telecommunications, opening the
possibility for preferential treatment of their companies
from the GOI in return for the Alitalia bailout. Not all of
the investors are personally or politically close to
Berlusconi, but all will likely consider the PM to owe them
favors.  The exact nature of these favors has been, and
likely will continue to be, a subject of lively media
interest.

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AN INTERNATIONAL PARTNER STILL NEEDED
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¶6. (U) The plan to save Alitalia has always envisioned the
participation of an international partner, but that partner
will be a minority stakeholder.  Both Air France-KLM and
Lufthansa are meeting with union officials and speaking with
Cai representatives as they explore the possibility of
purchasing a 10-20% stake.

¶7. (U) Though the Berlusconi government's primary concern in
negotiations over sale of the airline was that it remain
Italian, the government has now said that the choice of a
minority partner is up to Cai and that it will be a
market-based choice.  Newspapers speculate that a Lufthansa
partnership would favor using Milan as a hub, while Air
France-KLM would favor Rome.  The Lega Nord political party,
Berlusconi's coalition partner, has publicly announced it
favors Lufthansa.

ADDITIONAL STUMBLING BLOCKS

¶8.  (SBU) Newspaper reports have pointed to obstacles that
could cause Cai to stumble.

The EU will still examine the
deal to ensure a true ""discontinuity"" between the new company
and the old and to confirm transparency in the handover. Cai
also still needs to obtain a license, since the current
license is held by Alitalia.  Marino Barzaghi, administrative
counselor to the president of Italy's civil air authority, in
a phone call with embassy staff dismissed these concerns as
journalistic speculation. He says all issues concerning the
EU are procedural and should not pose any problems.  He said
he does not forsee any disruption of the airline's service
while the changeover occurs.  Ryan Air however has moved to
block the deal. Newspapers reported Oct. 2 that the Irish
budget airline has filed a complaint with the EU, saying that
by allowing debts to remain the responsibility of the
government, the GOI is illegally protecting a failing
company.  Ryan Air representatives have said they'll take the
issue to court if the EU Commission allows the sale.

- - - -
COMMENT
- - - -

¶9. (C/NOFORN) The Alitalia saga is a sad reminder of how
things work in Italy and of PM Berlusconi's rather weak
adherence to some of the core principles of free-market
capitalism.  Berlusconi had the chance to let this be handled
as a business matter, but he chose to politicize it. Under
the guise of a rather quaint (and distinctly un-EU) desire to
maintain the Italian-ness of the compay, a group of wealthy
Berlusconi cronies was enticed into taking over the healthy
portions of Alitalia, leaving its debts to the Italian
taxpayers. The rules of bankruptcy were changed in the middle
of the game to meet the government's needs. Berlusconi pulled
this one off, but his involvement probably cost the Italian
taxpayers a lot of money. The way in which this deal was done
-- cronies, political interference, preference for Italian
buyers, custom-made laws -- provided the world with a clear
reminder of Italy's investment climate shortcomings. End
Comment.
SPOGLI