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### Viewing cable 08ROME1231, ALITALIA STILL FLIES UNDER THE ITALIAN FLAG BUT AT

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08ROME1231 | 2008-10-03 15:58 | 2011-06-18 11:00 | CONFIDENTIAL | Embassy Rome

`

    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.

    - - - - - - - - - - - - - - - - - - -
    ""ITALIANITA"" SUCCEEDS, BUT WAS IT GOOD BUSINESS?
    - - - - - - - - - - - - - - - - - - -

    ¶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.

    - - - - - - - - - - - - - - - - - - - - - - - - -
    THE INVESTORS OF CAI - CAPITALISTS OR CRONIES?
    - - - - - - - - - - - - - - - - - - - - - - - - -

    ¶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.

    - - - - - - - - - - - - - - - - - - -
    AN INTERNATIONAL PARTNER STILL NEEDED
    - - - - - - - - - - - - - - - - - - -

    ¶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

`