Turbulence Ahead

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It may not be the stuff of dreams, but for businessÑbe it high-tech or high fashionÑMilan leaves Italy's picture-postcard cities crumbling in the dust. Yet though it is closer in outlook as well as distance to Paris than it is to Palermo, the city finds itself at the center of a typical Mediterranean muddle: the squabbling over the new airport, Malpensa.

That Milan needed to ease pressure on the central but increasingly overcrowded Linate Airport is not in question. By 1997, when the on-again, off-again plans for the expansion of the out-of-town Malpensa AirportÑused mainly for cargo flights and a small number of charter flightsÑfinally got underway, Linate, with its single runway, was handling over 12 million passengers a year and was close to full capacity.

But Italian transport officials had more in mind than just the redistribution of air traffic in and out of Milan. The $1.2 billion, state-of-the-art Malpensa 2000 was to be an international hub to complement, perhaps even rival, Rome's Fiumicino Airport. The proposal was attractive enough to woo Dutch airline KLM, which had been seeking a European alliance partner, into the arms of Italy's state-run carrier Alitalia. The tie-up would create the No.1 European airline network in terms of passenger numbers and be based around the three hubs of Amsterdam Schiphol, Milan Malpensa and Rome Fiumicino. So enamored was KLM that it contributed $95 million to the development of Malpensa.

It didn't take long for the project to begin to live up to the rough translation of Malpensa — "bad thought". That is what the national airlines of Italy's fellow European Union members had when they discovered that Rome's effort to ease congestion at Linate was "not even a thinly disguised attempt," says Daniel Solon of aviation consultancy Avmark International, to stack the deck in favor of the oft-resuscitated Alitalia. Only routes carrying 3 million or more passengers a year would be allowed to operate out of Linate after Malpensa opened. The catch? The only route meeting that criterion was Milan to Rome — dominated, naturally, by Alitalia.

A quarter of Italy's international air traffic is generated in Milan. Before Malpensa opened, international travelers made short hops from Linate — 8 km from the city center — to, say, London, Paris or Frankfurt to catch intercontinental flights. Obliging such flights to use Malpensa — 53 km outside Milan — would give Alitalia an advantage as the only carrier that could use Linate to feed its intercontinental flights, which leave from Rome.

When 12 angry airlines — including British Airways, Air France and Lufthansa — took their case to the European Commission, charging infringement of the E.U.'s market-access rules, transport commissioner Neil Kinnock found himself on familiar territory. A year earlier, in an enquiry into state aid to the tune of $1 billion for Alitalia, his department had found that the airline had been accorded special privileges on airport slots; that it had exceeded its capacity limits on domestic routes; and that it had abused its dominant position on pricing. "Italy has long had a rather relaxed approach to E.U. rules," says one analyst, who speculates that the government may be using the Malpensa case to test the Commission's resolve to uphold E.U. law.

If that is so, the Italian authorities may have found themselves facing a tougher opponent than they had bargained for. Rome's "concessions" — allowing foreign airlines to maintain between one and three flights daily at Linate and phasing in the changeover, both of which still favored Alitalia — failed to win over an increasingly exasperated Commission. It was also not convinced by the Italian argument that Linate had reached capacity, as the number of flights had actually increased due to additional internal flights.

Then there was the inadequate infrastructure — improved road and new rail links were only completed six months after the airport opened — and environmental concerns — residents in the densely populated area complained loudly about the increased noise and air pollution. The Commission asked the Italian government to postpone the transfer, originally scheduled for December 1999, while it studied the environmental impact of the move and its compatibility with E.U. law. But in late April, in preparation for the summer schedules, Transport Minister Pierluigi Bersani forced the airlines to move, despite being warned that should the Commission declare the action illegal — a decision is expected by the end of July — Italy could face hefty compensation claims by the airlines and be obliged to move the displaced flights back to Linate.

With a question mark now hanging over the future development of Malpensa, KLM abruptly called off its impending alliance with Alitalia, claiming that it was becoming "an unacceptable business risk" and demanding its money back. As of last week, the Dutch airline looks set to fly off into the sunset with British Airways in a deal that would create Europe's largest airline in terms of passengers flown, leaving Alitalia all alone in an industry where partnerships are vital for survival. With its 1999 profits, at just $5.6 million, down 97% on '98, and its long-awaited privatization postponed again, the outlook is "pretty grim," says Charles Donald, an airlines analyst at Donaldson Lufkin & Jenrette. Because they are more competitive on price, he contends, "other European airlines have for the past five years treated the lucrative northern Italian market as one which will be theirs for the taking. The events of the last 18 months have merely accelerated that likelihood."

This would be a bitter pill to swallow for a government that has for so long enjoyed a rapporto privilegiato with its national airline. "Everyone wants to assist the home team, but sometimes the law of unintended consequences rears its ugly head," says Avmark's Solon. That is a lesson the Italian government should have learned years ago.

With reporting by Desideria Cavina/Milan