Cablegate: Low-Cost Airlines Face Challenges with Polish

Published: Thu 3 Mar 2005 11:24 AM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A
REF: (A) 2004 WARSAW 458, (B) 2004 WARSAW 5598
1. (SBU) Low-cost airlines continue to expand their
operations in Poland. During this rapid growth, air
carriers have encountered difficulties dealing with the
Polish airport authority, PPL. SkyEurope, in particular,
has publicly announced that it will not increase its Warsaw
operations due to PPL actions. Instead, the carrier will
move some of its routes to Krakow, which PPL does not fully
operate (although it does own 85% of the airport). Poland's
flag carrier, LOT, is concerned about the new low-cost
competition, but has answered with its own discount spin-
off, Centralwings, which is now flying. End summary.
2. (U) There are now approximately seven major low-cost
carriers operating regular flights from Poland. While many
of these flights originate in Warsaw, the cities of Krakow,
Katowice, and Wroclaw have also experienced an increase in
flights by low-cost carriers since Poland's entry into the
EU in May 2004. The two low-cost carriers with the most
flights from Poland, SkyEurope and Wizz Air, continue to add
routes and are each planning on adding several leased
aircraft to their fleets before the end of the year. In
addition, several other carriers have recently announced
their intent to expand their Polish operations, and the new
low-cost carrier, Centralwings, (a LOT spin-off) began
operating in early February.
3. (SBU) Despite this expansion of the Polish aviation
market, the airlines face operational difficulties at
Warsaw's airport, Okecie. Two of the low-cost carriers
recently described to econoff what they regard as
discriminatory practices by the Polish airport authority,
PPL (Przedsiebiorstwo Panstwowe Porty Lotnicze). The
SkyEurope PR Manager, Eyrk Klopotowski, said that the
largest challenge the airline has in Poland comes from what
he described as PPL's unwillingness to be an equal partner
with low-cost carriers. Klopotowski said that PPL does not
make decisions in advance, creating a situation where
SkyEurope cannot plan ahead. He gave examples of PPL not
setting fee structures for summer flights far enough in
advance, not informing airlines about how many slots will be
available for overnight parking of aircraft, and for
excessively fining low-cost carriers for delayed flights
that land at Okecie after 22:00, but exempting LOT and LOT's
spin-off, Centralwings, from such fines for their late
arrivals (Last year LOT said privately that it too has
issues with PPL, specifically with the development of the
new terminal at Okecie). SkyEurope and Wizz Air said the
problems with PPL are nothing new: last year PPL told the
low-cost carriers operating out of Okecie that it was going
to recall all their operating slots and reissue them based
on a lottery. The collective protest of the low-cost
carriers forced PPL to rethink that plan, according to
4. (U) As a result of these problems, SkyEurope will not
expand its operations out of Warsaw and will not overnight
its aircraft in Warsaw. Instead, the airline plans to
increase its flights and operations out of Krakow, one of
several airports in Poland partially owned but not fully-
operated by PPL. SkyEurope went public with many of these
concerns by issuing a press release on February 23 that
detailed its problems with PPL. In the release, SkyEurope
says that it "is not prepared to introduce new business to
the [Warsaw] airport by investing into new routes if the
airport does not ensure a predictable business environment."
5. (U) A year and a half ago, high landing fees plus the
same problems being experienced in Warsaw were keeping low-
cost airlines out of Krakow. Even traditional airlines such
as Lufthansa were reducing flights to Krakow as they made
increasing use of the Katowice's Pyrzowice airport, which is
100% privately operated and not linked to PPL. Local
officials in Krakow complained that they believed that
Warsaw-based PPL was purposely overcharging for landing fees
and generally making it difficult to use Krakow's Balice
airport as part of a strategy of maintaining Warsaw as
Poland's only hub. To address this perceived bias, local
government and business leaders formed a public-private
corporation to build a new terminal at Balice specifically
designed to meet the needs of low-cost airlines. While PPL
initially dismissed the idea of a second terminal as
impractical, once the group had secured financing and
received permission from the Polish military to use runways
(the grounds and runways at Balice belong to the military),
PPL quickly decided that it could offer better service and
more competitive fees to low-cost airlines (and other
airlines that compete with LOT).
6. (U) While the threat of building a competing terminal in
Krakow appears to have helped bring about changes in PPL
operating procedures that have paved the way for a number of
low-cost airlines to start landing in Krakow, the city is
still at a significant disadvantage when compared to cities
with airports not run by PPL, such as Katowice and Wroclaw.
By offering good service at competitive prices, Katowice's
Pyrzowice airport now has more direct connections to cities
through Europe than does Krakow, even though most of the
incoming travelers landing in Katowice are bound for Krakow
and must take a bus to complete their trip. Despite the fact
that Wroclaw attracts significantly fewer tourists than
Krakow, the Irish discount carrier RyanAir recently chose
Wroclaw as its only destination in Poland because it was
unable to reach an agreement with PPL for landing rights at
Krakow's Balice. The dispute over PPL's operation of Balice
has now reached the level of national politics, with the PO
(Citizen's Platform) party including complete privatization
of Balice airport on its platform.
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7. (SBU) In order to increase Warsaw's airport capacity, the
Polish government and PPL are currently expanding the Okecie
terminal and are planning to open an airport in Modlin,
north of Warsaw as an alternate site for low-cost carriers.
Formerly operated by the Polish military, the Modlin airport
needs significant renovation to be fully operational. While
PPL officials have privately told low-cost carriers that it
will not be running until 2006, the head of PPL said
publicly that Modlin could be ready as soon as this summer.
According to a Wizz Air representative, Modlin's
infrastructure is in disrepair. Wizz Air said that due to
the poor infrastructure, the airport's distance from Warsaw,
and the current lack of a mass-transit system to connect the
airport to Warsaw, low-cost carriers will not be
enthusiastic about switching operations from Warsaw's Okecie
airport to Modlin. However, Wizz Air acknowledged that the
one factor that will outweigh all others is cost. As PPL
has said already said publicly that Modlin will be priced
for the low-cost airlines, Wizz Air's representative said
that it would most likely move its operations to Modlin from
8. (SBU) SkyEurope said, however, that it will likely choose
not to fly out of Modlin as the company is fairly committed
to operating out of main airports and the lack of reliable
transportation to Warsaw from Modlin makes operating out of
the distant airport unreasonable.
9. (SBU) The prevailing wisdom of the Polish press and
airline insiders has been that the low-cost market in Poland
is too saturated and that it will inevitably consolidate.
Wizz Air's representative privately expects RyanAir will
plunge into Warsaw's market after Modlin opens. Despite the
prospect of increased competition, the SkyEurope
representative said that the company is currently on target
with its business plan, its investors are content, and that
as other low-cost carriers increase operations in Poland,
SkyEurope will continue to be independently competitive.
10. (SBU) So far, the only major casualty in Poland's low-
cost market has been the homegrown Air Polonia. The airline
folded late last summer after it became insolvent. While
the press has regularly reported that a strategic investor
is ready to prop the airline back up, it has not yet
happened. Early reports indicated that the airline fell
victim to increased pressures brought on by SkyEurope and
Wizz Air. A previous employee of Air Polonia, however, said
in a private conversation that the airline was more
interested in lasting just long enough for another airline
to acquire it than in creating a long-term profitable
business. This corresponds with what the head of Air
Polonia told econoff last year (reftel A).
11. (SBU) In order to counter the erosion of its market-
share, the Polish flag-carrier, LOT, spun off its own low-
cost carrier, Centralwings (reftel B). The low-cost
airlines in Warsaw don't yet have a firm idea of the impact
of the new Polish low-cost carrier, which has been flying
since the beginning of February. Wizz Air's representative
did claim that Centralwings poses a threat to other low-cost
carriers operating in Warsaw as a result of the preferential
treatment Centralwings receives from PPL and as a result of
LOT's ability to quickly loan mechanics, parts, and even
aircraft to Centralwings when needed, while the other low-
cost carriers have limited outside resources.
12. (SBU) None of Poland's airlines, including LOT, are
happy with PPL's current level of service. As the operator
of Warsaw's Okecie airport, the future operator of Modlin,
and the part owner of nearly all of Poland's airports,
decisions made by PPL have a significant impact on Poland's
air industry. It seems that the sharp expansion of low-cost
carriers in Poland over the past year has occurred in spite
of PPL. If Poland ever wants to develop a real tourism
and/or civil aviation market, the government will need to
encourage the airport authority to be more business
friendly. End summary.
13. This cable was coordinated with Consulate General,
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