US embassy cable - 05WARSAW1201

UNCLAS SECTION 01 OF 03 WARSAW 001201 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/NCE: TARA ERATH AND MICHAEL SESSUMS 
 
E.O. 12958: N/A 
TAGS: EAIR, ECON, PREL, PL, Economy 
SUBJECT: LOW-COST AIRLINES FACE CHALLENGES WITH POLISH 
AIRPORT AUTHORITY 
 
REF: (A) 2004 WARSAW 458, (B) 2004 WARSAW 5598 
 
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Summary 
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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. 
 
 
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LOW-COST CARRIERS EXPAND IN POLAND 
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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. 
 
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PROBLEMS WITH POLAND'S AIRPORT AUTHORITY 
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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 
Klopotowski. 
 
 
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SO, WE'RE MOVING TO KRAKOW 
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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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NEW AIRPORT IN WARSAW MAY SOLVE SOME PROBLEMS 
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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 
Okecie. 
 
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. 
 
 
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CONSOLIDATION? 
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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). 
 
 
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LOT AIRLINES JOINS THE FRAY 
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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. 
 
 
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Comment 
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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, 
Krakow. 
 
Ashe