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Czech Airlines loses lustre before sale

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On Tuesday the Czech cabinet postponed the launch of the privatisation of Czech Airlines (ČSA). The ministers asked Finance Minister Miroslav Kalousek to present more specific tender conditions that would give the government a bigger say in the selection of the buyer.

The national carrier has been waiting for privatisation for years. The latest scenario is to call a tender on 14 January and select the buyer by the end of July. Yet, there now seem to be good reasons for hesitation on the part of the seller – and there may be further delays.

A pretty bride

After losses posted in 2005 and 2006, new management restructured the company and brought it back into the black last year. For the first three quarters of 2008, ČSA posted a net profit of CZK 406 million (EUR 15.4 million). This was CZK 157 less than a year earlier but arguably still a good result, given record-high oil prices in the summer and the overall lethargy of airlines around the world.

The carrier boosted passenger numbers for January to September by 4.9% year-on-year to 4.4 million. ČSA has been gradually modernising its fleet of 50 aircraft, and in 2007 and 2008 was named the best airline in central and eastern Europe by US magazine Business Traveler. Its home base, Prague Airport, is an increasingly popular destination seeking to further expand traffic by building a new runway.

So far ČSA appeared to be a glowing bride with good chances of luring a long line of wealthy suitors. The price of the 91.5% stake held by the government is estimated between CZK 3 billion and CZK 5 billion.

The Russian national carrier Aeroflot has already expressed readiness for courtship and KLM/Air France is also expected to weigh in after the tender conditions are announced. The government says about 10 potential buyers have shown interest. It has mentioned Iceland Air and the Russian carrier S7 as “trustworthy strategic investors”.

Signs of worse times

But the past few weeks have seen some bad news that may discourage potential bidders or reduce the amount they will offer.

In October ČSA’s passenger numbers started to dwindle for the first time after years of solid growth only briefly interrupted by 11 September 2001. Quoting unnamed sources, Hospodářské noviny has reported that November figures were about 15% lower than a year earlier and that things might be even worse in December.

The decline, apparently prompted by the global financial crisis, has inflicted a major blow to the company’s new business strategy released in mid-2008, which promised to boost net earnings from an estimated CZK 100 million for 2008 to CZK 1 billion in 2013. “We can crumple [the plan] and throw it away,” said company vice-president Luboš Černý, as quoted by HN.

ČSA President Radomír Lašák tried to save the day by pointing out that his company may in the end benefit from the crisis as some other carriers are reducing flights to Prague, potentially driving their Prague-bound customers to ČSA’s arms.

A questionable profitability

Another disappointment may come when the potential buyers take a closer look at ČSA’s financial statements for 2007 and 2008 and find out that, besides some cost savings, the moderate profits owe mainly to considerable sales of assets.

Last year the carrier netted CZK 111 million. About half of that figure came from the CZK 750 million sale of a subsidiary, Air Cargo Terminal. The company “saved” another CZK 480 million by selling five of its aircraft and leasing them from the buyer instead. This year’s profit – if any – will be boosted by the sale of a catering unit for CZK 380 million.

All these divestments are now increasing the company’s costs, as it has to lease the five aircraft and buy the services it previously owned.

Jan Procházka, an analyst with brokerage Cyrrus, told HN that the new management had had to part with these assets to avoid “major troubles” and to raise financial reserves that will come in handy next year. “Thanks to the cash infusion, ČSA is now less dependent on banks’ willingness to lend,” said Procházka.

Troublesome pilots

The company’s growing labour costs are another Pandora’s box that worries to the current management and that may hurt ČSA’s appeal in the eyes of buyers. A collective agreement guarantees the more than 4,700 employees an annual wage growth by inflation plus 1% until 2010.

In early December, the management announced it would like to freeze all salaries in face of the global crisis and cut pilots’ wages by 15%. But ČSA staff are known as tough negotiators who have previously shown readiness to go on strike. The unions are unlikely to back the proposal at a time when the management is telling potential buyers the company is a goldmine.

“It is true that we have been caught by surprise, especially since only two weeks ago the president [Lašák] said the company was in an excellent condition,” said Filip Gaspar, head of the pilots’ association. He admitted that pilots might be willing to make concessions, but that they will in return demand guarantees from ČSA – and its future buyer – that the saved money will be used for the company’s development. Lašák called this requirement “completely absurd”.

Too late or too early?

The government now has to make a quick decision: It can ride the expected wave of consolidation in the airline industry and quickly sell ČSA before the declining customer numbers and growing labour costs significantly affect the bottom line. Although, by May 2009 when the tender is scheduled to reach the bidding stage, the problems may become more visible and the bidders less generous.

Alternatively, the government can admit the bride is not as healthy as it seemed only a few weeks ago and postpone the wedding until the crisis is over, customers come back and the company starts making money without having to sell its assets. That is a significantly riskier path: ČSA may soon recover and its price will spike, or it will follow many other European airlines into serious economic difficulties and get to a situation when it will have to beg for a takeover rather than choose the ideal wealthy groom.

Czech Airlines loses lustre before sale image 31Kryštof Chamonikolas
is a journalist and translator living in
London. He likes writing about business and politics.
You can reach
him at [email protected]

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