Czechs agree deal to sell flag carrier stake to Korean Air

By bne IntelliNews March 14, 2013

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The Czech government on March 13 gave the green light to an offer from Korean Air for a 44% stake in flag carrier Czech Airlines (CSA). The swift approval of the deal suggests Prague knows just how lucky it is to have found an angel from the east.

In line with the CZK148m valuation of the Czech airline by auditor Ernst & Young, the Asian carrier will pay CZK67.5m (€2.6m) for the minority stake in CSA, Prime Minister Petr Necas told journalists following a cabinet meeting, reports CTK. Korean Air confirmed on March 5 that it had made an offer the previous week. Necas says a contract is due to be signed on April 9.

The buyer will guarantee CSA's future and employment levels, and will also help with the development of the Vaclav Havel Airport Prague, said Finance Minister Miroslav Kalousek.

Following years of losses, Prague put up to 96% of the government-owned carrier back on the block in November, following a ditched privatisation attempt in 2009. The fact that it has found a buyer in the current environment, despite myriad obstacles, must be seen as a significant success. The attraction for the buyer is the Czech operator's potential as a European hub. A Korean Air spokesman said earlier in the month that the Asian carrier has no plan to seek managerial control of the Czech airline.

CSA, which boasts a fleet of 26 planes - none of which it owns - has just completed a three-year restructuring, which included a merger with the operator of its hub, Vaclav Havel Airport Prague. Kalousek claims a sale was a logical consequence of that process. "We have put an end to the restructuring process which aimed to rescue the future of CSA as part of [Cesky] Aeroholding," he pointed out.

However, similar to many regional peers, the Czech airline has seen its poor performance deepen recently despite the restructuring, and it finished 2011 some CZK241m in the red. The ongoing crisis - combined with high fuel prices and competition from budget airlines - has already knocked several European airlines out of the sky, and flag carriers in the CEE region have become ever more desperate to pin down strategic investors to help pull them into shape.

In the latest instance, Bosnia-Herzegovina announced on March 5 that BH Airlines has been grounded. The Balkan flag carrier now faces possible bankruptcy after Turkish Airlines pulled out of a joint venture in June last year, handing its 49% stake back to the government. BH is apparently back in the air after a deal with its bank, but for how long?

Fiscal austerity in European capitals - Prague is a particularly enthusiastic proponent - makes the hunt for an angel even keener, while the EU has also been clamping down on state handouts designed to keep these airlines flying. Hungary's Malev was grounded in February 2012 when Brussels demanded it hand back years of government subsidies. According to CTK, the entry of an investor was a condition of the European Commission for its approval of a CZK2.5bn loan to CSA from the state late last year.

Yet EU rules also present another obstacle, by forbidding control of airlines in member states by companies from outside the bloc. It was just that legislation which scuppered a deal last year that would have seen LOT Polish Airlines sold to Turkish Airlines, and it's a significant stumbling block given that the main candidates to take on Central Europe's airlines are the cash-rich operators from developing economies in the Middle and Far East looking for a European hub to build out their long haul networks westwards.

However, Korean Air - a CSA peer in the SkyTeam global airline alliance - is apparently happy enough without a controlling stake, having been working with the Czechs on closer cooperation recently. The companies set up a code-share agreement allowing the cross-selling of seats on each others' flights in Europe and Asia in December, reports Reuters, and as part of the privatization agreement, CSA will resume long-haul services - which were cut as part of its efforts to restructure in 2010 - with a twice-weekly flight between Prague and Seoul.

Korean Air already flies to the Czech capital four-times a week, and its spokesman admitted that it's CSA's routes and airport slots in CEE - it flies across Visegrad, as well as to the Baltics, Romania and Russia - that make it an attractive investment option.

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