In a LOT of trouble

By bne IntelliNews May 14, 2009

Matthew Day in Warsaw -

It is one of the world's oldest airlines, but a proud 80-year history of shuttling people around the globe may not be enough to save LOT Polish Airlines from bankruptcy.

The Polish state-owned company has endured a torrid time of late, and as the airline industry deals with the unexpected costs of swine flu, few expect LOT to escape yet more pain. More suffering could move the airline closer to the edge. Last year, it ran up unconfirmed losses of up to €162m, and the fact that the airline has delayed releasing its official results owing to discussions with its auditor over the 2009 budget has added to the swirl of unpleasant rumour surrounding it.

In particular, local newspapers have claimed that the airline now has trouble paying its bills as credit from unforthcoming banks dries up. Although LOT contests these reports, its denial has hardly been adamant. "Of course there are delays on some payments, but we are paying invoices," says Andrzej Kozlowski, spokesman for LOT. "We are in touch with business partners and are trying to coordinate the payments as much as we can."

Perfect storm

LOT's predicament reflects the problems faced by most of the world's airlines as they struggle to deal with the global recession. Passenger demand, according to the International Air Travel Association, "is falling in all regions" despite airlines cutting capacity.

LOT's woes, however, have been compounded a fuel hedging deal struck when global oil prices were surging. But instead of remaining high, as most expected them to, oil prices crashed, yet LOT has had to carry on paying the amount in its contract. To add insult to injury, the Polish zloty also began to lose value, adding to the strain the cost of aviation fuel has put on LOT's budget.

The Polish airline can take some limited consolation from many of its problems stemming from external, rather than operational, factors. But, says Geoff van Klaveren, an airline analyst at Exane BNP Paribas, LOT, like many small airlines, faces an uphill struggle. "There is a strategic issue in that most legacy airlines tend to have quite high cost bases," he says. "Now, the ones like KLM-Air France and BA have dealt with it by concentrating on long-haul premium traffic in order to cover their costs. The problem with the smaller network airlines, like LOT, is that they tend to be more short-haul focused, so bump up against the low-cost airlines much more frequently.

"Air France can say 'OK, we're prepared to lose out on market share to low costs on short haul because we're going to focus on long haul'. But LOT, which doesn't really have the scale or destinations and frequencies on long hauls, can't do this," he says.

Faced with mounting problems, LOT has started to nose around for a buyer.

With its good financial reserves and an appetite for expansion, Lufthansa has been touted as the most likely to buy into the ailing Polish airline, which is also part of the German carrier's Star Alliance.

But there are problems. To begin with, Lufthansa already has deals with three other airlines – BMI, Austrian and Brussels Airline – on its books and therefore could shy away from shelling out more cash for yet another carrier. On top of this, says Van Klaveren, Lufthansa prefers airlines that have restructured, which, he points out, is something LOT has singularly failed to do.

With Lufthansa a doubt, the Polish government said it will talk with Air France and BA to see if they're interested. If not, as a last resort the state could bail out LOT. But this could break European Union rules on state aid, so at the moment the airline's chances of survival appear slim.

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