Korean Air agrees to participate in Czech Airlines capital hike

By bne IntelliNews October 23, 2014

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Korean Air will participate in the capital hike of struggling flag carrier CSA Czech Airlines, the Central European airline said on October 23. CSA, which is fighting once more to stabilise itself, has been pressing the Asian company, which holds a 44% stake, to put its hand in its pockets for close to two months. 

Noting a "huge shift" in negotiations, CSA said in a statement that the "board received a decision by Korean Air to financially contribute to CSA's stabilisation and also a proposal for a contribution to its capital”.

It added that CSA parent Cesky Aeroholding - which groups the airline with Letiste Praha, operator of Prague's international airport - "has pledged to study the Korean Air proposal and it is ready to contribute to the capital increase of Czech Airlines as a private investor”. 

However, the statement offered no other details of the commitments, saying only that the CSA board will study the Korean Air offer. Cesky Aeroholding has said the carrier will need a financial boost of around $20m (€15.8m) in the next six months.
 
The capital hike was proposed by Finance Minister Andrej Babis to stabilise the company after CSA announced plans to cut a third of its staff. The Czech state holds 54% of the carrier, for the meantime, while insurer Ceska Pojistovna has a 2.26% interest.

Korean Air has told CSA said that increased financial support is contingent upon fulfilment of that restructuring plan approved in early September. CSA ended 2013 with a loss of CZK 922m (€33.3m). 

The Asian airline bought its 44% stake in April 2013 for just €2.6m. The privatisation contract provides it with an option to buy an additional 34%, and the airline is now awaiting regulatory approval to transfer this stake to Czech privately-owned carrier Travel Service. As a result, the state's stake in CSA will fall to 19.7%.

Stumbling block

That deal with Travel Service reflects a stumbling block that plagues flag carriers around Europe. Facing tough competition from low cost airlines, reduced demand through the global financial crisis, high fuel costs, and a clampdown by Brussels on state aid, many are looking for investors. The only realistic interest is from Middle Eastern and Asian operators seeking a European hub, but EU regulations do not allow majority ownership from outside the bloc. 

That leaves struggling national airlines with the unenviable task of trying to hawk minority stakes in companies making huge losses. However, the grounding of Hungary's Malev in February 2012, after the EU said it must pay back state aid, has served as a wake up call.

CSA is one of the few to have made a deal happen - hence the tiny price paid by Korean Air. EU is hopeful Serbia is another to have managed the trick, after it handed a 49% stake in JAT Airways to Etihad last year in return for a $40m investment in the company. The United Arab Emirates flag carrier also holds management rights for five years in the newly-christened Air Serbia.

However, Polish LOT Airlines continues to struggle. The EU limits scuppered a deal with Turkish Airlines in 2012, and since then the company has been scrambling to restructure while it survives on state handouts from Warsaw. 

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