bne -

The Polish government is in advanced talks with Etihad Airways over the sale of a large minority stake in LOT Polish Airlines, according to unnamed sources cited by Aviation Week. The government needs to offload the struggling flag carrier before it is forced to act on threats to let it sink or swim.

Reports that the United Arab Emirates airline was sniffing around its Polish counterpart emerged in early August. Unnamed sources confirmed to Aviation Week on August 9 that negotiations with the Abu Dhabi based-Etihad are already at an advanced stage. However, they also noted that it could be several months before any deal is reached.

An Etihad spokesman told the magazine, "we never comment on rumours and speculation." LOT also refused to comment, while the Polish Ministry of Treasury - which manages state property - would say only that "seeking an investor for LOT is in progress."

A sale would be a godsend for Warsaw, which like many other European governments has been trying to find a strategic investor for its national airline for some time. With the crisis hitting demand and high oil prices sending fuel bills skyrocketing, like many of its regional peers LOT has seen years of losses. Last year it had predicted it would be back in the black, but ended with a €38m loss.

The government has been forced to prop the airline up with handouts for years, but said late last year that it would not allow it to become a "bottomless pit". Despite that pledge, allowing LOT to sink would clearly be an unpopular move politically for a government that has seen its approval ratings sink in recent months. LOT CEO Sebastian Mikosz confirmed on August 5 that he has applied for another handout, which should be handed over next month.

Penned in by EU rules on state support, as well as state efforts towards stricter fiscal management, LOT joins other European airlines in facing a bleak future without finding a partner ready to buy a significant stake. With European airlines mostly struggling, the main candidates are found among Middle Eastern and Asian operators seeking a European hub.

However, EU rules prevent majority ownership in its airlines from outside the bloc. Turkish Airlines was close to buying LOT last year, but backed off at the last minute, reportedly due to that rule. Poland's Treasury points out that "the involvement of a non-EU investor in LOT is also possible in the current legal status. Parties to the transaction, however, are bound to develop legal mechanisms to ensure that LOT preserves the status as a community (European Union) carrier."

The two sides of the equation now appear to be adapting. Next door, the Czech Republic agreed a deal to sell 49% in Czech Airlines to Korean Air earlier this year, while Etihad agreed a deal to buy 49% in Serbia's JAT - rechristened Serbia Airlines - late last month. That deal - which hands the buyer management control despite not holding a majority - cost Etihad $39m out of an acquisitions pot of $100m, according to Polish business daily Rzeczpospolita. According to industry sources, the Abu Dhabi-based airline is looking at a similar acquisition of a large minority stake in LOT. Currently, the treasury holds 68%, the government-owned TFS Silesia Regional Economic Fund has 25%, while employees control the remaining 7%.

Should the deal in Poland go through, LOT would be the fourth European airline in which Etihad holds equity, with stakes also in Ireland's Aer Lingus and low cost carrier Air Berlin - in which it accepted a 29% holding to avoid crossing the 50% foreign ownership threshold.

Sources close to the company claim Etihad has no plans to merge its European affiliates into one entity, but is looking at central overall network planning and a harmonized strategy. Etihad argues it can realize significant synergies on the cost side, through joint purchasing and in other areas.