Poland looks to rid itself of a LOT of losses

By bne IntelliNews November 11, 2010

Jaroslaw Adamowski in Warsaw -

The long-drawn-out sale of LOT Polish Airlines could be finally entering its final stages, with the government planning to privatise the country's troubled flag carrier next year. Hopes in Warsaw are high that the deal will help propel LOT into profit after two straight years of causing losses to the Polish Treasury.

According to Poland's Deputy Minister of Treasury Zdzislaw Gawlik, four unnamed investors, including three airlines and one financial institution, are interested in purchasing a stake in the carrier. The chosen investor would acquire a minority stake through a share capital increase. "[The investor] should enter into LOT at the turn of the second and third quarter of 2011. At the same time, we are currently restructuring the company," Gawlik said, quoted by the Polish news agency PAP.

Germany's Lufthansa Group and Turkish Airlines, Europe's first and fourth biggest carriers respectively, are reportedly among the potential buyers. Should Lufthansa purchase LOT, this would significantly increase its lead over its biggest rival, the Air France-KLM group, analysts say.

The deal would also add further momentum to the German carrier's continuing growth. In the first nine months of 2010, Lufthansa, including its subsidiaries Austrian Airlines and Swiss, carried a total of 67.9m passengers, a increase of 22% over 55.6m in the same period a year earlier. This compares with the 53.2m passengers who chose to fly with Air France-KLM, down 1.5% on the same period last year. On top of that, Lufthansa's net profit for the first nine months of 2010 climbed to €524m from just €31m in the same period in 2009. The acquisition of the Polish airline could very well crown the carrier as the uncontested leader of Europe's airline market.

Marek Serafin, commissioning editor at PRTL.pl, an airline industry news site, says that laying the groundwork for the airline's privatisation, and thus securing a crucial pole position in the European market, should be a priority for LOT's board of directors. "Finding a strategic investor from the industry would be the best possible scenario for the Polish carrier," reckons Serafin. "Otherwise, it would become necessary to introduce very drastic changes in the company's business model."

Even though the airline's ongoing restructuring programme has already given positive results, its performance is still far from satisfactory. In the first seven months of 2010, the carrier narrowed its net loss to PLN64m (€16.3m) from PLN124m in the same period a year earlier. On the other hand, from January to July, approximately 2.5m passengers opted for flights with LOT, which was not only an increase of 12% from the same period last year, but also 5% over the pre-crisis year of 2008.

However, analysts argue that recent positive results of the Polish airline should not obscure that the problems faced by LOT and other medium-size national carriers in the region are of a structural nature.

Pushing for consolidation

According to Serafin, many European carriers had ambitions of setting up air transport hubs in their local airports and developing networks of long-distance flights; in Central Europe, the airlines that pursued such ambitions included LOT, Malev, CSA and Austrian Airlines. But, the fully liberalised European air transport industry does not need so many hubs, and only heavyweight players could strive for a significant share in this increasingly competitive market. "LOT's financial issues, similar to those faced by Hungary's Malev or the Czech CSA, confirm that consolidation trends dominate in the European airline market," says Serafin. "Three European carriers, committed to building major groups, are capable of contending in the global airline market.

For LOT and other regional players this means that expansion opportunities are extremely limited. But the Polish airline may have an edge over other Central European companies. "If we are to compare LOT with CSA and Malev, the outlook for the Polish carrier is far better. LOT stands good chances of entering one of the three biggest airline groups... [but] this option is no longer open to the Czech and Hungarian carrier," argues Serafin. "The two have practically scrapped long-distance flights, and now they have to struggle for survival, competing with both major airlines and low-cost carriers. Their business model will increasingly come to resemble that of the latter."

Besides financial dire straits, frequent management changes at the top have been another major source of instability at LOT. Since it was established as a joint stock company in 1992, the airline has seen 14 chief executives come and go. The latest to sit in the cockpit is Marcin Pirog, former CEO of Carlsberg Poland, appointed the head of the airline in late October. "Poland's airline market is already the largest one in our region. In 10 years, it is expected to double, and its size will most likely match that of major Western European markets," says Serafin.

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