Poland looks to wean LOT off state aid as it clears EU hurdle

By bne IntelliNews July 30, 2014

Tim Gosling in Prague -


Warsaw leapt on July 29 to push troubled flag carrier LOT Polish Airlines to raise its efforts to find a buyer as a ruling from the European Commission on state aid cleared the way for any potential saviour. 

The Polish government has complained bitterly over the past couple of years as it has been forced to pump more cash into the airline. Last year, as yet another supposed turnaround resulted instead in yet another request for help, Prime Minister Donald Tusk warned that the carrier is not sacred. 

On top of huge losses, and the doldrums through which Europe's national airlines have been flying for years, LOT has had the threat hanging over it that Brussels could force it to hand back the millions in state aid.

However, as it heavily hinted it would do earlier this month, the European Commission has now approved PLN804m (€200m) in state aid. It also ruled that the company’s sales of subsidiaries to the state were made under market conditions and therefore not a form of state support. If Brussels had found the rescue funds were improperly given and ordered them repaid, LOT would likely have faced bankruptcy. It was just such a scenario that grounded Hungary's Malev airlines in 2012.

However, the commission said LOT's ongoing restructuring plan "will allow the company to become viable in the long-term without unduly distorting competition". 

Back in black

Alongside approval of the aid, Brussels' faith that LOT can reverse its losses will cheer the government, which wouldn't welcome the inevitable backlash if it had to pull the plug on the flag carrier. At the same time, the government has illustrated it is running out of patience and cash. Contrary to recent suggestions of an emerging turnaround from the flag carrier's management, an analysis of the airline's books by KPMG found large and growing liquidity problems, as bne reported earlier this month

The analysis rated LOT's overall ongoing and contingent liabilities at PLN3.7bn (€896m) at the end of 2013, a PLN500m increase over a year earlier. The dire numbers "indicate continuing uncertainty which could raise serious doubts about the ability of the company to continue functioning," the accountants wrote.

The gloomy situation was in stark contrast to a recent announcement by management, which asserted LOT has embarked on a deep restructuring and that its results are finally beginning to turn around. The state-owned carrier posted a net profit of PLN26m in 2013, compared with a PLN400m net loss the previous year. The goal is to have LOT permanently flying in the black by 2015.

That 2012 loss tipped the flag carrier into deep financial trouble, which saw it forced to request a PLN400m bailout from the government. Visibly irked, Warsaw promptly replaced top management. A new team, headed by CEO Sebastian Mikosz has revamped LOT's long-haul network and renegotiated contracts with unions to cut costs. The government has actually approved a second PLN400m tranche of aid for LOT, but Mikosz has not tapped that as yet, insisting instead that he can fix the carrier's problems. However, it's thought the airline may take advantage of the money later this year.

Mother's milk

Unsurprisingly, Warsaw is keen now that the state aid threat has been removed to wean the airline off state help as swiftly as possible. Like many others in the region, the government has been trying to offload its national carrier. However, European industry struggles have reduced the list of potential EU suitors. Airlines from the Middle East and Asia are keen to establish European hubs - the Czech and Serbian flag carriers both sold stakes to eastern investors last year - but EU regulations prevent any company from outside the bloc owning a majority of any airline within its borders.

It was that legislation that scuppered a sale of LOT to Turkish Airlines in 2011. Government officials have maintained in recent month that talks with potential suitors are ongoing, although names have not been leaked.

"LOT has had a long and very difficult restructuring. We expect to complete this process, which formally take place in October 2015," said Treasury Minister Wlodzimierz Karpinski in a statement. The tasks now before the company are to maintain its position as the leading carrier in Central and Eastern Europe, intensify work on a long-term strategy, and use its potential … to actively seek a strategic investor."

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