Poland still has a LOT left to privatise

By bne IntelliNews February 14, 2008

Matthew Day in Warsaw -

After years of talk and delays, Poland's national airline LOT appears to be readying for take off on the Warsaw Stock Exchange (WSE). Ditching the long-dominant policy of procrastination that surrounded the airline's privatisation, the Polish government has made it clear that come the summer, LOT will shed its state-owned status.

Reflecting the new Polish government's apparent eagerness to privatise, Deputy Treasury Minister Zdzislaw Gawlik has gone on the record saying it is a "foregone conclusion" that the Treasury will sell its 67.97% stake in the airline, with the ministry earmarking June and July as possible months for LOT to debut on the WSE.

The tail-wagging enthusiasm to float the airline comes as a change of tack since Warsaw's last serious flirtation with LOT's privatisation in 1999. Then, SwissAir bought a 25% stake in the Polish airline, but thoughts of any more sell-offs were cooled by the Swiss carrier's spectacular bankruptcy in 2001, and then chilled further by differing approaches to privatisation from successive Polish governments.

And question marks have already been raised over the wisdom of pushing through LOT's privatisation this year. Recent turmoil on the world's financial markets, which has sent share prices falling, has undermined the appeal of an IPO, with fears that the government could fail to get a good price for its stake. These anxieties have been expatiated by a possible downturn in the travel sector resulting from a slowdown in the global economy, and LOT having to contend with rising fuel and wage costs. "This year will be difficult," conceded LOT's CEO, Piotr Siennicki, at a press conference in early February, adding that LOT would probably have pay €27m more for fuel, €6.9m more in wages and €4.1m in higher regulatory fees than in 2007.

Take off

Despite these problems, now could still be a good time to sell. "The airlines of the world last year collectively had their first year of profitability since 2001," says Laurie Price, director of aviation strategy at Mott MacDonald, a management and engineering consultancy. "It may well be a good time to privatise, as it looks to us as if the underlying drivers of traffic, such as increasing per capita GDP and competitive fairs, are still there."

LOT, which flew 3.7m passengers last year, would also benefit from investment. Like many flag-carriers it has had to contend with the voracious growth of regional low-cost airlines while at the same time fighting with Europe's long-established players. A monetary shot in the arm should help the airline re-enforce its market position.

So far, Lufthansa has emerged as the only serious contender to buy into LOT if the government opts to also bring in a strategic investor. Although the German airline has remained coy about its plans, Gawlik has confirmed that the Germans have expressed an interest in buying a majority stake in the Polish carrier, and that a meeting between the Treasury and Lufthansa has been arranged.

LOT's membership of Lufthansa's Star Alliance would grant any purchase a natural synergy, but more importantly, says Price, a controlling stake in the Polish airline would make abundant sense to Lufthansa, as it would help it tap into what the International Air Transport Association calls the "world's fastest growing air passenger market," with growth of over 11% predicted for the next two years.

"The Germans can increase their business opportunities in a new and emerging market that is growing by double-digit figures a year," Price says. "The market is also tied to a fast growing and economy, and Poland's population has shown an incredible propensity to fly."

Price adds that LOT, which should take delivery of eight Boeing 787s over the next two years, also comes with a relatively modern fleet, and has the added appeal of a low-cost base. The airline also appears to have turned its back on a rather chequered financial past by posting reasonable results of late. In the first nine months of last year, it recorded a basic operation profit of €22m, a marked improvement on 2006 when it ran up €11.8m in losses.

The prospect of a prized Polish company being owned by what some regard as a regional competitor has prompted calls for the airline to look for a buyer from outside Europe. There are reports that Russia's Aeroflot is interested. However, this is less likely because EU law forbids non-EU airlines from buying a controlling stake in a European airline.

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Poland still has a LOT left to privatise

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