Iskra Pavlova in Sofia -

With Slovenia set to announce the names of interested investors in flag carrier Adria Airways in the coming weeks, worries are rising about the company’s ability to keep its business in the air until a saviour arrives.

Adria is one of 15 state-controlled firms that Ljubljana plans to sell under a major privatisation programme adopted in June 2013 to avoid an international bailout of the economy. In July, Slovenia managed to reduce the number of remaining companies slated for privatisation to seven after completing the sale of its second biggest lender Nova Kreditna Banka Maribor (NKBM) and ski manufacturer Elan. However, a month later the government’s asset-selling body SDH had to cancel the sale of Telekom Slovenije and chemical producer Cinkarna Celje, meaning it has fulfilled just half of its privatisation pledges more than two years after the adoption of the plan.

It remains to be seen what will be the fate of Adria’s sale. The invitation for letters of interest was published in July, but no official statement on the sales process has been released since then. The daily Finance reported on September 21, quoting unofficial information, that the bidding deadline expired on September 20, claiming some offers had arrived from investment funds.

The Slovenian government has already tried to privatise Adria before in 2012, but the tender ended in early 2013 with no sale despite reportedly attracting 10 bids. Media reported that Germany's Intro Aviation, a consultancy firm that helps troubled airlines recover, came the closest to acquiring it.

Like other governments in the region coping with struggling flag carriers, Slovenia also tried to tempt a rich Middle Eastern investor into taking control. President Borut Pahor proposed that Qatar Airways take a stake in Adria during a meeting with Qatari Emir Sheikh Tamim bin Hamad al-Thani in Doha on January 15, a Slovenian official told a number of Gulf newspapers. Doomed Serbian airline Jat was rescued by Etihad of Abu Dhabi in 2013 largely through the efforts of the country’s prime minister, Aleksandar Vucic; it’s now flying high as Air Serbia. Governments in Croatia and Montenegro are still trying to find buyers for their troubled airlines.

Nothing came of Pahor’s offer, so the Slovenian government’s only option is to try another privatisation tender for the 91.58% held by the state (the remainder belongs to individual shareholders). Yet time is short.

Lack of fuel

According to local media, Adria has plunged into a liquidity crisis and could have problems surviving the winter season when passenger traffic decreases and with it the company’s cash flow. And on September 19, the Dnevnik daily reported that sources as saying that Adria has been even exploring the option of asking for more state support to solve its cash flow problems.

The airline already received a €50mn assistance from the state in 2011 to support its restructuring following several difficult years, which the European Commission said in 2014 was in line with EU state aid rules. The finance ministry was quoted as saying in the Dnevnik report that it is well aware of Adria’s liquidity problems, but at the same time underlined that it should not hope for a fresh injection of capital. “The company cannot receive new state aid for solving liquidity issues in the coming ten years since it has already received restructuring assistance [in 2011],” the ministry noted without giving further explanation.

Adria officials told Dnevnik in the same report that the airline has not asked the government for a new capital injection, but urged the state and the respective ministries to help improve the business environment in the aviation industry. According to Adria, its problems result from too high airport fees and fuel prices in Slovenia.

Adria Airways managed to report a small profit last year, for the first time since 2007, yet this was not a result of improved operations but only thanks to the sale and leaseback agreement for two aircrafts signed in December. Adria turned to a €0.9mn profit in 2014 from the €2.9mn loss in 2013 and the €10.8mn loss in 2012.

The company auditors KPMG said in July, in a statement published as part of Adria’s 2014 financial report that without the profit from the aircraft sale, Adria would have reported a €4.4mn loss for 2014. In particular, the company sold the two aircrafts for €22.6mn, earning a €5.3mn profit from the transaction since their value on its books stood at €17.3mn.

Moreover, KPMG noted that Adria’s early 2015 financial results have further deteriorated after it reported a €5.3mn loss in January-April alone. KPMG warned that if Adria fails to realise its plans for 2015, serious doubts would be cast on its ability to continue as a going concern.

In a move to cope with the expected downturn in its business during the slow winter season, Adria announced on September 10 that it is suspending its Maribor-London Southend route for the winter, estimating it would not deliver the expected business results during the period. The route was only launched in June.

The airline said in its financial statements that it will continue take measures to optimise its fleet in 2015 and proceed with its restructuring programme, which includes the sale of stakes in daughter companies, of remaining holiday capacities and of property it does not use.

After its net sales revenue remained almost unchanged in 2014, edging up 0.7% to €143mn, Adria hopes to see it rising 17% in 2015 thanks to higher passenger numbers. It plans to transport 1.37mn passengers this year, up from 1.11mn in 2014 (when they rose 8.4%). Earlier in September, the Slovenian statistics office reported that Adria transported 695,500 passengers in January-July, up 16% on year.

Adria’s long-term financial liabilities (loans from domestic banks) dropped 69% to €7.2mn in 2014 after the company repaid some bank loans thanks to the aircraft sales. Short-term liabilities to banks also declined, by 77% to some €2.8mn, but short-term liabilities to suppliers went up 5% to almost €22mn.

At the same time, the company’s assets shrank 32% to €47mn at the end of last year. Short-term assets fell 8.3% to €13.3mn, a shortfall of more than €11mn over Adria’s total short-term liabilities (€24.6mn). The equity capital edged down to €9.9mn from €10.1mn.

Media reports argue that following the latest aircraft sales in December, Adria’s property has diminished as well as its potential revenue sources, which might be critical in case some of its partners and suppliers (ie. Ljubljana Airport) demand payment of overdue debts.

Finance’s brief September 21 report quotes unnamed market experts as alleging that the approaching negotiations with potential buyers for Adria could be difficult, depending on how much of the company’s debt the state is prepared to assume.