Tim Gosling in Prague -

Turkish Airlines backed out of talks to buy LOT Polish Airlines late on June 1. Warsaw says it will continue to talk to the other suitors it has insisted there has been all along, though claims the deal was scuppered by EU legislation ruling out control from outside the bloc are bad news for struggling airlines across Europe hoping for a saviour from the east.

Turkish Airlines (TA) had been upfront and bullish on its bid to buy out the struggling national carrier in order to establish a base in Central Europe. Therefore, its blunt statement to the Istanbul Stock Exchange on June 1 that it is withdrawing from negotiations was a surprise. Given that TA had recently said it hoped it could have the deal wrapped up by early summer, its sudden realisation that the deal would have made a "limited contribution to its medium- to long-term plans" leaves as many questions as it answers.

Unnamed "unofficial" sources hint to the sale being dropped because of EU law, which outlaws companies from outside the bloc owning more than 50% in any EU airline, reports Polish Radio. If so, that will alarm a host of flag carriers outside the three major European alliance groups (Star Alliance, Sky Team and One World), which are hunting for new investment. The pool of candidates is limited, with Turkish joined by operators from the Middle East such as Emirates as the only likely saviours.

Spokeswoman for Poland's Treasury Ministry, Magdalena Kobos, told journalists that after receiving formal notice from TA, "we will return to talks with other partners who have declared an interest in LOT."

However, sources close to the Treasury Ministry told Polish Radio that no other airline is interested in securing a deal with the ailing Polish carrier, which saw a much improved performance in 2011 to cut its loss to PLN145.5m (€36m).

Marcin Pirog, chairman of LOT, said that the board will concentrate on securing the airline's financial position, whilst admitting that the TA withdrawal"complicates matters. "The better the financial condition the company finds itself in, the more attractive it will be as a partner," he said.

Looking east

Poland has been enthusiastically chatting up China in recent months, inviting investment as it seeks to make itself the Asian giant's premier partner in CEE. Although it may have come relatively early in the relationship, this is just the sort of situation for which that effort has been designed. It's notable that Pirog spoke whilst on a visit to Beijing, a destination that LOT has just returned to after a number of years. On May 31, Deputy Treasury Minister Rafal Baniak met with the chairman of Air China, voicing hope that that the airline may be interested in the privatisation of LOT. Baniak said at the time that this would show TA the truth of Warsaw's previous claims that it is not the only prospective investor in the state-owned airline.

However, sources close to Air China told Polish Radio that privatisation talks took place only once, and that "that is too little to warrant talks concerning any interest of Air China to purchase LOT." At the same time, like any other investor, the Chinese are unlikely to be interested in a non-controlling stake in the Polish airline.

Analysts at Renaissance Capital suggest the breakdown of the deal is not too surprising: "We believe abandoning the LOT acquisition would not hurt [TA's] development plans, as the synergy effects from acquiring LOT appear limited to us, given the proximity of the air carriers' hubs, increased competition on Middle Eastern and African routes, and risks of a worsening global economy. In addition, the air carriers follow different business models with different fleet orientation (long-haul [TA] vs a more regional focus for Lot, which has recently been trying to reorient its operations through an Asian network expansion; an aggressive growth model for [TA] vs a more stable development focus for Lot through cost cutting to turn around its loss-making operations). While most press reports did not mention the potential value of the aborted deal, Polish newspapers (eg. Polish daily Rzeczpospolita) provided an estimate of PLN2bn ($630m)."