Korean Air confirms bid for Czech flag carrier

By bne IntelliNews March 6, 2013

bne -

Korean Air confirmed on March 5 that it has made a bid for a 44% stake in Czech Airlines (CSA). Should the deal go through, it will give the struggling flag carrier, and parsimonious government, a surprisingly positive outcome to efforts to find an angel from the east.

Admitting a bid of "several million dollars" for CSA, a Korean Air spokesman was quoted by AFP as saying: "We submitted a bid for the stake in Czech Airlines last week after doing due diligence. If successful, this will be our first investment in another airliner." He added that the carrier has no plan to seek managerial control of the Czech airline.

Prague put up to 96% of the wholly government-owned carrier back on the block in November, following a ditched privatization attempt in 2009. Details of the offer are expected to be released by Finance Minister Miroslav Kalousek following a cabinet meeting on March 6, Czech daily Dnes reported on March 4.

Prague had previously set a March deadline for bids, and auditor Ernst & Young valued the company at CZK148m (€5.8m). "This has happened, we didn't have to change the schedule," Michaela Lagronova, spokeswoman for Cesky Aeroholding - the airline's holding company - told CTK.

CSA, which boasts a fleet of 26 planes none of which it owns, is in the latter stages of a three-year restructuring, which included a merger with the operator of its hub - Vaclav Havel Airport Prague - in an attempt to stem years of losses.

Hunting angels from the east

Similar to many regional peers, the Czech airline has seen that poor performance deepen recently, and it finished 2011 CZK241m in the red. The ongoing crisis - combined with high fuel prices and competition from budget airlines - has already knocked several European airlines out of the sky, and flag carriers in the CEE region have become ever more desperate to pin down strategic investors to help pull them into shape.

In the latest instance, Bosnia-Herzegovina announced on March 5 that BH Airlines has been grounded. The Balkan flag carrier now faces possible bankruptcy after Turkish Airlines pulled out of a joint venture in June last year, handing its 49% stake back to the government.

Fiscal austerity in European capitals - Prague is a particularly enthusiastic proponent - makes the hunt for an angel even keener, while the EU has also been clamping down on state handouts designed to keep these airlines flying. Hungary's Malev was grounded in February 2012 when Brussels demanded it hand back years of government subsidies.

Yet EU rules also present another obstacle, by forbidding control of airlines in member states by companies from outside the bloc. It was just that legislation which scuppered a deal last year that would have seen LOT Polish Airlines sold to Turkish Airlines, and it's a significant stumbling block given that the main candidates to take on Central Europe's airlines are the cash-rich operators from developing economies in the Middle and Far East looking for a European hub to build out their long haul networks westwards.

However, Korean Air - a CSA peer in the SkyTeam global airline alliance - is apparently happy enough without a controlling stake, having been working with the Czechs on closer cooperation recently. The companies set up a code-share agreement allowing the cross-selling of seats on each others' flights in Europe and Asia in December, reports Reuters, and as part of the privatization agreement, CSA will resume long-haul services - which were cut as part of its efforts to restructure in 2010 - with a twice-weekly flight between Prague and Seoul.

Korean Air already flies to the Czech capital four-times a week, and its spokesman admitted that it's CSA's routes and airport slots in CEE - it flies across Visegrad, as well as to the Baltics, Romania and Russia - that make it an attractive investment option.

Sole bidder

Yet it wasn't enough to tempt Qatar Airways without access to a controlling stake apparently, with reports in local media saying that the South Korean airline is the sole bidder. Qatar admitted it was looking into making a bid earlier this year, but has now dropped out, reports claim. The airline refused to comment to Reuters.

That suggests Prague may be looking at a somewhat low offer from Korean Air, but given the parlous state of the European airline industry, ongoing losses across the region's flag carriers and high competition for the handful of potential suitors, it would likely need to be a derisory offer for it to turn down the bid. Indeed, the CEO of Cesky Aeroholding said bluntly on television in November - when Prague put the company up for grabs - that the risk of not being able to find a strategic investor at that time "is higher than 70%".

That said, Prague has made it clear in the past that it can't afford to give in to every demand to take CSA off its hands. The last effort to privatise the flag carrier in 2009, following heavy losses from a failed expansion plan, collapsed when the sole bidder - Czech charter airline Travel Service - said it refused to complete the acquisition without securing a capital injection from the government. The offer was €40m back then. The total value of Cesky Aeroholding is CZK2.3bn according to local media reports.

The government, on the other hand, claimed that it canceled the deal because the bid was too low. Prime Minister Petr Necas insisted in November that his government is ready to do the same if there's no suitable bid received.

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