Poland reportedly set to launch talks with Air China on Lot stake

Poland reportedly set to launch talks with Air China on Lot stake
Lot has been seeking an investor to help it navigate stormy skies for years.
By bne IntelliNews August 3, 2016

Warsaw is set to launch talks with Air China over the sale of a 49% stake in state-owned Lot Polish Airlines, local media reported on August 3.

Following years of losses, and restructuring with the help of public money, Lot is on course to post a profit of PLN30mn (€6.8mn) from core operations after the first six months of 2016, the company said in late June. That should put Poland in a better position to attract a strategic investor. While the Law and Justice (PiS) government is generally opposed to privatisation, officials admitted earlier this year that concluding a multi-year hunt for an investor swiftly is a priority for Lot's survival.

The likely valuation of the minority stake in the Polish carrier is unclear. Rzeczpospolita speculates it may be $100mn (€89.3mn), based on an independent valuation carried out by transport consultancy Tor.

Both Lot and Air China have been showing interest in developing activity in one another's home market. Lot would like to expand its current Chinese routes to include at least one city other than Beijing. Air China is opening a route to Warsaw in September.

However, a deal would serve a more fundamental service for the Polish flag carrier. Like many of its European peers, Poland has been looking for a strategic investor for the loss-making airline for years. However, EU rules insisting investors from outside the bloc cannot control any airline within it have scuppered more than one deal across the continent, including plans by Turkish Airlines to buy Lot.

Lot’s need for an investor is met by the lure for Asian and Middle Eastern airlines to establish European hubs. At the same time, China is pushing to deepen business and investment ties in many sectors across the bloc, with Central & Eastern European states seen as a bridgehead.

Beijing is busy signing deals across CEE, with host countries keen to secure a slice of its massive investment warchest. For the government in Warsaw, cooperation with China offers the chance of capital inflows while Western investors are weighing the political risks attached to the current administration. Poland signed a strategic partnership deal with China in June.

Should the Chinese buy into Lot eventually, the transaction would be similar to Korean Air’s acqisition of a 44% stake in Czech airlines CSA in 2013. The deal gave CSA a solid financial footing after years of losses and a failed privatisation attempt. Chinese company CEFC, which has been busy buying up a variety of smaller assets in the country, bought into CSA earlier this year, and is reportedly hoping to expand its holding.