Poland tries to keep LOT aloft

By bne IntelliNews February 15, 2013

Jan Cienski in Warsaw -

Air disasters are usually caused by a cascade of improbable failures that build to a catastrophic conclusion - the same is true for ailing airlines, as LOT Polish Airlines is finding out as it battles to stay aloft.

LOT, owned by the state treasury, has been in trouble for more than a decade, but seemed to be finally turning a corner last year, with management predicting a PLN52m (€12.5m) profit for the year, boosted by the PR buzz of becoming the first European carrier to take possession of Boeing's new 787 Dreamliner.

Instead, the flag carrier had to turn to the government for a PLN400m emergency injection of cash in December just to be able to keep flying, and now looks likely to post a net loss of about PLN200m for the year. That revelation ended up getting CEO Marcin Pirog fired.

Added to the airline's woes, the Dreamliner was brought down to earth with suspected problems with its innovative batteries - leaving LOT unable to use it on lucrative long-haul routes. On February 14, the airline said that its two current Boeing 787 Dreamliners will remain grounded through the summer season until November, forcing LOT to extend the lease on three Boeings 767 that it currently uses and look to lease two more 767s for the summer season.

LOT of bad news

LOT has also been savaged by fierce competition from low-cost carriers like Ryanair and Wizz Air, who are much cheaper and more nimble than the lumbering former national airline.

At the top end of the market, big European carriers like Lufthansa, BA and Air France siphon off Polish passengers through their west European hubs to long-haul destinations. A new threat has also landed in the form of Middle-East airlines Qatar and Emirates, who are offering rock-bottom fares to Asia through their Gulf hubs.

The man riding to LOT's rescue is Sebastian Mikosz, who was its CEO in 2009-2010 and helped it extricate itself from the consequences of badly drafted fuel supply contracts that were drowning the airline in red ink. He left after falling afoul of the airline's powerful unions, but was summoned back by an embattled treasury minister, Mikolaj Budzanowski, whose own job is in danger from a furious prime minister, and given a very broad license to rescue the airline as quickly as possible. "I have [Donald Tusk's] blessing to do whatever is necessary. I am being permitted to do what was not possible two years ago," Mikosz told reporters just a few days after taking over the airline.

But a rescue will involve juggling a lot of balls.

One is negotiating with the European Commission, which has to approve the December rescue package, as well as any further aid for restructuring the airline, which could come to an additional PLN600m. The rescue plan is supposed to be presented to the Commission by June 20, and its approval is likely contingent on LOT cutting capacity so as not to violate the EU's competition regulations.

Another is figuring out what to do about the Dreamliners. Mikosz said by scratching them from LOT's line-up, he will have to rely instead on older 767s, which have fewer lucrative business and premium seats. Meanwhile, LOT has to continue making payments for airliners sitting uselessly on tarmacs in Warsaw and Chicago. "Dammit, the Dreamliners would have finally given us a bit of a competitive edge," said an obviously frustrated Mikosz.

He has written to Boeing asking for help in negotiating new leases for the fleet needed to make up for the lack of Dreamliners. Once the current crisis is over, LOT is also likely to ask Boeing for compensation.

He is also preparing the airline for another round of layoffs, sending a request to local authorities for as many as 500 job cuts out of LOT's 2,300 staff. "If there are no group layoffs, the airline will not survive," said PM Tusk, who is keen to avoid a similar kind of political fallout from LOT going bankrupt that the Hungarian government faced when Malev went belly up in spectacular fashion in 2012.

Mikosz is also tweaking the schedule, dropping four routes that were not making money while adding long-hauls to New York and Chicago, where LOT has a competitive advantage in offering direct flights to Poland for the large Polish diaspora that lives there.

He is also pressing the government to move quickly to change a law that reserves a majority of voting shares for the state, a restriction that makes LOT an unpalatable potential takeover target. "I don't believe in a privatisation process that does not allow for a change of control," Mikosz said, noting that the law scared off potential buyers during his previous stint as CEO. "I am counting on the government to change the law, it is a litmus test of its intentions towards Lot."

That is Mikosz's goal - to turn LOT around as quickly as possible and prepare it for sale before the end of this year.

The most obvious partner would be a European carrier, who would be able to take control of LOT and incorporate it into its own network. However, the big carriers have made it clear that they are not interested at the moment.

Non-EU airlines are constrained by EU regulations from taking a majority stake in an EU carrier - one of the factors that dissuaded Turkish from making a bid last year, but Mikosz feels that a creative approach could make LOT interesting for a non-EU airline. "I am convinced and I believe that LOT can be privatised," he said. "That is my most important goal."

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