Poland's national air carrier needs zł.1 billion to stave off bankruptcy Warsaw Chopin Airport

With one of the most modern fleets on the continent, Poland’s state-owned air carrier LOT had dreams of conquering the skies. Instead it now needs millions in state aid to survive.

Waves were made back in November 2012 when the first Boeing 787 Dreamliner in Europe was delivered to LOT. The new aircraft was the first of eight to join the airline’s fleet as a replacement for the outdated Boeing 767s.

The airline will pay significantly higher lease payments for its new toys when compared to the old planes, as much as zł.900,000 monthly according to data obtained by Forbes from an unnamed source. Still, the same source claims that a transatlantic flight with the 787 will bring zł.150,000 more in ticket revenue, with savings on fuel costs on service to New York running zł.50,000 to zł.60,000.

Also, LOT was heavily advertising the fact that its Dreamliner is the very first on the continent. The national carrier promised it would make good on its claims to take advantage of this particular window of opportunity to strengthen its position on North American and Asian destinations, especially considering heavy competition from Lufthansa, which already has a fleet of larger B747s and will have its own Dreamliners by spring.

Wake-up call

Today though, the facts do not paint an optimistic picture. The company is in deeper trouble than any new airplane can fix. LOT has asked the government for as much as zł.1 billion in aid to get back on its feet, starting with a zł.400 million tranche to pay off current obligations, which was recently paid out.

Marcin Piróg was promptly dismissed from his post as CEO after Treasury Minister Mikołaj Budzanowski blamed him directly for the state of affairs at the airline. The board of directors designated Zbigniew Mazur, in charge of financial affairs, to assume leadership of LOT until a new CEO is appointed. His top priority for now is the implementation of restructuring measures to get the airline out of its five-year-long losing streak.

Airspace is a battlefield

Of course, it was no secret to industry experts and analysts that the Polish national airline is in dire straits. Just as the shining Dreamliner was touching ground at Warsaw’s Chopin Airport, transportation expert Adrian Furgalski firmly stated in a radio interview that there was no chance that the new 787s would save the Polish airline.

He agreed that the new plane will save money and provide more comfort, but noted that presenting eight new aircraft as the only solution was clearly an overstatement. Mr Furgalski also pointed out that no progress has been made in terms of privatization and with time, the company is becoming less and less attractive for any investor with its whopping zł.150 million loss in 2011 and no hope of getting out of the red this year.
Analysts also doubted the success of the strategy presented by then-CEO Marcin Piróg, who insisted that having the first Dreamliners on the continent “will allow us to move from a slightly defensive position to the offense, since we have a product which is definitely better than what the competition has. The second airline to receive a Dreamliner in Europe is British Airways – and they will have the plane 9 months later than LOT.”

The problem here, though, is that while LOT will in fact have the 787s waiting to take passengers to North America and Asia, it will have a hard time expanding its domestic and European service. That in turn is needed to bring in passengers to the hub in Warsaw, since customers from the capital or other Polish cities alone are not enough to fill the seats on transatlantic flights.

Another major issue is that the network of flights from Europe to the US, China or Japan is a battlefield with players much mightier than LOT. The competition has better transfer hubs and bigger fleets. Airlines the likes of Air France, British Airways or Lufthansa can easily bring in passengers from a number of regional airports. Besides, says Marek Serafin, editor-in-chief of the PRTL.pl aviation web portal, these airlines use larger planes, such as the Airbus A380 or the Boeing 777 for intercontinental service, in which the per-passenger cost is much lower than that of the 787.

2013 not looking too rosy

In an interview for PRTL.pl, Elżbieta Marciszewska, a professor at the department of transportation at the Warsaw School of Economics said that the economic outlook will not help LOT. “2013 will be a difficult year for the Polish aviation industry. It is difficult to assess whether the new Dreamliners alone will be effective enough to promote long-haul service. Will LOT manage to intercept transit traffic, especially in the lucrative business and premium classes?”

Ms Marciszewska noted that air carriers from the Persian Gulf are targeting the region. Moreover, Norwegian is announcing the launch of an inexpensive transatlantic service using their fleet of Dreamliner 787s, not to mention LOT’s Star Group partner Lufthansa, which is gradually increasing its presence at Polish airports. The traffic to and from the US could increase if visa-free travel for Poles were to be approved, but LOT shouldn’t count on filling its premium and business class seats here.

Polish Treasury Minister Mikołaj Budzanowski is pushing LOT to restructure Courtesy of MSP.GOV.PL

What’s next?

The Treasury Ministry has agreed to provide the national airline with financial aid in exchange for some radical changes in its operations. As part of this, LOT is set to implement job cuts that would see at least 600 people lose employment. These cuts are expected to save the company as much as zł.300 million annually.
According to Rzeczpospolita, the reductions would mainly affect the company’s ground staff. The national air carrier will also reduce the number of flights operated and the Embraer 170 and Boeing 737 aircraft used by LOT would be returned to the leasing company. All in all, the reductions could bring in savings of about zł.600 million annually.

That may not be enough, says aviation expert Sebastian Gościniarek. He recalls how during the past year, LOT sold off nearly all of its assets to avoid bankruptcy, so it has nothing more to liquidate. The situation is difficult, he says, but it is hard to assess how difficult, since LOT has not disclosed much data over the past few months. Dziennik Gazeta Prawna obtained insider information suggesting that the zł.1 billion promised will not solve all the problems. LOT is a bottomless pit, one employee familiar with the company’s financial situation was anonymously quoted as saying and added that in 2012, the company sold real estate, stock and shares in subsidiaries for zł.900 million, which it managed to quickly spend. Mr Furgalski strongly feels that nothing will save a company that has been bringing losses year after year and suggests that LOT should very simply declare bankruptcy.

Yet the Polish government, as the major shareholder of the national airline, remains optimistic as to LOT’s future. Treasury Minister Mikołaj Budzanowski presented three available options: bankruptcy and liquidation of the carrier; privatization; or restructuring followed by privatization. He said that the State Treasury chooses to go with the third option. As a result, LOT will receive the needed financing and a detailed plan for far-reaching restructuring will be prepared, which will include headcount reduction and trimming of non-profitable destinations and outdated machines. Only after that phase is complete will the Treasury return to the search for a suitable strategic sector investor, who would retain the LOT brand name once the company is privatized.

Will they succeed this time around? Or will LOT join the likes of Hungarian national carrier Malev and become a page in aviation history? 2013 will likely be the year we find out.

Mark Ordon