LOT Polish Airlines had just taken a second major step into the future when, at the end of October, it established a true hub operation at its base at Warsaw. The first step - or perhaps more of a leap - came a year ago when the Polish Government kicked off the privatisation process with the sale of a 38% stake in its flag carrier to the SAirGroup. Jan Litwinski has no doubts about the significance of the move. He had identified privatisation as a top priority when he first took over as LOT's president and chief executive back in 1994. Even so, it still took another five years before the SAir deal was achieved. Now, he wants to go a step further and take LOT towards full privatisation - sooner rather than later.
The Polish Government announced last May that it agreed with privatisation in principal, but Litwinski is under no illusions - this could be yet another frustrating experience. Not least, such a move requires a change of the 1991 law which dictate that the state retain a controlling 51% of the shares. Official wheels grind slowly, and so far no concrete moves have been made in the Polish Parliament towards repealing that restrictive piece of legislation. According to Litwinski, SAir has told the government that it would be prepared to increase its stake, but he believes that an international public offering is the most likely way forward. He adds that to put a timeframe on this would be pure speculation, but the near future can be ruled out.
Since LOT was also being wooed by global leaders such as British Airways and Lufthansa, the choice of SAir (parent of Swissair/Sabena) as its partner may have surprised some. After all, the Swissair-led Qualiflyer alliance is argually the smallest and least global of the global airline alliances. Yet Litwinski argues that there is a logic for LOT. "Qualiflyer is a group whose philosophy is coherent with our own strategy," he says. "Its policy of basing operations around a multi-hub system created the chance of developing Warsaw into a Central European hub for the group's members, while improving the prospects for the fast development of our own traffic." LOT brings to Qualiflyer knowledge of the Polish market, a potential 35 million passengers and a good network in Central and Eastern Europe, he adds.
Litwinski makes another telling point, which clearly had a major bearing on the alliance decision: "Within Qualiflyer there is no danger of us being absorbed by a strong partner; there is no danger of LOT being degraded into a feeder position." And if the Qualiflyer grouping does tie up with a more powerful partner - discussions are thought to be taking place between Swissair and British Airways among others - Litwinski believes LOT would have more leverage as a member of Qualiflyer than if his airline were to go it alone. "Our position as LOT would be completely different than if we were to negotiate with a global partner on our own," he says.
Since becoming a full member of the alliance at the beginning of this year, LOT has already been transformed. This continuing process is set to reap further benefits for the airline over the next few months. "Qualiflyer has had a decisive influence on what has happened at LOT," Litwinski admits, but points out that his airline's restructuring programme predates joining the alliance. That had already been initiated in 1998, following analyses undertaken both in-house and by external organisations.
Five-phases of restructuring
Subsequently modified to take account of the requirements of its new business partners, restructuring has been divided into five phases. The first two steps have been completed, including the creation of a new structure and a fresh business plan through to 2003, as well as evaluation of areas of co-operation and synergy with partners. The third phase is now focused on re-engineering of internal processes. That will be followed by further integration work, with the plan being to achieve a $90 million improvement in financial results by 2003. The final fifth phase covers continuous improvement.
"We have conducted an internal re-organisation during the first half of the year, adjusting the organisational structure to the business processes and structures of Swissair," says Litwinski. Part of this was the mid-July launch of a widespread Performance Improvement Package, which included 100 separate projects, such as enhancements to ground and in-flight services. From January, LOT will also introduce a new budgeting system. The carrier already has changed its Gabriel reservation system to Octopus, integrated its Voyager frequent flyer programme with the Qualiflyer loyalty scheme and set up a modern nationwide call centre to permit 24-hour access to LOT services and ticketing.
At the same time, the airline will take over business representation of the Qualiflyer group in Poland. It already represents the group in Scandinavia, where it joined the NORDICS organisation. Sales integration includes implementation of the "Under one Roof" project, whereby separate offices and agencies are replaced by a joint operation. But, Litwinski emphasises, the most important benefit from Qualiflyer membership is integration of the network, co-ordination of timetables, and "replacing competition with collaboration". LOT's single route to the Far East has been closed. This termination leaves the prime routes to North America as its only intercontinental connections, which, through its collaboration with American Airlines, provide access to myriad destinations on that continent.
Central to the repositioning was the creation of a Qualiflyer hub at Warsaw-Okeçie Airport as of the start of the winter timetable on 29 October. The figures tell the story. The new timetable will offer around 2,300 weekly transfer connections, compared to 850 previously. This represents an increase of 151 flights on international and 48 flights on domestic routes. Examples are an additional 16 flights to Milan, 11 to Vienna, and 10 to Stockholm and Paris, as well as similar increases domestically. There are also new direct connections from Warsaw to Düsseldorf 13 times a week, to London Gatwick and Hamburg seven times, and fewer frequencies to Bucharest, Stuttgart, Tallinn and Zagreb. New direct international connections have been introduced from provincial cities to Brussels and Copenhagen. The new system divides operations at Warsaw into six daily connecting waves, with a maximum transit time of 100 minutes. To facilitate the increased schedule, LOT has taken delivery of an additional eight Embraer ERJ-145 regional jets and three more Boeing 737-500s.
The cost of LOT's restructuring and re-alignment is huge - estimated by the airline at 1 billion zloty ($215 million). But, says Litwinski: "This is not an investment for today, it is an investment for the future." A large part, he reveals, is accounted for by the $150 million re-capitalisation from the share sale to SAir.
Litwinski insists that the airline's books, which reveal losses of 40.5 million zloty in the first eight months of the year, will show profits by year's end, even taking the cost of restructuring fully into account. Although the second half of the year is traditionally the stronger, these projections look ambitious given the continued high price of fuel and weakness in the Euro currencies which represent a large part of LOT's foreign earnings. Litwinski's acceptance that the cost of the new operations will indeed exceed the anticipated rise in traffic revenues also suggests that profits will be tough to produce, unless the airline is counting on extraordinary income from somewhere else.
Extraordinary income
Such income may be realised from the sale and leaseback of aircraft, which Litwinski says is a priority. So too is diversification into a mix of ownership and operating leases for better balance sheet management. Until now, most of the fleet has been acquired through finance leasing. LOT particularly wants to buy its three Boeing 767-300s. The first four Embraer ERJ-145s were financed through Polish tax leases, the first such transactions in the country's history. The remaining Embraer aircraft may be financed the same way. The recently delivered Boeing 737-500s were acquired on short operating leases of 3.5 years because, says Litwinski, "we did not want to limit our options as to the possible issue of exchanging the whole short-haul fleet".
LOT's short-haul fleet comprises nine Boeing 737-500s, seven 737-400s, two 737-300s, 10 Embraer ERJ-145s (five more are on order) and eight ATR 72-200 turboprop aircraft. The large boost in the 50-seat ERJ-145 fleet was driven by the need to increase frequencies, allowing LOT to replace a single 737 service with two ERJ-145 flights. LOT is expected to decide next year on the replacement of the 737s with either next-generation versions or the Airbus A320 family. Litwinski insists that the airline is not locked into Boeing forever and will evaluate any Airbus offer, to make an informed choice. Qualiflyer's standardisation on Airbus types could swing the balance in favour of the European manufacturer. For long-haul flights, LOT operates two Boeing 767-200ERs and three 767-300ERs. The 737-300s are dedicated to holiday charters flights, with a third leased for the season. Charters account for 15% of international passengers. This segment will grow as a result of increased middle-class wealth, says Litwinski, but the airline faces competition from an independent Polish airline, White Eagle Aviation, which also operates 737s.
From the start of next year, the ATR 72-200s are being transferred to low-cost subsidiary EuroLOT, which operates five smaller ATR 42-300s. EuroLOT, which had its own routes and operated as an autonomous company, was re-organised on 1 August into a purely low-cost service provider. As a result, the entire route structure, as well as all management functions, such as sales and revenue management, were transferred back to the parent company. LOT now buys in at a much lower cost what are effectively wet-lease services from EuroLOT, including aircraft and crew, for its thinner domestic and regional European routes.
Providing a large number of convenient connections in an effort to create a hub is only part of the story, says Litwinski. Proper infrastructure at the airport is also required, as are appropriate operational procedures. In co-operation with the Polish Airports State Enterprise (PPL), the already crowded Terminal 1 has been fitted with extra check-in desks, an improved transit area and gate check-in facilities for passengers travelling with hand luggage only. Additionally, three new de-icing stands are being completed to avoid delays during Poland's severe winter weather.
Easier check-in
LOT is also introducing new customs clearance and check-in procedures for passengers starting their journey at domestic airports, to ease connections at Warsaw onto the international Qualiflyer network. Further check-in desks and improved bus transfers to aircraft are planned for next year. Baggage handling is a potential bottleneck and discussions are ongoing on whether to upgrade the system or build a completely new facility in conjunction with the proposed new Terminal 2.
Given the present facilities, it remains to be seen just how far LOT can go in providing an efficient hub operation at the airport. But Maciej Kalita, director of Warsaw Airport, insists that the facility is ready to handle the additional flights. He also points out that, while LOT accounts for around half of the airport's business, his priority is the airport and that his other customers will receive equal consideration. This gives the clear impression that the relationship between airport and LOT is unseasonably frosty. Warsaw-Okeçie will exceed 4 million passengers this year, close to the maximum handling capacity of 4.5 million a year. The new Terminal 2 and other planned facilities will, therefore, be essential for LOT and Qualiflyer to achieve their goals. Litwinski says the airline is being consulted by PPL on the design of the new terminal to ensure that its needs are taken into consideration.
The $300 million Terminal 2 will bring the airport's total capacity to 12.5 million passengers and 240,000 movements annually, a figure Kalita says could be reached as soon as 2010. PPL opened tender documents for the terminal at the end of September and plans to make a decision on the winning bid by next February, for a start in March. Construction will take three years.
The terminal complex will include a new railway station, which will link the airport to the central station in Warsaw's city centre. Kalita says that the rail link could bring 6-7 million passengers to the airport. PPL is also close to signing a contract for a new hotel and office building, with construction work to start in January on a 20,000m2 cargo centre. Fast taxiway exits from the two runways will also be built early next year. For the longer term, a new parallel runway is planned, which will reduce noise around the airport. A new air traffic control tower came into operation in October and the complete ATC system is being tested for commissioning within three months.
Can LOT succeed in its partnership with Qualiflyer and turn Warsaw into the main hub in Central Europe? As one LOT executive puts it: "We are trying to walk on water, and we might get wet, but we needed to take this bold step to position ourselves for the future." Litwinski envisages a future in which LOT is to be the best airline in Central Europe, with the most convenient connections between both Poland and Europe and between Poland and North America. "On a global scale," he says, "we can only compete as a group, and I hope the power of this group keeps growing."
Man for all reasons
Born in Warsaw on 20 May 1948, Jan Litwinski has been linked with LOT Polish Airlines since graduating with a Masters engineering degree from Warsaw Institute of Technology in 1972. The subject of his thesis was, appropriately, aviation.
He spent the first four years in the airline's maintenance department, before taking up a five-year posting as station manager in Madrid. After returning to Warsaw in 1981, Litwinski became manager of the international cargo department, followed by a second five-year stint in Spain as director of LOT's Madrid office.
His next appointment at home moved him up to commercial director, and, after LOT had been transformed into a Joint Stock Company of the State Treasury, he became the airline's first president, re-appointed when his first term of office expired. As head of the airline, Jan Litwinski has led LOT through a difficult period of market transformation and fleet modernisation.
Litwinski is a member of the IATA Council of Human Resources Development, and Board of Governors and vice-chairman of the National Aviation Council. He has also been a member of various advisory boards, such as the Presidential Council for Sports and Tourism and the Prime Minister's Council for Tourism.
He is married with two sons, and is fond of tennis and photography.
Source: Airline Business
