Paul Duffy/PRAGUE
IT IS FIVE years since the economies of Eastern Europe started shifting towards the styles, structures and modus operandi of the West, yet the problems facing Central and Eastern European airlines wishing to lease Western aircraft, engines and equipment are not diminishing. Many operators are struggling to come to terms with the change to business structures and practices familiar in the West.
Frantisek Shaby, executive vice-president for finance and planning at Czech Airlines (CSA), for example, explains how his company has had to cope with a complete breakdown of state-funded interest-free loans for fleet purchases. "It has all come to an end," he says. "Now state guarantees are not even available." He adds, that by 1992, because of the political changes in the region, followed by a severe national economic crisis, augmented by the Gulf War, CSA found itself with a new fleet of aircraft on order - two Airbus Industrie A310s, five Boeing 737-500s and four ATR 72s - but no cash to pay the bill. The Government provided an interest-free loan on that occasion, but that was the last time. Now CSA's board has approved plans for a new fleet - two 110- to 140-seater aircraft and up to six 70-to 80-seaters, but the airline will require 100% financing to buy them. At the same time, CSA will also have to face up to direct competition from leading European carriers. With the Czech market now close to deregulation, competition may be faced from new national carriers as well.
Krzystof Ziebinski, director of marketing and sales of LOT-Polish Airlines, says that 40 years of central planning has had a substantial effect on the country's transport system. The artificially low exchange rate, used to boost traffic for the airline, particularly on subsidised routes between Comecon countries. Just as the political and economic situation began to change, however, traffic, which peaked at 2.1 million passengers in 1989, fell to 1.2 million passengers by 1991 and has climbed only slowly upwards since then.
POLISH PRIVATISATION
Privatisation of Poland's airports, followed by huge investment, has resulted in substantial increases in airport costs. An investment in a new fleet of four Boeing 767s, ten Boeing 737s and eight ATR 72s, which are all leased, has created a further financial burden.
The fleet itself is only part of the cost - training crew on new systems and a public-relations campaign to inform the public about the new-look airline (LOT) have all been needed.
Vadim Sorokim, senior vice-president of Ukraine International Airlines, (UIA) describes the first three years of the airline's existence with a witty comment: "When you're up to your neck in alligators, it can be hard to remember that your objective was to drain the swamp". He says that the odds are stacked against CIS carriers. Just now, the Ukraine Government and GPA, joint shareholders of the airline, do not have any more money to invest in the carrier, so new investors are being sought. Negotiations are in progress with the European bank of Reconstruction and Development and two other airlines for each to take a 9% interest in UIA. The airline has decided to buy aircraft only when it has funds for deposits. In the meantime, it will lease what it needs.
Erzsebet Antal, head of finance and treasury at Malev Hungarian Airlines, describes how the airline has added Boeing 737s and 767s to its fleet since 1988, with all the difficulties of financing leasing agreements. "How can the value of these aircraft be reflected in the airline's balance sheet and help to strengthen its credit status?" she asks.
From the Western perspective, there are the difficulties of assessing credit-risk ratings for companies in Eastern Europe which often have no real accounting history on which judgements can be made, and no (or poorly designed) business plans to indicate what the needs of the borrower might be. Also, the difference between the approaches of the old Comecon accounting systems and those practised in the West mean that the gap is often very difficult to bridge.
The different legal approaches in Russia and the West are another problem. Andrew Matthews, a partner in the Prague office of legal firm Clifford Chance, outlines the lack of legislation in the area of aircraft mortgages in the Czech Republic, Poland and Russia, and the inability of registering an interest in aircraft in these countries.
He says that Russia is expected to recognise aircraft mortgages in a new civil code now being prepared. He emphasises the need to define legally the rights of the owner in the event of default, along with the need to take account of fiscal matters such as withholding taxes, import taxes and value-added tax.
Allen Oliver, vice-president for aerospace at the CIT group, describes CIT's lease of the first McDonnell Douglas DC-10 into the CIS. The aircraft was leased to Moscow-based operator Avcom, which had an agreement with ARIA to operate it in a freighter role. The agreement fell through just as the aircraft was delivered, and so, as Avcom then found difficulty in meeting the lease payments, CIT agreed to take the aircraft back. De-registration was achieved in just 5h.
WESTERN AIRCRAFT
He says that the operating economics of Western aircraft, including much lower fuel consumption will "...force airlines to acquire Western aircraft", and he is very excited about "this sector of the market".
Western financiers often suggest that operating leases are well-suited to the region's airlines, although General Electric Capital Aviation Services vice-president of marketing, Patrick Bergin, says that an innovative approach should be taken to finding answers to legal and political requirements.
Stephen Vella, managing director of Aircraft Leasing and Marketing, considers used aircraft to be potentially suitable, but a rising market has reduced availability and increased lease rates. "The sea of parked aircraft has almost gone". One difficulty, he says, is that banks show a "...lack of courage to take risks on small and medium-sized airlines in the West, let alone the CIS".
One of the major problems facing operators in Eastern Europe is the cost of insuring aircraft. Why, they ask, do Soviet-built aircraft attract higher premiums than their Western equivalents?
Colin Mahoney, director of aviation-insurance broker Alexander Howden Aviation, says that it is "...largely because the insurers don't have enough information about the accident statistics and safety records of these aircraft".
Operators in Eastern Europe also raise the problem of why airlines, now separated from political domination, and often based in countries with stable governments, often applying for European Union membership, have to pay substantial political-risk insurance premiums on top of the lease charges. "It is an expensive extra cost with no value for the payer," says Ziebinski of LOT.
Fritz Ott, executive vice-president, corporate finance of Austrian Airlines, classes the chief disadvantages of working with Eastern European operators as mainly to do with "capital and know how", but he also draws attention to "political and economic instability, and the regulatory and legal environment". Fairness should work both ways, he says, asking why "Hungary, the Czech Republic and Bulgaria" should need expensive political-risks insurance now?
He can outline the strengths of CIS aviation, however, as being "market and manpower". He says that it is all to do with "...a pent-up wish to travel, plus no shortage of pilots, excellent technicians and well-educated young people".
Eugenius Skerstonas, advisor to Lithuanian Airlines' director general, picks up on this point, saying that there is a need to send people to the West to be trained in these areas, but it is costly.
Skerstonas also talks about the care, which needs to be taken when entering a typical East/West joint venture. It often follows the same pattern he says, "Initial optimism followed by a lack of understanding".
PARTNERSHIP SUCCESS
Chris Foyle, chairman and managing director of UK freight operator Air Foyle, is more optimistic, however, and points to the success his own company has enjoyed with its partnership with the Antonov design bureau in the operation of Antonov An-124 freighters. Rene Glogg, financial director of Zimex Aviation, is equally upbeat about his company's joint venture with Avcom in the operation of executive jets from Moscow - a virtually new type of business in the region.
He describes the region as a "complex market". It should not frighten away Western partners, he says, but it is one to be approached with care. He describes the need for senior Western industrialists to travel to tight schedules, and the advantages of operating a locally based aircraft.
"The market is an important growth area for the West, as long as political and economic circumstances allow," he says.
Source: Flight International
