Those familiar with east European aviation since the fall of the Berlin Wall could be forgiven a wry smile when CSA Czech Airlines announced its intention to join with Air France and its SkyTeam global alliance. Back in 1992, Air France had taken a 19% stake in the then-Czechoslovakian flag carrier, only for the relationship to end acrimoniously two years later with the Czech government buying back the shares. Both sides insist that history is not going to repeat itself. Neither is CSA alone among the region's carriers in hoping for a fresh start.
CSA president Miroslav Kula was a board member at the time of the first Air France deal, and is consequently aware of the irony of the present situation. "We are doing things the opposite way around this time. We will start with commercial co-operation and later on we can talk about shareholding and capital," he says.
A further sign of an intent to bury past differences comes from Air France chairman Jean-Cyril Spinetta. He says the two carriers "have always had constructive bilateral relations. Even when they were difficult, they were constructive." He confirms that Air France is considering a stake of up to 15% in CSA. Prague has indicated that it hopes to launch a public flotation around 2002-2003, which Kula says will involve 30- 35% of the airline's equity.
Air France partner Delta Air Lines could also be interested in a stake, although its senior vice president for alliances, Paul Matsen, sounded cautious when asked about the possibility raised by the flotation. "It has been part of our discussions, but we have not made any commitments," he says, adding "We don't consider equity a necessity, although it can be appropriate in certain strategic situations."
This leaves Air France looking like the most likely candidate, although those familiar with the region warn that it has not got CSA in the bag yet. Uwe Baur, vice president of consultant SH&E , believes that the CSA situation "is still open" and that the French carrier could yet find itself trumped by others when the equity comes on offer. He points out that British Airways was very close to Poland's LOT at one stage, but then found itself outbid by both Lufthansa and, the eventual winner the SAirGroup when an equity stake came up for offer.
Despite this cautionary tale, it is still possible that in a few year's time the two carriers could once again find themselves in an alliance as they were in 1992. Kula is confident that this time things will work out. "Both are very different airlines," he says.
Kula is hardly understating the point here. Under the stewardship of Jean-Cyril Spinetta, Air France has metamorphosed from a struggling giant reliant on state aid to one of Europe's most profitable airlines. Similarly, CSA has had time to put the Communist era behind it and made a net profit of $1.1 million on a turnover of $394 million last year.
One of the main reasons for Air France's success has been the expansion of its Paris Charles de Gaulle hub, while CSA similarly sees its Prague hub as a major selling point. Spinetta cites CSA's connections to Eastern and Central Europe as one of its key attractions. David Bishko, general manager finance and planning for Delta's Atlantic region, says "as well as an additional customer base and frequent flyers, CSA gives us a new gateway." Noting the difficulties of a single hub serving the whole of Europe, he says Prague can become a hub for eastern Europe, with Paris CDGserving western Europe. This would provide "the flexibility of two gateways."
Alliance interest
SkyTeam is not alone in seeing the opportunities which an Eastern Europe hub brings. The Star Alliance has gained significant extra access through the addition of Austrian Airlines and its hubbing operation at Vienna Airport, which has passenger volumes considerably larger than those of Prague and Budapest combined (see tables over page).
Fear of becoming just a feeder for dominant western alliance partners has been a stumbling block in previous East-West airline partnerships, including the previous CSA-Air France marriage. LOT chief executive Jan Litwinski says that one reason for choosing to join SAir's multi-hub Qualiflyer alliance was that there was less chance of being downgraded to a feeder operation.
Advisors to the privatisation process argue that this fear is exaggerated. Budapest, Prague and Warsaw boast strong economies by Eastern European standards, as well as substantial émigré populations with a penchant for visiting the homeland, providing a strong passenger base. SH&E's Baur says that although some prestige routes from the state-controlled era may be dropped by western partners, it would not make sense to turn the carriers into feeder operations. "You could build up a feeder operation cheaper by starting from scratch."
Some insight can be gained from CSA's future plans. The carrier is launching a Prague-Vilnius service next year on the back of its SkyTeam membership and says it plans to "further develop its network in Eastern and Southern Europe." CSA also plans to fly to Lyon, Air France's second hub.
Transatlantic services are being boosted with a return (after four years absence) to New York's JFK Airport, using Delta's facility, and the two carriers have filed for a wide ranging codeshare agreement.
Baur says there has also been significant interest from Asian carriers. He says the Far East carriers are attracted by the possibility of feeding some Western European routes that have insufficient traffic to justify non-stop services.
Hungarian strategic partner
Hungarian flag carrier Malév is also once again seeking a Western partner, although it is offering an equity stake at the outset. As with CSA, Malév has experience with aborted alliances: Alitalia owned 35% of its shares, before having to sell them in 1997 as a condition of the Italian carrier's state aid package.
Malév hopes to have a new strategic partner in place next year, and is currently in the midst of a bidding process, with a 10% (which may rise as high as 47%) stake on offer. However, the run up to this deadline has seen first the carrier's chairman, Csaba Siklos, and more recently its chief executive officer, Ferenc Kovacs, leave the carrier.
The latter's departure last month, according to local media reports, was sparked by his opposition to workforce cuts designed to streamline the carrier in the run up to privatisation. Kovacs was appointed in October last year, after serving as deputy to Antol Pongracz, who also served for less than a year. His successor is his former deputy, Dr Erzsebet Antal.
A commentator close to the carrier's privatisation talks said that the loss of Kovacs "was not the sort of thing you want to see when you are privatising an airline." He added, however, that APV, the Hungarian state privatisation agency, has taken a leading role in the running of the airline and that the loss "would not make much of a difference."
Whatever the repercussions of Kovacs' departure on Malév's privatisation timetable, the situation there appears much healthier than in Romania, where flag carrier Tarom's privatisation has been postponed.
The reasons behind this are political with an imminent general election having "blind-sided" the privatisation process, according to one source close to the talks. Tarom is seen as a difficult sell anyway, with Romania's economy in far worse shape than those of Hungary, the Czech Republic and Poland. It is not expected to be in the first wave of new entrants to the European Union (EU).
Relations between the Eastern states and the EU is a key issue casting its shadow over the privatisation process. Brussels is in negotiations with 10 Eastern European nations, initially covering membership of the European Common Aviation Area (ECAA) as a step towards full EU membership.
A key part of these talks has been the transitional period during which time the Eastern airline industries would be partially protected from sudden exposure to more vigorous market conditions. The length and depth of this transitional period has been the main sticking point in these talks. States such as Romania and Bulgaria, which are not anticipated to be in the first wave of new EU members, are expected to have longer and more protective transition arrangements than those on the fast track like the Czech Republic.
Hungary and Poland are the only states still to sign an agreement. Brussels insiders say that negotiations with the latter are very near completion, but that talks with Budapest have been bogged down in wider negotiations covering Hungary's EU entry.
If agreement with Hungary cannot be reached, there is a possibility that Brussels may go ahead anyway. Indications are that negotiations with at least nine of the ten states will be wrapped up early next year, after which the procedural process will begin. Ratification is anticipated in early 2002.
If Hungary fails to reach agreement on joining ECAA, commentators point out that it is expected to be in the first wave of Eastern European countries joining the EU, for which it would almost certainly have to join the ECAA anyway. "The ECAA situation was something that investors need to take into consideration," warned one analyst close to the privatisation talks.
This and the latest developments at Tarom and Malév show that there are no shortage of surprises in store when it comes to Eastern European privatisation's - although it should be remembered that unstable global alliances mean the choice is no less tricky for those seeking partners. Those familiar with Eastern European aviation history can look forward to more twists and turns in the rocky road towards privatisation.
Source: Airline Business
