AndrzejJeziorski/PRAGUE
The irony of watching consecutive presentations on successful alliance strategies from representatives of Air France and Czech Airlines (CSA) cannot have escaped many of the delegates attending the Adam Smith Institute's conference on Air Transport in Central Europe and the Baltic States in early June.
These airlines' own alliance, which had seemed set to give CSA a head start over other carriers in ex-Communist Central Europe, came to an acrimonious end in March 1994. In August 1992, Air France had bought a 19.1% stake in CSA for $30 million, which was eventually bought back by the state-owned bank Konsolidacni Banka, following intense Czech dissatisfaction with the way Air France was treating the alliance.
Differences between the French and Czech sides had come to a head with Air France demanding a $25 million cash injection from the Czech Government, which then held 49% of the airline, claiming that the loss-making joint venture had been overvalued. At the time, CSA was losing market share to more aggressive competitors, struggling under unfavourable lease terms on two Airbus A310s, and trying to come up with an adequate restructuring plan to make it financially viable.
IRRECONCILABLE DIFFERENCES
One of the problems with the deal was that the partners had competing interests, says CSA's vice-president marketing, Jiri Prusa. "If two airlines are too close to each other and one is big and one is small, the temptation is to turn the small one into a feeder for the other," he adds.
CSA had also hoped that Air France would help it modernise its distribution system: this never happened, however.
Subsequent efforts to find a replacement partner were soon shelved, and the airline's shares remain largely state-controlled - owned by the Government's National Property Fund (which now holds 56.42% following revaluation of the airline's shares), Konsolidacni Banka (16.32%) and the European Bank for Reconstruction and Development (16.32%). The remaining 10.94% share is held by a Czech insurance company, the city of Prague and other private shareholders, and there are no plans to privatise further, says Prusa.
Since the split with Air France, CSA has been content with a codeshare deal with Luxair, joint-services agreements with Iberia and THY Turkish Airlines, and block space agreements with KLM, LOT Polish Airlines and German flag carrier Lufthansa.
"Alliances may hurt when they go wrong, when objectives are not met, when there are unbalanced benefits between partners," says Air France's Michel Gorog. CSA would certainly agree, and Prusa rules out any future partnerships involving a sale of equity.
In fact, it is hard to find any successful joint ventures with Western carriers in the region at all. Some observers say that those airlines which started up joint ventures in the region soon after the dramatic political changes at the turn of the decade seemed to have no clear idea of what to do with their new partnerships.
Malev's 1992 alliance with Alitalia has amounted to little, and the financially troubled Italian airline may soon sell some or all of its stake in the Hungarian flag carrier. LOT has been going it alone until now, mostly successfully, although the airline still cherishes years-old hopes of a strategic alliance.
The smaller-scale efforts of airBaltic - the Latvian/Scandinavian/USjoint venture - seem more promising, and the airline could still break even this year. The similarly pocket-sized Estonian Air - managed since 1996 by Denmark's Maersk Air following the Estonian carrier's privatisation - is forecasting that it will produce measurable profits in 1999.
There are many reasons why Central European airlines might want alliances with Western carriers, beyond the usual benefits of network and market expansion, increased competitiveness and joint frequent-flyer programmes.
Prusa says that the specific problems facing the ex-Communist Bloc must be considered. The region's airlines have entered the international competitive market late. "This is one of the reasons why Central and Eastern European airlines must make alliances a part of their strategy," says Prusa - but he stresses that the type of alliance must be right.
Image problem
The airlines also find themselves faced with an image problem: people in the West see them as unsafe "-even though the product is just as good", says Prusa.
Like most airlines in the region today, CSA has a fleet the bulk of whose 25 aircraft are now Western - Aero International (Regional) (AI(R)) ATR 42s and 72s, Airbus A310s and Boeing 737s - and its safety record is exemplary. Yet CSA recently had to sue a German newspaper which illustrated a story on air safety in the ex-Eastern Bloc with a collage showing a CSA Tupolev Tu-134 apparently about to collide with another aircraft.
This type of negative perception is used by competitors to their advantage, says Prusa. A credible partner airline could help defuse the problem.
The region's airlines also face other problems, including limited local markets, lower productivity arising from pre-1990 business practices, immature communication, distribution and marketing operations, and financial commitments linked to fleet upgrades. Prusa also expresses concern over "hasty" transitions to liberal market conditions.
"Liberalisation is, of course, something we all should be aiming at, but unfortunately the development in the Czech Republic and some other countries has been too fast, and does not take into account 50 years of Communism, and a lack of understanding and experience of competitive markets," says Prusa. If liberalisation comes too fast, Central Europe's airlines might not be able to adjust in time.
"Fifty years of Communism", however, is a chant frequently heard by Westerners trying to do business in the region when things go wrong, and eventually stops being an effective excuse. "How long do these countries need to adjust?" frustrated entrepreneurs ask.
Prusa says that exaggerated expectations from one or both partners put alliances at risk: Western carriers looking for immediate results will almost certainly not find them in this part of the world.
The interests of the partners must also be compatible, and the type of alliance must be right: whether route specific co-operation or a joint venture. While the joint venture with Air France was disastrous, the two airlines continued jointly operating a Prague-Paris service - successfully, says CSA - until just recently.
So, given the problems likely to be encountered, why would a Western carrier want to enter such an alliance in the first place?
Air transport in Eastern Europe is underdeveloped, but growing, says Frederik Sorensen, head of the European Commission's Air Transport Policy Unit. The unit is conducting early negotiations with all ten Central European countries, with the goal of establishing common rules for civil aviation across the whole of the European continent, based on European Union regulations.
According to Sorensen, European Union airports handled twice as many passengers in 1992 as the total population of the EU's member states. In Central Europe, the passenger-number figure was about 15% of the region's population, with the individual countries' figures varying between 10% and 40%.
"There is no doubt that the traffic growth potential is very large," says Sorensen, although observers note that growth has not taken place as quickly as some airlines had hoped. Alliances with local carriers nevertheless do give Western airlines a presence in a growing market, and a partner which can operate as a low-cost feeder to long-haul routes. Yet these attractive potential benefits must somehow be reconciled with the smaller partner's own desire to grow, and not to be reduced to a regional feeder.
An interesting contrast to the Air France/CSA story is offered by recent developments in the Baltic states, where the national carriers of two of the countries, Estonia and Latvia, are both international joint ventures.
Latvia's airBaltic is a joint venture between the Latvian Government, Baltic International USA (BIUSA) and SAS, and operates to major North European airports - flying some of these routes in partnership with SAS and Lufthansa. The airline's history goes back to 1991when BIUSA decided to create a Riga-based airline using a fleet of aircraft which formerly belonged to the Latvian division of Aeroflot.
The intention was to link all three Baltic states to major CIS and European cities through a Riga hub. BIUSA thus offered to take a one-third stake in the former national carrier Latavio, with its fleet of 22 jet airliners and 14 turboprops.
BALTIC contrast
The recently independent neighbouring states Estonia and Lithuania reacted badly, however, reluctant to see their traffic siphoned away from them. Theoretically, each country recognised that the Baltic states are simply too small to have three national airlines: in practice, however, each country wanted its own capital to become the hub for the region.
So BIUSA agreed on a lower-key approach, and in June 1992 Baltic International Airlines was founded - 60% owned by the state, 40% by BIUSA. The airline would serve routes to Germany and Switzerland using a fleet of two Tu-134s, and leaving Russia, Scandinavia and Central Europe to Latavio.
The company later operated a leased McDonnell Douglas DC-9, then two Boeing 727s, with which it served Frankfurt and London Gatwick.
In 1994, SAS and BIUSA were asked by the Latvian Government to draw up a plan for a single Latvian national airline with mixed state and private ownership. SAS was operating frequent services to Riga and had 50 years' experience in tri-national ownership shared between the state and private sectors, and looked a promising partner.
Negotiations with the Latvian authorities dragged out over a year, during which time the Government tried to privatise Latavio.
"It would be difficult to describe the disruptive impact of this move," says Daniel Solon, BIUSA's vice-president Europe. SAS refused to have anything to do with the privatisation, for fear that it would "taint" its own project, now known as airBaltic.
The privatisation failed dismally. Latavio folded, and airBaltic finally began to operate in October 1995. The airline was launched under SAS management, with 51% of shares in Government hands, 28.5% with SAS, 8% with BIUSA and 6.2% each held by Swedish and Danish funds.
After initially planning to operate a fleet of ex-SAS DC-9s, airBaltic has opted instead for a leased fleet of three Avro RJ 70 regional jets and one Saab 340 turboprop. The airline now plans to replace one of the RJ 70s with a larger RJ 85 within the next 18 months, and may acquire a second RJ 85 later. A second Saab 340 or a 2000 is also being considered.
The company hopes to break even this year, despite the introduction of a new $12 per-passenger airport departure tax which threatens to keep airBaltic in the red a little longer (Flight International, 18-24 June).
Baltic International Airlines still exists as a dormant shell company in the hands of BIUSA, with the right to operate both passenger charter and cargo flights.
WHAT ABOUT THE NEIGHBOURS?
airBaltic's US shareholder also placed a bid in the privatisation of Estonian Air, when the Tallinn Government decided to offer 66% of the national airline to private buyers, allowing 49% foreign ownership. In the end, however, the Estonian privatisation agency decided to select Maersk Air, together with its partner Cresco International, which is an Estonian investment company.
Maersk now owns 49% of the airline, Cresco has 17% and the Estonian Government retains 34%. Solon believes that Maersk was chosen partly because of an unspoken desire in Estonia to spread foreign investment beyond already substantial Swedish and Finnish interests in the country, while the Danish carrier's unquestionable operational expertise and financial strength clinched the deal.
Estonian Air has changed beyond recognition from its original ex-Aeroflot fleet of 13 Tu-134s, four Yakovlev Yak-40s and 12 Antonov An-2s, to its current, somewhat smaller fleet of two leased Boeing 737-500s and two Fokker 50s. The airline claims it now carries more passengers on these four aircraft than it did with its entire Soviet-built fleet, and it predicts that it will be in profit by 1999 as passenger numbers and sales continue to climb (Flight International, 7-13 May).
Estonian is also looking at new codeshare deals with KLM and British Airways to add to existing co-operation with Finnair.
Poles apart
One Central European carrier which has operated with some success and no strategic partnerships up to now is Poland's LOT. The carrier was modestly profitable until last year, when it was badly hit by exchange rates and operating cost increases (Flight International, 18-24 June).Revenues are still growing, however, and it is about to transfer its regional operations to a lower-cost subsidiary called EuroLOT, which was due to be launched at the beginning of July.
Since 1992, the company has slashed its workforce from about 5,500 to about 4,000, says Jacek Tomaszewski, LOT's senior commercial officer for strategic planning and network development. Productivity has climbed steadily, and activities not directly related to air transport operations - such as catering, ground handling and fuelling - have been transferred to new sister companies and subsidiaries.
The airline has revised its route strategy, dropping unprofitable services and focusing on West European destinations.
The company has also made efforts to improve its image. "If we are going to find our place in tough competition, we must not settle for being perceived as an airline located on the sidelines of Europe, utilising obsolete technology and carrying the very cheapest portion of traffic only," says Tomaszewski.
LOT now operates an all-Western fleet of Boeing 767s and 737s, and ATR 72 turboprops, which are now being handed over to EuroLOT. The company has struck code-share deals with Air France, Alitalia, American Airlines, Austrian Airlines, Lufthansa and Swissair.
The Polish flag carrier says that it is in talks with an unnamed potential strategic partner - probably American Airlines, say sources in the industry - but it is too early to tell what form such a partnership could take, or indeed whether it will go ahead.
Sources in the airline say that there is concern in Poland that a joint-venture partner could try to absorb LOT completely, turning it into a feeder, and these fears have to be allayed before a deal can be struck. There is certain to be no decision on a partnership of this sort before the Government gives the go-ahead for privatisation of the airline, which is still 100%-owned by the state treasury.
No progress can be expected on privatisation now until after the parliamentary elections are held in September, say airline sources. LOT therefore seems to be facing at least another year on its own.
Source: Flight International
