It's four o'clock by the time I sit down with Radomir Lašák, the 43-year old chief executive of CSA Czech Airlines. Airline Business arrived at the firm's Prague headquarters on the day the Czech Government formally opened the long talked of tender for the privatisation of the SkyTeam carrier. Our meeting has already slipped several hours as the day's commitments have mounted up for Lašák. But despite a hectic schedule, he remains completely unflustered at the end of what could be such a privotal day in the airline's history.
This is in keeping with Lašák's focused approach to the task of turning around CSA. He took the helm in early 2006 after the central European carrier had overstretched during an ambitious expansion and found itself struggling to stay afloat. A successful privatisation would mark a significant conclusion to the airline's turnaround efforts.
So how close was CSA to collapse when he took over? "Close," says Lašák. "I started to read about bankruptcy law."
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He pinpoints the carrier's difficulties as the growth of the business not matching the massive expansion embarked on in 2004. After several years of steady growth, boosted by the popularity of its Prague base and entry into the SkyTeam Alliance, the airline had set out on a large growth path. It grew its fleet from 35 to 50 aircraft in the space of a couple of years, placed an order for a dozen Airbus A320s to overhaul its narrowbody fleet and drew up an ambitious growth plan.
"The problem was the capacity was not full and they started to fight with low cost via the price," says Lašák. "It's crazy for a standard national carrier to do these kind of steps. It means at the end of 2005 there was zero in the account, there was a huge confirmation of the purchase of 12 Airbus aircraft [to come] without any of its own capital, and they increased the wages hugely. It means the status of the company wasn't so good."
On taking the helm, Lašák tore up the carrier's business plan on the grounds its starting point was inaccurate. The Kc500 million ($23 million) result figure for the base year was about right. But it was a Kc500 million loss, not a profit.
Lašák set to work on a new strategy and by the summer of 2006 a new, more pragmatic three-year business plan had been approved. This included the sale of assets such as its catering business and air cargo terminal to help generate funds and tackle its debts. A new management team was put in place and Lašák, fresh from leading the turnaround at Czech internet bank eBanka, embarked on turning around the carrier's fortunes.
"It's not about one big bang," says Lašák. "The turnaround in the company was based on a huge number of decisions. The first was to start to push the sales side to sell, to increase the prices and implement a strongly managed sales force, to manage the prices and so on.
"The second thing was the cost side, where there was still a huge, huge mess. It means we pushed cost savings everywhere. Through the combination of the two methodologies, via hundreds of steps, we were able to turn around the company and the three-year programme was really successful."
The performance met its financial objectives. The first year saw a stabilisation of the losses, the second year - aided by the sale of its air cargo terminal - a net profit of Kc207 million and at the nine-month stage, the third year was on course for profit.
If Lašák feels the carrier struggled by trying to compete on price with low-cost carriers, it has under his leadership clearly positioned itself as a network carrier serving business passengers. The route network has been overhauled to concentrate on routes with one key criterion profitability. The result is a more business-friendly network and more destinations in Eastern Europe and into central Asia.
More adjustment will follow this summer. Buoyed by the success of the Almaty route in Kazakhstan it opened last year, CSA plans to open two more destinations in central Asia this summer. It also plans more frequencies to the Russian cities of Moscow and St Petersburg in 2009 and more business-friendly timings for its Manchester service.
"The airline business is simpler than others," says Lašák, pointing to the ability to study the data to understand passenger flows. "You are able to evaluate where the potential is. It's not just a feeling, it's about hard numbers. We are able to evaluate performance on each flight. If there is an unprofitable connection we move it."
In line with this philosophy, CSA has also scaled back its long-haul operations to include just one year-round scheduled route to New York - it also operates seasonal scheduled flights to Toronto. The remainder of its long-haul Airbus A310 capacity is deployed on charter flights.
"We strongly focus on the business passengers and we were very successful because we were able to increase the average price [yields]," he says. "For the rest of the capacity we found a very good model, Click4Sky."
Click4Sky was established in the autumn of 2007 as a virtual low-cost airline product. The carrier sells out unused capacity, predominantly on off-peak flights, at a fixed one-way price of 59 ($71) through this brand.
"It was very successful because it added some additional revenues, but didn't cannibalise the core business of CSA. That is the reason we divided these brands," says Lašák.
It comes after successive CSA management teams had wrestled with how best to tackle the threat from low-cost carriers, which have long been present at an attractive and open Prague. Central European budget carrier Wizz Air is the latest to join the fray, launching six routes from Prague in February. It is one of 10 budget airlines, out of more than 40 airlines in total, operating at Prague and generating around a quarter of the airport's traffic.
While CSA previously studied establishing its own low-cost brand, the creation of the separate Click4Sky brand, sold on a separate website, is part of the clear distinction of CSA as a network carrier.
"I think the situation is the same everywhere. It's not possible to transfer the standard national carrier to low-cost," he says. "There are a number of reasons this is not possible. There are a large number of trade unions and the history, because we have some extra costs from additional business activities and connected facilities like handling and maintenance. Thanks to this history - CSA is one of the oldest airlines at 85 years - I think it's not able to implement a low-cost model easily. We are not low-cost, we do not want to be branded as low-cost and this strategy was successful," he says.
Lašák acknowledges the airline's recovery was aided by the positive market conditions of 2007. "We were lucky as it was at a stage where the whole economy was increasing and it was a good time for doing good business, but this situation finished during the middle of last year," he says.
"We grew the passenger numbers on a daily basis to the end of September last year," he says. Passenger traffic over the first nine months of 2008 grew nearly 5% to 4.4 million. But conditions deteriorated in the last quarter. "The last three months there was a decrease," says Lašák.
Even amid high fuel costs, CSA had at the nine-month stage of 2008 doubled pre-tax profits to $22 million and recorded operating profits a third higher at nearly $40 million. But, in keeping with most airlines, the deteriorating market conditions took its toll in the final quarter.
"We are [still] expecting a profit for 2008," says Lašák, but noting this will in part be achieved through revenues generated by the divestment of its air catering unit at the start of 2008. "The business plan was to break even [at an operating level], but thanks to high fuel prices and the last quarter, we were not able to achieve break even. Profit will be good, it will be positive, but the operating profit for the core business without extra items will not be sufficient to cover the costs of the company."
Like most airline executives, Lašák is still waiting to see how 2009 will turn out. But generating only around 20% of its revenues from the Czech home market, the carrier's fortunes are to some extent tied to those of the overseas markets its serves.
The tougher market conditions already mean CSA will revisit its new business plan. Having achieved the stabilisation of the company in its first three-year plan ending 2008, CSA last summer drew up a new business plan for 2009-13.
The vision retains the hallmarks of Lašák's more watchful approach, targeting a 5% increase in turnover over the course of the plan while remaining relatively comparable in size. The fleet is planned to increase from 50 to 55 aircraft, though capacity would be further boosted by the arrival of more A320s into the fleet.
CSA has already taken its first 12 A320-family aircraft and in 2007 converted options on eight more A319s for delivery in 2011/12, helping to reduce its costs. Combined with further cost savings, the plan aims to boost profits ten-fold from Kc100 million to Kc1 billion by 2013.
"This plan will have to be adjusted because of the current situation," says Lašák. "We didn't suppose some huge increase on the passenger side, we counted something like one, two, maximum three percent traffic growth year-by-year. But the current situation [in the market] there is a double digit decrease, which is unbelievable. So we introduced an action plan to react to current market conditions and to partly compensate for the sudden decrease in passengers."
The Czech Republic hopes the task of seeing through this next phase of development will be carried out under new owners of CSA. Privatisation has long been on the agenda for the airline, but its failure to find consistent profitability has long delayed it. The government has had the wheels in motion for a privatisation since appointing Lašák, but made CSA's financial recovery the key condition to moving ahead with the sale.
That time has now come with the tender opened for the sale of the state's 91% stake in the airline on 5 February (see box). It envisages selection of a strategic partner no later than the end of September.
"The government, I hope, will sell a 91% stake and I am able to see the future of this company in connection with some bigger market," says Lašák. "It depends who will buy this company whether it is a west side or east side company. I think there is more business logic to co-operate in the east. If you fly from the west there are a lot of hubs, and nobody will fly via Prague. I think there is more logic for a takeover by somebody from the east.
"I don't feel there is any huge power over me [from the majority shareholder]," he adds. "We have a very independent decision making process. But if you are owned by the government, you can't be so strong with the trade unions. I think there is still potential for cost reduction. We have some wages which are higher than the European market."
Other decisions facing the new owners include the possible further modernisation of the fleet, both on narrowbody and long-haul.
"If the company will be healthy through the crisis we would like to replace some of the oldest Boeing 737 [-400/500s] with new A320s because the performance is excellent," says Lašák. CSA currently operates 14 Airbus narrowbodies and 20 Boeing 737-400/500s, alongside a dozen ATR 42-72 turboprops. The carrier has also eyed possible replacements for its A310s, which date back to 1991-93.
"We don't expect any other investment on the long-haul. I think the renovation of long-haul will wait for a new investor after privatisation. Long-haul aircraft are a big investment and the Czech Republic is a very small market," notes Lašák.
Having waited many years to sell the carrier, the privatisation of CSA comes as financial markets are at a low point, and when airline fortunes are generally taking a nosedive. But Lašák believes the timing chimes with consolidation moves across Europe.
"Of course it's better to sell all kinds of companies if there is a good market situation," he acknowledges of the timing. "[But] I think the consolidation is here. There is consolidation, it's real. And for survival in this [market conditions] situation it would be better to join a big market."
He believes the carrier's more healthy financial position marks one of its major strengths and will make it an attractive proposition for investors. "I think there could be interest as in comparison to the others [attempting privatisations] as we are in a very good situation. We are still cash-rich, we still survive and we don't have any huge loans."
And if CSA's privatisation is successful, does that mean Lašák's work at the carrier is complete? "Personally I don't have any huge expectations," he says, noting that he has been in the situation before when French bank Societe Generale acquired control of Komercni Banka.
"For me it will be a big achievement to finalise the privatisation with a strategic investor," says Lašák. "Then it's a decision for both sides."
"For me it will be a big achievement to finalise the privatisation with a strategic investor"
Sporting chance
The tall figure of Radomir Lašák took the helm at CSA in January 2006, bringing with him a mix of economic expertise and a sporting pedigree. Lašák played for a premier league volleyball team between 1986 and 1988.
But it was in the banking sector Lašák made his mark. Having attended the Prague School of Economics and later obtained an MBA from the Prague International Business School, Lašák began working for Komercni Banka in 1991. He joined the bank's management board in 2000 and was part of the crisis management team which paved the way to its privatisation.
Between 2002 and 2004 he led a management team which turned round the financial performance of Czech electronic bank, eBanka.
A successful privatisaton at CSA would further enhance his reputation as a turnaround specialist. "There is only one evaluation if somebody is successful," he says, "and that is based on real numbers."
Ready to sell
The Czech finance ministry formally launched the tender for CSA on 5 February. The ministry is looking to sell the state's 91.5% stake in the airline in the tender, which is being managed by Deloitte Advisory, though the carrier's minority shareholders will also be approached over the possibility of up to a 100% stake being made available.
Under the two-stage tender, expressions of interest must be submitted by 23 March and due diligence is expected to begin in April and last for between four and eight weeks. Final bids are envisaged by June 2009 and selection of a strategic partner is targeted no later than 30 September.
Any prospective owners will have to maintain Czech Airlines' core air transport operations, its safety and security standards, as well as a domestic base at Prague Airport for a minimum period of five years after the takeover, says the ministry.
One carrier which had already publicly thrown its hat in the ring is fellow SkyTeam carrier, Aeroflot. The Russian airline has long voiced an interest in the Czech carrier's privatisation, reiterating this interest publicly again in October. Once the tender was formally launched, Aeroflot wasted no time in affirming its interest in taking part in the tender and noted it was in talks with prospective local partners to work on a bid.
Other groups to be linked with early interest in the CSA sale include Odien, parent of Czech travel firm Cedok Group, while Icelandair - which already holds a stake in Czech charter carrier Travel Service - has previously been linked with possible interest.
Look back at our cover interview with then CEO Miroslav Kula from January 2003
Source: Airline Business
