Turbulence Hits Eastern Europe’s Carriers

Fewer investors and tighter state budgets are grounding airlines | “No commercial carrier will step in unless it makes business sense”

Lenka Ponikelska, Edith Balazs, and Alex Webb


For Prague-based public-relations consultant Joe Cook, the toughest part of a business trip to Bulgaria later this month will be finding a flight. Since Czech Airlines cut services to Sofia earlier this year, Cook must travel via Vienna or Munich at twice the time and cost. It’s the same story for journeys across much of Eastern Europe as cuts in state spending and a dearth of investors have forced government-owned operators to downsize networks. “Flight-related costs have increased, and one’s choices are reduced,” says Cook. “You start thinking, ‘Do I really need to go there?’”

Europe’s economic crisis is weighing on airlines from the Balkans to the Baltic as austerity programs coincide with high fuel prices and a European Union clampdown on government aid. Poland’s Polskie Linie Lotnicze Lot is seeking to sell stakes in its domestic airline, as well as its catering, casino, and fuel operations, to bolster its finances after five years of red ink. Latvia’s profitless AirBaltic is looking for a partner to buy a 50 percent stake. Serbia, which has been trying to sell JAT Airways for years, says it may inject as much as €180 million ($233 million) on top of recurring government-backed loans to make it more attractive to a potential buyer. And Estonia’s Economy Minister Juhan Parts last month said the closure of money-losing Estonian Air is “an option.”

“Carriers are paying the price for being financially mismanaged,” says Tomas Mencik, an analyst at Czech brokerage Cyrrus. “Governments that used to pump in money for reasons of politics and prestige are cash-strapped, and no commercial carrier will step in unless it makes business sense.”

Eastern European carriers can’t count on stronger Western airlines to bail them out. Air France-KLM, Deutsche Lufthansa, and British Airways parent International Airlines Group, the region’s three major operators, are shying away from takeovers to focus on stemming losses on short-haul flights in Europe.

Eastern Europe’s worst travel disruption yet came in February with the collapse of Hungarian flag carrier Malév. It folded when the EU issued a ruling compelling the airline to repay government aid. The move depressed passenger numbers in Budapest by 36 percent. Ryanair Holdings, Europe’s top discount airline, quickly opened a base in Budapest to fill the void but said last month it would cut 40 percent of its service there due to high airport charges. A dozen former routes from Hungary are still inactive.

József Váradi, chief executive officer of Budapest-based Wizz Air, Eastern Europe’s biggest discount carrier, says the region’s state-owned airlines are most vulnerable. “If it was purely down to market conditions, none of these airlines would be flying today,” Váradi said in an e-mail.

The Czech government last month renewed attempts to sell Czech Airlines after failing to find a buyer in 2009. Since then the carrier has trimmed its fleet, reduced employee headcount, and cut routes to focus more on Russian destinations. Korean Air is considering an offer for the carrier, according to the company, but no decision has been reached.

Poland’s Lot, Eastern Europe’s biggest state-owned airline, lost a potential buyer in June when Türk Hava Yollari, or Turkish Airlines, ended talks because of EU rules on outside ownership. EU constraints on state subsidies are also taking a toll. Regulators this month began probing aid to AirBaltic and Slovenia’s Adria Airways. “Government involvement is much lower because the EU has a very close eye on everything,” says Heinrich Grossbongardt, an airline marketing consultant in Hamburg. “Just look at the collapse of Malév. It wouldn’t have happened four or five years ago.”

The bottom line The shutdown of Hungary’s Malév highlights the woes of Eastern Europe’s ailing airlines. Western carriers aren’t interested in buying.


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