Czech Airlines (CSA) may be adopting a new motto: If you can't beat them, buy them. Declining occupancy and a potential multimillion loss resulting from skyrocketing oil prices is driving the country's prime airline to pursue a takeover of Travel Service — the largest charter and low-cost airline in the country.

"The way to boosting our business leads to taking over Travel Service," said CSA President Jaroslav Tvrdík.

Czech Airlines won't be the first company to buy a competitor to grow its business, or the last.

The airline giant recorded an 18 percent rise in the number of passengers — 2.3 million — over the first half of the year. However, it also increased the number of planes in its fleet, so occupancy is actually down to 63 percent during the same period based on the number of planes in the air. In 2003, occupancy on CSA flights reached 73 percent and was 70.5 percent in 2004. Since June occupancy has been increasing again.

In the first half of the year, the number of passengers boarding low-cost and charter flights was on the rise. Last year, up to 18 percent of airline passengers flew with low-cost airlines, according to a recent KPMG study. It said the EU attracts up to 40 percent of those passengers, suggesting the Czech Republic could be a fertile market for low-cost airlines.

While the number of CSA passengers grew around 20 percent last year, Travel Services, which flies under the Smart Wings label, grew 40 percent. In contrast to the declining occupancy of CSA flights, Smart Wings' occupancy rate keeps on rising.

Also tempting CSA is the growing charter market. Travel Service operates over 50 percent of charter flights in this country.

"We aspire to become a Central European leader in the charter business. That's why we want to take over Travel Service," Tvrdík said.

This isn't the first time Czech Airlines expressed an interest in Travel Service. Negotiations between the two have been dragging on for about three years. Talks were interrupted in February 2004 after Travel Service denied CSA access while it was conducting due diligence of the company.

However, Travel Service officials had a change of heart earlier this year and CSA asked the Anti-Monopoly Office (ÚOHS) to consider whether a takeover would breach any of the country's anti-monopoly laws.

Last month, the ÚOHS announced that it had no objections to the merger.

"The takeover won't harm competition because [CSA] would still be exposed to strong market competition," said Filip Vrána, ÚOHS spokesman.

For its part, Travel Service officials refused to comment on the talks. However, CSA president Tvrdík said completing the takeover will be a long process.

Big investments

Keeping the airlines in the black will be a clear priority for management, said ČSA Supervisory Board Chairman Eduard Janota.

The financial results of ČSA will, in fact, determine the pace of the possible takeover, he said.

"We'll see no sooner than next fall how imminent the deal will be," Janota pointed out.

Despite last year's profit of 324 million Kč ($13.2 million), massive investments and increased operational costs due to high fuel prices, the strong Czech crown against the U.S. dollar could push ČSA's numbers into the red, Tvrdík said.

Even so, ČSA plans to invest up to 350 million Kč in upgrading its IT systems. Later this year, the airline will launch e-ticketing — another long-term cost saver. Construction of a new repair center costing 1.2 billion Kč and a 115 million Kč training center are also on the books. More recently, ČSA paid 110 million Kč to expand its catering services, and the airline is committed to paying up to 12 billion Kč in 2006–2008 for the purchase of 12 new Airbus planes to help modernize its aging fleet dominated by Boeing 747s.

The merger with Travel Service will not only add another 10 Boeings to ČSA's existing fleet, but will bring with it new passenger lists from major travel agencies, including market leader Čedok, that have contracts with Travel Service.

Following ÚOHS approval, ČSA indicated it was set to resume talks with Travel Service, according to ČSA spokeswoman Jitka Novotná.

She said ČSA was preparing to carry out due diligence together with consultants from Deloitte and Weil, Gotshal & Manges.

She said negotiations over the price of the takeover won't take place until due diligence and other business negotiations are complete.

During the previous round of talks between ČSA and Travel Service in spring 2004, business analysts estimated that ČSA could pay around 400 million for the takeover.