Korean Air offers hope to struggling ČSA

Korean Air's purchase of a stake in Czech Airlines (ČSA) offers the struggling Central European carrier a chance to expand after years of cutbacks and decline, analysts have said after the $3.4 million deal was announced.

South Korea-based KAL has agreed to take a 44 percent share, being the only bidder after ČSA's state-run parent company, Český Aeroholding, asked dozens of the world's largest airlines late last year if they were interested in buying the Czech national flag carrier.

As well as potentially breathing new life into a struggling ČSA, which like other regional airlines has suffered due to competition from low-cost carriers and larger West European operators, the deal could reverse the declining fortunes of Václav Havel Airport Prague. Last year the airport suffered an 8.3 percent drop in traffic.

The deal is "a huge success," according to Michaela Lagronová, spokeswoman for Český Aeroholding. "At a time of crisis, when all the airlines in Europe are struggling and the smaller airlines are going bankrupt, this is one of the few transactions that are actually happening," she said.

Korean Air will develop Prague as a transit point and help restore ČSA's position as a long-haul carrier, Lagronová said. Independent analysts also welcomed the sale.

"By selling a share to Korean Air, I believe Czech Airlines has ensured the long-term growth and long-term survival of the company," said Tomáš Menčík, an analyst at Cyrrus in Prague.

The agreement with KAL, due to be signed in April with the shares transferred by the end of June, values ČSA at $7.6 million, a modest figure that reflects ČSA's recent difficulties, which have seen assets sold off and routes scrapped as balance sheets have fallen into the red. In 2011, the most recent year for which figures are available, the airline lost 241 million Kč, with Europe's poor economic performance and high fuel costs contributing to losses.

The deal could bring multiple benefits to ČSA, which is more than 95 percent owned by Český Aeroholding. Menčík said the Czech airline could hope for an increase in its occupancy percentage as passengers are channeled between the airlines' connecting services, while ČSA's purchasing power will increase as part of a larger airline group.

More long-haul flights

"ČSA is such a small company they cannot get any discount when they buy planes. The discounts compared with the catalog [price] are usually 1 percent to 3 percent. The big airlines usually get a 30 percent to 40 percent discount," he said.

David Bentley of the airline industry consultancy Big Pond Aviation said the restoration of long-haul flights by ČSA would "bolster its reputation and increase its enterprise value."

"There are a lot of carriers in CEE that cannot attract external investment," he added, drawing a contrast with this month's deal.

KAL has an option to increase its stake in ČSA, although the size of any further purchase or purchases is likely to depend upon whether the EU loosens restrictions on carriers from outside the bloc owning majority stakes in European flag carriers.

Miroslav Dvořák, the CEO of Český Aeroholding, told journalists this month he expected these rules to be abolished, thereby promoting acquisitions.

As a result of the purchase, Korean Air will secure one of the three seats on ČSA's supervisory board and is likely to have a say in major management decisions. Just as analysts see benefits to ČSA from this month's deal, so they have identified upsides for KAL.

Bentley said the company's investment in ČSA was "small change for what could be a significant gateway building opportunity." It allows KAL to "stake its claim to the region," ahead of rival carriers from Southeast Asia.

"The CEE countries did not 'take off' as new hotspots for aviation as it was anticipated they would a few years ago. Nevertheless, there is growing trade between that region and North Asia that makes this a reasonable gamble for KAL, especially as this is its first foreign financial venture," he said.

Founded in 1962, Korean Air is South Korea's largest airline and has a fleet of 119 passenger aircraft and 27 cargo planes, compared with ČSA's total fleet of 26 aircraft.

Like ČSA, the Korean airline is a member of the SkyTeam alliance, and in December the two carriers set up a codeshare agreement. At the same time, ČSA announced it was launching a service to Seoul.

When the government passed a resolution in November to set up a tender to privatize ČSA, letters were sent to dozens of the world's largest airlines asking for expressions of interest. Only Korean Air and Qatar Airways responded, with the Korean airline the only one to submit an actual bid.

Among the other Central European carriers that have faced difficulties are Poland's LOT, which has struggled to turn a profit, and Hungary's flag carrier, Malév, which collapsed in 2012 after 66 years of operations.

Daniel Bardsley can be reached at
business@praguepost.com