Czech Airlines and airport to merge

Prague Airport and Czech Airlines (ČSA), both state-owned, will enter into a single, government-owned and -managed holding structure, a unique partnership in the aviation industry that stands in contrast to the push for liberalization in nearly every other sector.

The government's decision to create Český Aeroholding (ČA), announced Nov. 24, has been questioned by aviation industry analysts and other airline companies concerned that it is another blow for fair competition at the country's main aviation hub and may even run afoul of EU competition rules, though the airport, the airline and their owner, the Finance Ministry, have all insisted it follows regulations.

"This is a completely different action from the effort to liberalize other markets like rail, energy and others," said Jan Procházka, an analyst at brokerage firm Cyrrus who follows the aviation industry. "It's certainly not a normal situation in Europe. There are no similar situations, but it's OK under EU regulations, so this will test how it works."

A European Commission (EC) competition office spokeswoman, Maria Madrid, declined to comment on whether the state-owned holding structure was in compliance with regulation and would not confirm or deny a report in the daily Hospodářské noviny that alleged the EU was already investigating illegal state support of ČSA.

"When the commission has comments to make, we issue a press release," Madrid said. "And this is not the case for the time being."

ČA will be a joint-stock company that the state hopes will have an easier route to financing and have more stable results. The project will be self-financed, "without making any claims on the state budget," said ČSA spokeswoman Hana Hejsková. The entire process is expected to be completed by 2012. While the structure was designed to adhere to both national and EU competition laws, ČA is still subject to approval by bodies at both levels.

The two companies have already maintained cozy relations. ČSA's passenger volume makes up 45 percent of Prague Airport's total customers. Nearly all transfer passengers who come through Prague's hub, 90 percent, are carried by ČSA.

More tellingly, the two companies have shared the same management, Miroslav Dvořák, who has acted as CEO on both companies' boards since 2009, and in fact, the proposed holding structure may be more in line with competition rules than its current situation, Procházka said.

"The situation with Dvořák as head of ČSA and Prague Airport was not OK with regulation. ... This holding structure is certainly better than the situation they've had for the past year and a half," he said.

Turbulent industry

As the airline and the airport are both majority state-owned, the holding structure is a first for the industry, but there are and have been other instances of minority stakes and ownership between airlines and airports. Lufthansa, the German flag-carrier and the largest airline in Europe, owns a 9 percent stake in Fraport, the group that owns Frankfurt Airport, Lufthansa's main hub.

"It isn't unknown in Europe for airlines to have their fingers in the pie of state assets; a large [part] of Britain's air traffic service provider, NATS, is owned by a group of British airlines," said David Bentley, the joint managing director for Manchester-based Big Pond Aviation, a research and consulting group focused on air transportation.

ČSA is undergoing a three-year restructuring plan to get it out of the red, one that's involved significant asset sales and is expected to be completed in 2012. The airline reported a 125 million Kč profit at the end of September for the year, but without asset sales, the first nine months would have shown a 1.39 billion Kč loss. In 2010, the airline has already sold 2 billion Kč worth of assets.

The situation may have been avoided, Bentley said, if the government had been more realistic about the airline's value during the failed privatization tender in 2009 that saw Air France-KLM and Russian airline Aeroflot pull out after they examined the company's book value, which currently remains at zero.

The government also failed to sell Prague Airport after announcing a tender in June 2009.

"Prague Airport could have been sold by now if the government hadn't been a bit greedy just as the financial bubble burst," Bentley said. "Asking for up to $6 billion was even off the scale in the good old days, being three times what London Gatwick was sold for even though [Prague Airport] is only one-third its size."

The state maintains it will still seek to privatize both entities in the future, Dvořák told journalists at a Nov. 26 press conference, saying the process will be relaunched in 2015 at the latest.

Procházka said he expects the state will look at privatization again in three to five years, but the expected value will be much less than everyone, including himself, anticipated in 2009.

"I told everyone in 2009 it would be about 4.5 billion Kč. I think in a few years it could be maybe 1 billion Kč," he said.

In the meantime, Prague Airport would do well to take steps toward making it clear to its airlines and customers that there is no favoritism between the airport and ČSA, Bentley said. Travel Service, which operates SmartWings and was part of  a consortium that was the final bidder for ČSA in 2009, told the Czech News Agency it's already considering filing a complaint with the EC. Representatives from Travel Service could not provide comment at press time.

"Is it bad for competition at Prague?" Bentley said. "Well, there are two terminals, and really one should be sold off to the private sector. Otherwise, there is at least the opportunity for monopoly activities to creep in, and airline pricing agreements would need to be absolutely transparent at all times."

Claire Compton can be reached at
ccompton@praguepost.com