LOT landing on surer ground as market continues expansion
Swissair's purchase of a strategic stake in LOT Polish Airlines promises to strengthen the national carrier's position in an increasingly competitive market here and abroad through upgrades in know-how and enhancement of its passenger network from a global alliance, industry members have said.
"I think it'll make LOT a stronger competitor in a growing market," said George Storozynski, head of finance at ING Barings, which was an adviser to Swissair on LOT's privatization.
In late October, Swissair was chosen to become a strategic investor in LOT, with the company initially acquiring a 10% stake in the airline and pledging to increase its holding to about 38% through a capital increase. The actual transaction is scheduled to happen toward the end of January, Storozynski said.
Key to LOT's growth is the membership it will receive in the global alliance Qualiflyer Group. Membership in an airline alliance was a prerequisite in talks with possible investors, according to tender guidelines.
"(LOT) is becoming more and more integrated into the global transport scheme," said Pekka Immonen, Finnair's director of sales for Eastern and Central Europe, about the Swissair choice.
As a member of the alliance, for example, passengers wishing to fly from Warsaw to South Africa can make a connection in Brussels with Sabena Airlines, also a Qualiflyer member, all on one ticket, Storozynski said. "The LOT consumer will be able to experience more seamless travel," he said.
Changes will also likely take place in-house because of the sale. Although Swissair has stated its intention not to get involved in the running of the airline, LOT management will have access to competitive techniques at other airlines within the Qualiflyer alliance, such as marketing and finance procedures.
"LOT's management is very progressive, very forward," Storozynski said.
The Qualiflyer Group includes Swissair, Portugal and Turkish airlines, AOM French Airlines, Crossair, Lauda Air, Tyrole Littoral and AirEurope. In addition to direct access to airlines in the group, members of LOT's frequent-flier program will be able to gather and spend miles when traveling to non-European destinations via more than a dozen other airlines, among them Delta Air Lines, Cathay Pacific Airways, Qantas and South African Airlines.
But integration into a global alliance still holds a major challenge for LOT. Stepping up to the big leagues, it must now begin performing for an outside investor.
"Their concept of profit making and building shareholder value is of utmost importance," Immonen said. But, he added, "it's difficult to give good results to shareholders."
That's because airlines are bound by national and international safety standards, which pump up operating costs. But some agency executives here downplayed potential LOT outlays to meet safety standards because LOT is already meeting required standards.
"I don't think they will make any changes because LOT is already regarded as a safety-conscious airline," said Ole Johansson, country manager for SAS Scandinavian Airlines.
Overall, LOT's transformation and potential for growth can be seen as an indicator of a dynamically developing airline market. According to Immonen, the airline market has grown by about 20% a year during the past three years.
But Immonen also believed that this growth would slow in 2000. "Logic tells me that there has to be a slowdown in revenue growth," he said.
In calendar 1999, Finnair carried approximately 31,000 passengers from Poland. But for 2000, Immonen estimated that number to drop by about 5%.
One reason for the near-term slowdown is a changing passenger profile, industry members said. Formerly, airline loads carried Poles abroad in the search for work, such as in the United States. As the economy here improves, the flood of Poles leaving the country is ebbing.
An improving economy at home is a healthy sign of longer-term growth, said Hans Scheller, country manager for Lufthansa airlines.
"With the development of this economy, people will be traveling more," he said.
Business travel, where airlines make the best margins, is due to be a major profit generator as the economy grows. But that's only part of the revenue equation. As the living standard here increases, higher disposable income will follow, Storozynski said.
"I think most of the growth in the market will be vacation travel and charter flights," Storozynski said. And to address the increased demand, LOT will be introducing more planes for holidaymakers throughout 2000, he said.
LOT is not the only airline forecasting increased traffic this year. SAS is expecting to see its traffic increase by 10-15% with newer planes and more flights to meet the growing demand. "The majority will be holidaymakers, but the increase will come from business travel," Johansson said.
But the airline industry is not without its difficulties: One area where the country's airline development could be held back is in bilateral agreements that would allow international flights to and from various destinations within Poland. Presently, such flight paths are contingent on bilateral agreements. Poland is obliged to open its skies as a condition of European Union (EU) membership, but no movement closer toward that is expected this year. The consensus is that any move to more open skies won't come before 2002, and possibly not before 2004, industry members said.
The lack of accessibility affects smaller carriers as well as the major airlines that can feed their hubs abroad from regional airports here. For example, Air Ukraine only has flights between Warsaw and Kiev and Lvov, Ukraine, said Lyubov Medvedeva, representative for Air Ukraine in Warsaw. Medvedeva would also like to eventually see flights to Krakow. But she also warned that obtaining the rights to fly to other cities within Poland is difficult, requiring talks on both corporate and government levels. And every single part of a planned route must be examined.
"I haven't seen a tendency toward open skies," Medvedeva said. "For us, all of Poland is closed."
For the past two years, Finnair has been pursuing the possibility of flying from Gdansk to Warsaw using LOT equipment and a code-sharing agreement. Finnair and LOT were in such negotiations as late as fall 1999, but so far no results have come from it.
While in the past there have been allegations that LOT is making it difficult for airlines to operate within the country, one reason for the LOT privatization was to prepare for open skies and a free market, according to industry members.
"Their joining Swissair Qualiflyer will help them meet the competition," Storozynski said.
