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Cablegate: Czech Airlines Continues Its Fight for Flight

VZCZCXRO3132
PP RUEHIK
DE RUEHPG #0028/01 0201633
ZNR UUUUU ZZH
P 201633Z JAN 10
FM AMEMBASSY PRAGUE
TO RUEHC/SECSTATE WASHDC PRIORITY 2066
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RULSDMK/DEPT OF TRANS WASHDC PRIORITY
RHMCSUU/FAA NATIONAL HQ WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 02 PRAGUE 000028

SENSITIVE
SIPDIS

USEU/ECON FOR MCATON, EEB/TRA FOR JBYERLY, MWALKLET-TIGHE,
MFINSTON

E.O. 12958: N/A
TAGS: EAIR PGOV ECON EZ
SUBJECT: CZECH AIRLINES CONTINUES ITS FIGHT FOR FLIGHT

REF: A. 2009 PRAGUE 495
B. 27 OCTOBER 2009 PRAGUE DAILY

PRAGUE 00000028 001.2 OF 002


1. (SBU) Summary: Following the Czech cabinet's decision not
to complete the privatization process for Czech Airlines
(CSA) (Ref. B), the Finance Ministry with the help of several
state-owned companies is taking steps aimed at moving the
heavily indebted carrier towards financial solvency.
Privatization plans for both CSA and Prague's Ruzyne Airport
are halted indefinitely, as the state-owned entities'
finances become further intertwined. The Czech government is
likely to continue its financial maneuvering to prop up CSA
and could discourage future tender participation. End
Summary.

----------
Privatization Canceled
----------

2. (SBU) On October 26, 2009 the Czech cabinet rejected the
only remaining bid on CSA's privatization tender: a CZK 1
billion ($59 million) bid from Unimex-Travel Service, a joint
venture between a Czech trade group and a charter air service
80 percent owned by the IcelandAir Group. On the same day,
Ruzyne Airport CEO Miroslav Dvorak took on the additional
task of President and Chairman of CSA. Additionally, the
cabinet approved a debt-for-equity swap with state-owned
assets management company Osinek and canceled Osinek's lien
on several of CSA's properties, allowing CSA to sell these
properties or use them as collateral. According to the editor
of a major newspaper, the Czech government has used Osinek to
prop up struggling, state-owned companies in the past as a
way to circumvent EU competition regulations. The size of
Osinek's ownership share in CSA is still undisclosed.

3. (SBU) In November, Czech banks reportedly opened credit
lines to CSA in response to the sale of its duty free shops,
which raised eyebrows among economic analysts. One analyst
was quoted in the press, calling this development "either a
miracle or a case of undisclosed public support." On January
6, CSA sold its headquarters to Ruzyne Airport for CZK 607
million (USD 33.7 million). Several economic analysts
positively assessed CSA's decision in the press, explaining
that the company desperately needs assets and that an airline
does not need to own its office space. Still, CSA found
itself on the defensive, denying any inpropriety caused by
Miroslav Dvorak's representing both CSA and Ruzyne Airport in
this transaction, noting that the price was based on an
independent appraisal.

----------
Prague Airport Remains Public Indefinitely
----------

4. (SBU) Prague's Ruzyne Airport's privatization tender was
expected to follow shortly after CSA's. However in early
December, the Czech Parliament overrode the Senate's
opposition and passed legislation banning the privatization
of Ruzyne Airport. Left-of-center Social Democrats (CSSD),
with the support of Communists, led this effort, citing
potential financial and security concerns. Although
President Vaclav Klaus vetoed the law on December 16 (a
Presidential power that he exercises freely), Parliament is
expected to override Klaus's veto this Parliamentary session.
The bill enjoyed a comfortable majority in the Parliament
the first time, and it takes only 101 out of the possible 200
votes in Parliament to override a presidential veto.

----------
A Pyrrhic Victory
----------

5. (SBU) Comment: Financial analysts both inside and outside
of CSA still predict one more year in the red (CSA posted a
record loss of CZK 3.2 billion (USD 178 million) in 2009),
but agree that financial conditions are improving. Now that
the Czech government realizes that it will own CSA for the
indefinite future, it has reinvigorated efforts to bring the
company out of debt and into profitability with the help of
other state-owned enterprises. Despite rumors that the CSA
and Ruzyne privatizations are fated for a joint tender, a
more likely short-term outcome involves continued, heavy
support from the airport for CSA in the form of additional
internal purchases and shifting of finances between
companies. While these financial maneuvers may succeed in
bringing CSA into financial solvency, the negative publicity
throughout and after the tender process could discourage

PRAGUE 00000028 002.2 OF 002


future participation in government privatization tenders.
Moreover, this process could set back Czech efforts to be
seen by foreign investors as having an attractive,
transparent business environment. End Comment.

Thompson-Jones

© Scoop Media

 
 
 
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