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Cablegate: Zagreb Airport Director Describes Grim Financial

VZCZCXRO0850
OO RUEHIK
DE RUEHVB #0110 0541112
ZNR UUUUU ZZH
O 231112Z FEB 10 ZDK
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9925
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS ZAGREB 000110

SENSITIVE
SIPDIS

DEPT FOR EEB/TRA, EUR/SCE, TREASURY FOR INTERNATIONAL
AFFAIRS LARRY NORTON, COMMERCE FOR ITA/MAC KRISTIN NAJDI

E.O. 12958: N/A
TAGS: ECON ETRD ETA EINV HR
SUBJECT: ZAGREB AIRPORT DIRECTOR DESCRIBES GRIM FINANCIAL
SITUATION AT CROATIA AIRLINES

1. (SBU) Summary. Zagreb Airport Director Tonci Peovic sat
down with Ambassador and Econoff on February 12 to discuss
the current state of air transport, the performance of the
national airline, and problems within the Transport Ministry.
According to Peovic, Croatia Airlines is in a dire financial
situation and is suffering losses of up to $50 million. He
said the company would not be able to survive a strike or
other disruption to its operations for more than a few days.
The state-owned company is in major need of restructuring,
but the Minister of Transport is in a politically weak
position and may be unwilling to make sweeping changes. The
case illustrates the dysfunctional role of the State in key
economic sectors in Croatia. End summary.

2. (SBU) Six months into his mandate as Zagreb Airport
Director, Tonci Peovic sat down with Ambassador and econoff
to describe a growing financial crisis within civil aviation.
Croatia's state-owned airline, Croatia Airlines, is the
central pillar of Croatia's aviation industry, accounting for
64% of traffic through Zagreb Airport, and over 70% of the
airport's revenues. In the last 7-8 months, Peovic reported,
Croatia Airlines has amassed roughly $10 million in arrears
to the airport, and the sum is growing. He told us the
company itself faces over $50 million in losses, as well as a
possible pilots and flight attendants strike. If
negotiations with the union break down and a strike occurs,
it is Peovic's opinion that the company could not survive
financially for more than a few days. There have even been
rumors in the press that Lufthansa might be interested in a
takeover.

3. (SBU) According to Peovic, the central problem is
political. Croatia Airlines is overstaffed, the product of
years of jobs being used as patronage. This has reportedly
resulted in a high employee to passenger seat ratio of 1 to
1.3 (for comparison, Peovic told us that EasyJet has an
employee/seat ratio of 1 to 5). This includes a huge ground
staff at Zagreb Airport with numerous inefficiencies and
redundancies. The Ambassador asked Peovic if the Minister of
Transport was aware of these problems and if he was prepared
to take action to address them. Peovic indicated the
Minister appears risk averse because of his current political
weakness. (Note: Although Transport Minister Bozidar Kalmeta
is one of the most powerful leaders in the ruling HDZ party,
his influence has weakened lately due to numerous scandals
and mismanagement allegations surrounding his ministry,
including allegations of corruption in roads contracting and
several rail accidents).

4. (SBU) Peovic's long term task will be to oversee the
construction of a much-needed new terminal for Zagreb.
Zagreb Airport has seen no significant expansion since 1974
and the small size and inadequate facilities conflict with
Croatia's vision for itself as a regional hub.
Unfortunately, Peovic said the plans developed by his
predecessor are unrealistic and unaffordable, requiring at
least 300 million euros. Peovic believes that, rather than
constructing a "monument", the government should undertake a
more modest project in cooperation with one or more strategic
partners along the "BOT", Build, Operate Transfer, model.
But this will also require a decision from the Ministry of
Transport, which Peovic feels is unlikely to happen soon for
the reasons outlined above.

5. (SBU) Comment: Peovic's description suggests the
government is unprepared for the potential collapse of its
flagship carrier and the resulting economic damage such an
event would cause. Croatia cannot afford the negative
spectacle of a high-profile business failure in a year when
it must convince EU member states, increasingly wary since
the Greek debt crisis, that Croatia's economy is sound.
While Croatia Airlines may still be able to muddle through,
the case is indicative of the State's dysfunctional role in
the economy and its inability to respond effectively to the
challenges posed by the continuing economic crisis.
FOLEY

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