Arkia move sparks Arab backlash

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Peter Bennett VIENNA

Israeli group Arkia says it will invest up to $100 million in loss-making flag carrier Balkan Bulgarian after it won the rights to buy a majority stake. But problems with some of Balkan's Arab routes have set in, with some countries objecting to dealing with an Israeli-owned company.

Officials in Beirut, Tunis, Algiers and Damascus were threatening to pull Balkan routes after the Israeli carrier bought the stake. Another Arab city, Tripoli, also threatened to suspend flights, despite Balkan having only recently started a service.

The impasse with Arab countries shows no sign of easing, despite the intervention of the Bulgarian transport minister, who flew to Damascus to hold talks with his Syrian counterpart.

Observers close to the deal also say that there are worries that the Israeli company has no experience in running a scheduled airline - it is a charter-only carrier - and that it would lack the funds to see the investment project through.

Arkia's successful bid was made under the auspices of the Zeevi Group, a 49%-owned subsidiary of Arkia. It will pay only $150,000 for the 75% stake, but it will also assume much of the carrier's debt, estimated to be in excess of $120 million. It also has an obligation to invest in Balkan, but for the moment officials at Arkia refuse to comment on its plans.

One of Arkia's priorities will be the renewal and expansion of Balkan's fleet, which is falling further behind schedule. The bulk of the $100 million investment will be spent here - Balkan still operates up to 23 Soviet-era Tupolevs and has two Airbus A310s in service. It had to return two Boeing 737-500s to Air France after closing its New York route.

Balkan owns hotels and catering and engineering companies that could also be sold to raise cash as part of an extensive restructuring scheme that is likely to be initiated.