CEE flag carriers struggle as EU turns off state aid tap

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State-owned carriers in Central and Eastern Europe (CEE) are under particular threat from the challenging economic climate afflicting the continent's airline industry.

Lida Mantzavinou, an analyst at consultancy Frost & Sullivan, said all European network carriers face increasing pressure from low-cost operators in the short-haul market and, on long-haul routes, from burgeoning Asian and Middle Eastern airlines.

Rising fuel prices and difficult access to credit due the European banking crisis are a further factors affecting the industry as a whole.

However, the situation is worse for airlines in the CEE region, said Mantzavinou. The European Commission (EC) wants to end state support for protected but unprofitable flag carriers, Poland's LOT for example, while national airspace boundaries are falling in favour of greater competition.

Mantzavinou observes a lack of "strategic direction" among such airlines and a missing urge to become profitable, because losses have traditionally been covered by the government.

Furthermore strong union and political influence has made it difficult to modernise existing structures and reduce costs, she said.

The central first step for a turnaround is to restructure the airline's capital and bring in external investors. While it does not matter so much whether this is a single or multiple parties, Mantzavinou does not recommend floating the airline on the stock exchange through an initial public offering, because "the domestic equity market [around CEE carriers] is not strong and the airlines do not have a good financial track record".

The Romanian government has previously indicated it is looking to float a 20% stake in state-owned carrier Tarom this year.