Romania's national airline still hopes to attract a western partner, if only the economy would improve.

Take one battered old airport, add a few old Russian aircraft, and then throw in years of political instability. Stir with economic collapse, simmer for nine years, and serve with a garnish of mismanagement.

It's a recipe for a business disaster, and the Romanian government has served it up well. By the early 1990s its national airline Tarom, once proud to be eastern Europe's only owner of western built aircraft, was falling apart.

Tarom began a dramatic restructuring programme. It reorganised its work force, cut back on routes and even managed to make a profit of $6 million in 1992. It then began to replace its ageing Russian fleet with modern western aircraft. There was talk of a rapid privatisation, a strategic partner and booming passenger numbers. The future looked bright.

Then, in late 1996 and throughout 1997, Romania's economy went into reverse. Output shrank by 7 per cent and foreign investment plummeted. So too did the number of Tarom passengers. After carrying 1.5 million people in 1996, the carrier carried just 800,000 in 1997, when it suffered a pre-tax loss of $24 million.

When sales fell, so too did Tarom's hopes of attracting a western partner and joining a global alliance. Privatisation was delayed as the government twisted and turned and fumbled with policy. For Tarom the near economic collapse, caused largely by political bickering in the government, could not have happened at a worse time.

'It is difficult to have a strong airline when you are surrounded by a weak economy,' says Adrian Sidarov, Tarom's new chief operating officer. 'A strong Romanian economy will help Tarom get stronger too. The better the economy is, the more Romanians will start travelling. The only chance is to restructure and to privatise. That is the only way to have a healthy economy.'

Sidarov reiterates over and over his point that Tarom is relying on the Romanian economy to improve and help it recover. But he is hoping for a minor miracle. At best, the Romanian economy is forecast to have zero growth this year and growth of just 3 per cent in 1999, while real progress on economic reform is not expected to be quick.

The petty Romanian political squabbles that stopped reform from progressing in 1997 are far from over. Agencies such as the International Monetary Fund are warning the government that it must accelerate privatisation or it will not receive badly needed loans. And, in the meantime, many of Romania's state-owned businesses, including Tarom, are caught between the devil and the deep blue sea - they badly need to be sold into private hands but cannot afford the investments necessary to make themselves profitable.

Last September, the government issued a decree saying that Tarom would be privatised and, says Adrian Sidarov, there is a strong will on the government's side to see this through. For the short term, several aspects have to be clarified. There is no privatisation deadline, for example, while the decree only states the 'will' to privatise and does not include a firm plan.

'Now, together with the Romanian Ministry of Transportation, we have to discuss how privatisation will be made,' says Sidarov. 'The idea is to have Tarom restructured and reorganised first and then privatised. We can use privatisation as a tool to strengthen Tarom.' The decree to privatise Tarom was issued before some major changes in the government and inside the MOT. The discussions first stalled, then were postponed and finally had to start again more or less from scratch.

Central to the negotiations is the method of privatisation. The options include a strategic alliance, a financial institution taking a large stake, and a straight public offering. Realistically, this last option is a non-starter before either the strategic or institutional buyer can be found. Either would provide Tarom with a much-needed cash injection to complete its restructuring and fleet replacement programme.

'As a manager, I will strongly recommend to the government a strategic partnership with another carrier,' says Sidarov. 'What is happening in the aviation industry is that the big alliances look like taking over the market. There will remain some niches but these will get smaller and smaller.'

Tarom's potential for growth will be limited if it is not part of a strategic alliance, he adds. 'That is why I would like a major airline to take part. I don't know how, by taking 5 per cent, 10 per cent or 49 per cent, but a major airline should be made a partner of Tarom.'

But Tarom is running out of time. Central Europe is moving rapidly to privatise its airlines. British Airways looks certain to buy a stake in Hungary's Malév. Poland's government is to change a law to allow a foreign airline to take a 51 per cent stake in its national carrier LOT, which began its codesharing agreement with British Airways in July.

In the Czech Republic, CSA says it is on the hunt for an institutional investor and even Bulgaria, regarded by most to be even further behind Romania in its economic reforms, has a shortlist of five strategic partners to take a majority stake in Balkan Bulgarian. So is there a danger that Tarom will be left behind?

'I hope not,' says Sidarov, who believes Tarom is attractive to a strategic partner because of its traffic potential. Romania is a market of 23 million people, the largest population in the region after Poland and the Ukraine, he explains. 'This is the potential and it will start looking better the stronger the Romanian economy gets and the stronger Tarom gets.'

'The second reason is related to geography. Bucharest could be a good mini-hub for Asia or the Middle East.' Tarom already has connections to nine Middle East destinations including Dubai, Cairo and Tel Aviv, as well as direct flights to Delhi and now Beijing, and it is likely to increase the number of destinations and frequencies to the region.

'But of course there is a danger of being left behind,' he admits. 'Delaying the privatisation poses a danger but we believe there will be other major players that will still be looking for a partner in this region.'

Throughout central and eastern Europe, all the airlines are wary of the mistakes made in the past with western partners. Malév's partnership with Alitalia failed, as did the joint venture between CSA and Air France. The fact that they tried to do something quickly did not guarantee it would work, comments Sidarov.

Sidarov is just six months into his position but he is aware of the intricacies of the global aviation industry after spending four years working in Tarom's New York office. 'Right now, I think the important aspect is complementarity,' he says of Tarom's potential partner.

The Romanian government is likely to be less choosy in its selection of a partner and the airline will probably have to be satisfied with what it can get rather than having a choice. Either way, however, Sidarov does not want Tarom to be overrun by a larger ally. He believes that if Romania's national carrier becomes a subsidiary of a larger player, Romanians would be left with a big hole in their souls.

'If you want to continue to be the national airline, you cannot become just a feeder or a regional airline,' he adds. 'The personality of the airline has to continue to exist. This means that you have to look for a partner that will not overwhelm you [or] try to make you an insignificant part of their operations. You have to look for a partner that will help you grow and develop your network. That is my idea of a real partner.'

Tarom, and more importantly the Romanian government, has to work fast. Following a new bilateral agreement with the US, up to three US carriers will be given access to Romania, and this will put additional pressure on Tarom's lucrative Romania-US market. But the competition for traffic rights to Romania is already increasing. In 1995 and 1996, some carriers resumed their service to Bucharest after years of not travelling to Romania, while others increased their frequency.

'We have no time to lose. It is very important for us to make Tarom stronger today and not tomorrow, because tomorrow might be a lot more difficult. Time is no longer on our side. We already lost two years in restructuring the company and we have no more time to lose.' Sidarov is not panicking, but he is aware that as Romania's economy improves the country will look more attractive to foreign airlines.

Still, the signs are that Tarom can look ahead with optimism. Despite the slow recovery of the Romanian economy, standards of living are improving. Industry will eventually be privatised and foreign investment will probably resume, while there is a promise to crack down on corruption, nepotism and mismanagement.

And for Tarom, passenger business is on the increase. It has already managed to increase passenger numbers for four consecutive months coming into the peak summer season. In the first 13 days of July, it carried 3,000 more passengers than the previous year - a 10 per cent increase - and for the whole of June it recorded a 13 per cent rise.

On the flip side of the coin, Tarom has withdrawn from services not pulling their weight. Flights to Bangkok and Stockholm were ended as traffic to Thailand and Sweden went into decline. Silvia Columb, Tarom's marketing manager, says it was difficult to sell a destination with one or two flights a week. With Scandinavian business traffic looking more towards the Baltics than the Balkans, passenger numbers were disappointing. 'The time was perhaps not right,' she adds.

Restructuring and rethinking are continuing in other areas too. More than 400 people were laid off in January, with more trimming expected in the autumn. Tarom is looking at splitting off the technical department, spinning off other areas, and contracting out services.

At Bucharest's Otopeni airport, six of Tarom's Antonovs sit grounded by the main runway as its modern fleet of Boeing 737s speed past. A new terminal, still undergoing trials, and a revamped old terminal put a glossy finish on a once bleak airport.

At one point Tarom owned more than 50 aircraft. Now it operates just 23, the result of a reduced number of destinations certainly, but also of better turnaround times. Load factors, dropping throughout 1997, are rising once more and are at 90 per cent for routes to Paris, London and the US. The carrier also started a new service to Beijing in June, and the inaugural flight was 60 per cent full.

'We are on a rising path,' says Sidarov. 'After a period where we had a lot of changes in personnel, infrastructure and maintenance, we should start to see results. Now what we hope is that we can stop the decrease in traffic, finish the restructuring and continue replacing the old fleet.'

Tarom has bought two A310-300s, six 737-300s and four ATRs, mainly through export credits. It has a contract to take five more ATRs with an option on two more and is likely to buy another eight 737s. Although it does not use Antonovs on international routes any longer, it does on domestic routes, and these will be next to go.

'Now what we have to do is take advantage of the investments that have been made into this fleet, to attract more passengers and improve the yield. Now it is time to start making money from these aircraft.'

The assets are in place and the restructuring is continuing but Tarom is still losing money. It carries only about 50 per cent of the passenger traffic in and out of Romania, so is it failing in its approach to marketing? Will it not find competition increasing in the years to come? And will it not find attracting more passengers in the future more difficult?

'Yes,' says Sidarov. 'I think what we are missing right now is aggressiveness in attracting passengers. In the last few years we did not have enough of this in going for passengers. We have made a lot of changes in the quality of service, and it is a pity that we did not make the public aware of them.'

Changes include the upgrading of business class - a service that is so important to Sidarov that he is offering business travellers a refund if they are not satisfied with it. It will be expensive, he admits, to start marketing Tarom abroad but really this is where Tarom needs to go to attract new customers. 'Everyone in Romania is proud of its airline, but have passengers in the west even heard of it?' he asks.

Low yield but high volume tourist passengers have yet to materialise, although this may be as much a problem of poor infrastructure throughout Romania as anything else. Further, Romania does not have a romantic capital like Prague or Budapest to attract the casual visitor, nor the expatriate community of Poles living abroad that LOT can appeal to.

Privatising the tourist industry, improving the infrastructure around the country and marketing Dracula will help. But this takes time and money - something that Romania is chronically short of.

Amid a fragile economy, a procrastinating government and increasing competition, it would be easy to dismiss Tarom as a perpetual struggler, but it is still a mystery whether the Romanian state will now serve up a rice pudding or a gourmet desert for its national airline.

Source: Airline Business