Friday, 13 March 2009

Success for Olympic at last

The sale of Olympic Airlines to Marfin Investment Group marks New Democracy's first major state sector success since the 2005 voluntary redundancy scheme that turned OTE's balance sheet around. It is also the battered conservative party's first major political success since Greece's veto of Fyrom's Nato entry in May last year.

Following an overnight liquidation, Marfin will spend 62.4 million euros buying Olympic's logo, slots, flight operations and technical support base. It will separately purchase ground handling operations if current talks with Swissport do not end in agreement. Marfin has also pledged an investment of 70 million euros to turn Olympic around.

The government has succeeded in preserving a historic carrier Greeks are sentimentally attached to without resorting to a change of name. It has done this while keeping the company under Greek management and partly through Greek capital, rather than through an overseas selloff in the style of OTE, which went to Deutsche Telekom.

Successfully concluded, the Olympic sale stands in stark contrast to other stalled privatisations. New Democracy's tender processes for the Piraeus and Thessaloniki ports have caused work stoppages for more than a year. The latter has now been cancelled altogether because of the preferred bidder's withdrawal.

But we had come to expect particularly little from Olympic after six attempts to restructure or sell the airline failed over fifteen years. The road to Olympic's privatisation is strewn with the political corpses of Athanasios Tsouras, Haris Kastanidis, Tasos Mantelis, Christos Verelis and Mihalis Liapis. Why did Development Minister Kostis Hatzidakis succeed where five transport ministers failed?

Perhaps the biggest clue for Hatzidakis' success comes from a reading of past failures.

Pasok launched the first restructuring process in November 1994, which the following year produced Olympic's first profit since 1978. Pre-approved by the commission, it foresaw a staff cut, a pay freeze, EU aid and a massive writeoff of 1.4 billion European Currency Units (ECU) by the state. The restructuring worked well until the new administration of Kostas Simitis brought in Haris Kastanidis as transport minister, who killed it with a 20 percent pay hike.

As forecast 1996 profits evaporated into deficit, Kastanidis was replaced by Tasos Mantelis. Mantelis passed a second restructuring law in 1998, which saved money by stiffening work conditions for cabin crew and pilots under threat of worse unilateral action to come if consensus with the unions failed. Labour action proved so determined and prolonged, however, that Mantelis paid for his loss of faith with the unions with concessions that ended up dwarfing savings. The airline posted a 75mn ECU loss for 1999 rather than the 61.4mn ECU profit Mantelis had promised.

Mantelis' final gambit was to bring in foreign management in the form of Speedwing, a British Airways subsidiary. Speedwing was to develop the business rather than cut back on costs. It won over unions with massive voluntary redundancy payments on projected income the commission called "optimistic", but its tenure was cut short by Simitis' third transport minister, Christos Verelis, who ordered Speedwing out in 2000.

In September 2003 Verelis legislated the fourth restructuring plan. From the indebted mess that was Olympic Airways, he created Olympic Airlines with just 1,850 employees. This was to be sold off as a profit-maker, while other bits of the group, such as technical support and ground handling, would be sold separately to pay off old debts and a voluntary redundancy scheme. The Verelis brainchild was launched on December 12 but continued to lose money. The commission, backed by the European Court, refused to accept Olympic Airlines' non-liability for the debts of Olympic Airways.

Transport Minister Mihalis Liapis launched a new, old-fashioned attempt to sell off the airline when New Democracy came to power in 2004. His preferred bidder, Olympic Investors, was stymied by a new demand from the commission in September 2005 that the airline return 540 million euros in illegal state aid since 2002. This was on top of 160 million euros the commission had demanded in illegal aid until 2002.

Finance Minister Yiorgos Alogoskoufis stepped in. In consultation with Energy and Transport Commissioner Jacques Barrot, in April 2006 he published the fifth business plan since 1994. It liquidated both Olympic Airways and Olympic Airlines and sold off a parthenogenesis called Pantheon. This created a greater legal cleavage with the old Olympic by avoiding asset transfer. Pantheon would acquire new takeoff and landing slots exchanged for Olympic's old ones and hire some of the Olympic staff.

The plan ran into three problems. It did not preserve Olympic, to which Greeks felt attached; the commission insisted on shutting down the old company before launching the new one, meaning a loss of market share; and the question of whether redundant Olympic staff would be paid severance left a massively expensive Damoclean sword over Pantheon's head. Pantheon's cleverness created greater problems than it solved.

After the 2007 election, incoming Transport Minister Kostis Hatzidakis seems to have taken a leaf out of everyone's book. Like Athanasios Tsouras in 1994, he got commission approval for his plan first. He launched an international tender process on 17 September 2008, the day the commission gave him the go-ahead. Like Alogoskoufis, he opted for a liquidation rather than Mantelis' failed asset transfer, which carried the debt over too; but unlike Alogoskoufis he made sure the liquidation was an overnight one that kept the airline continuously operational and granted severance to all employees (that is expected to cost 256 million euros this year alone, Hatzidakis says, but running the airline would cost more). Like Verelis, he opted for a salami-slicing of the group and separate selloffs of parts. Like Verelis and Liapis, he did not shy away from direct talks with a Greek white knight who would see the political and sentimental attraction of Olympic, as well as the financial.

Yet the most plausible explanation for Hatzidakis' success, counter-intuitively enough, is the current financial crisis. It alone provides an explanation for all the things we don't yet know about the Marfin deal.

Kastanidis, Mantelis and Speedwing failed because they bought off the unions at too high a price. Why haven't the unions militantly resisted such a swiftly concluded agreement?

What of 700 million euros in waived social security payments, fuel tax breaks, aircraft leases, voluntary redundancy schemes and operating losses the commission wants Olympic to return to the state? This demand, backed by European Court decisions, destroyed tender processes with Axon Airlines, Golden Aviation and Olympic Investors in 2002 and 2005. Yet the commission remains silent in 2009.

In the same vein, who will shoulder the estimated 200 million euros in operating losses the airline will incur between now and when Marfin officially takes over on October 1?

Marfin has not said it will shoulder Olympic's debts. We can only conclude that there will be a taxpayer writeoff at the end of the auctioning process.

Under-the-table government help, decried by Olympic's domestic and European competitors, has been the biggest single difficulty in selling off the airline over the years, but Brussels seems willing to let bygones be bygones. Implicit public financing is the biggest element in the Marfin deal, now made possible by the accepted blurring of the line between public and private money on both sides of the Atlantic.

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