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Cypriot unions accept the ‘inevitable’ – a merger of Cyprus Airways and Eurocypria

3-Jun-2010

Cyprus-based Eurocypria’s trade unions this week stated they had no opposition to a merger between the carrier and Cyprus Airways. A report on a merger between the two government-owned carriers is being compiled by KPMG and is due before the end of Jun-2010. In an unusual case, the Cypriot Government owns 100% of Eurocypria and 70% of Cyprus Airways.

Both airlines have been experiencing difficulty in 2009/10 as vacationers stayed away because of the effect of the recession. Arrivals from Britain, who make up almost half of all arrivals, and who saw the value of their Pound sterling (GBP) fall by up to 20% against the Euro (EUR), are sharply lower. They were put off visiting what is already an expensive country compared to alternatives like Crete and most of the other Greek islands, not to mention Turkey (including the annexed, officially unrecognised Turkish Republic of Northern Cyprus [TRNC]), which is considerably cheaper this year. (As a result of the economic problems in Greece that GBP/EUR variation has narrowed a little in recent weeks).

Five-star tourist product

Cyprus is geared towards a ‘five-star’ tourist product and there are comparatively few options available to budget vacationers. That might go some way to explaining the absence of Ryanair (the nearest it gets is the Greek island of Kos). easyJet has just four routes and Paphos and one at Larnaca (all from the UK), while Air Berlin flies to Larnaca from London, Dusseldorf, Hamburg, Nuremberg, Berlin and Vienna. Other major European LCCs have limited service – Norwegian from Copenhagen, Stockholm and Oslo into Larnaca while Spain’s Vueling gets no closer than Athens.

It is clearly a difficult situation for both airlines, as made evident by the acceptance of the unions that a merger is necessary. Cypriot unions are, like their Greek cousins, usually fierce negotiators and highly protective of their jobs.

Despite remaining a powerful force in the country, neither Cyprus Airways nor Eurocypria have been able to capitalise on it. Part of the reason is the government’s long-running differences with Turkey, which have been exacerbated recently since the election of the hard-line Dervis Eroglu as TRNC President in Apr-2010, which means the carriers cannot operate over Turkey. Cyprus Airways is calling for financial compensation from the government over earnings losses it attributes to the dispute.

In the 12 months ended 31-Dec-2009 Cyprus Airways’ revenue plunged 20.1% to EUR249 million. Fuel costs fell by 46.7% thus reducing the deterioration in operating profit to a EUR5.7 million loss (2008: EUR2 million profit); pre-tax loss to EUR3.2 million (2008: EUR2.1 million profit; and net losses to EUR3.3 million (2008: EUR1.7 million profit). The carrier cannot provide guidance for 2010 “due to the uncertainty of the duration of the global financial downturn.”

This island ain’t big enough for the two of us

It has been suggested for some time – again by the unions - that Cyprus Airways could merge with Eurocypria, or that the latter could close, on the basis that Cyprus (population one million) is not large enough for two national carriers.

Eurocypria, a charter airline with a customer base almost entirely made up of tourists, is also in financial difficulties. It has been posting annual losses of around EUR10 million, but forecasts a small operating loss for this year and a marginal operating profit for 2011. It was reportedly bailed out by a foreign investor in Jan-2010 after which the government pledged support and a EUR35 million funding package dressed as an increase in share capital since EU competition regulations prohibit governments from giving financial assistance to companies. But around EUR28 million of that went toward paying off debt. A local law firm filed an official complaint on 17-Feb-2010 with the European Commission regarding the financing on behalf of an anonymous client.

Ironically, Eurocypria was bought by the state, at a high price, as a way of helping Cyprus Airways which was in dire financial straits and needed a cash injection to survive. As the state could not subsidise the airline, it bought its loss-making subsidiary at a premium price.

If it is any comfort to the Greek part of the island, these airlines are not alone in their discomfort. In May-2010 it was reported that Cyprus Turkish Airlines was facing bankruptcy, after Turkish Technic called in a long-standing debt, which actively froze the carrier’s assets. The carrier owes the aircraft maintenance company approximately USD12 million and has total debts amounting to USD120 million.


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