Worrying omens for Central and Eastern Europe as Meinl Airports is liquidated and SkyEurope battle

Meinl Airports International (MAI) was a relative newcomer to airport investment, but built up a portfolio rapidly. A subsidiary of Austria’s closely held Meinl Bank, it was headquartered in the British Channel Islands tax haven of Jersey. Selling 70 million shares for EUR10 each, it focused its activities on Central and Eastern Europe, the lack of activity in Austria and nearby Switzerland (also the lack of will to privatise) causing MAI to look east, also as far afield as Russia. Initial investments were at the Sochaczew (40% increasing to 49%) and Bydgoszcz (49%) airports in Poland and at the Lake Baikal (Mukhino) Ulan Ude airport in Russia (100%), the first sale of a Russian airport to an international investor. Meinl Airports also took an initial stake of 10.1% in Turkey’s listed TAV Airports, with the intention to acquire more, and a co-operation agreement with TAV.

In May-08 MAI acquired a 67% interest in Italy’s Parma Giuseppe Verdi Airport, after So.Ge.A.P, the Italian airport's management company, selected MAI as its private partner. MAI was to invest EUR20.5 million as part of So.Ge.A.P.'s planned capital increase and provide the airport management company with a loan of EUR17 million. The airport’s additional capital needs of a further EUR62 million were to be covered through debt financing and cash flows. Over the next 20 years, approximately EUR290 million was to be invested in the airport, of which EUR180 million would be provided by So.Ge.A.P. This transaction saw the exit of The Low Cost Airport Group (UK), which held a 5% interest in Parma Airport and which had aspired to the 67% on offer.

But these promising beginnings hid a layer of uncertainty about the firm underneath, not least the nature of some of the more obscure investments, but also about corporate governance issues, initially at another division. To some people it was of little surprise to learn, in April of this year, that shareholders of MAI had decided to liquidate the company and pay out its funds, mirroring a move by sister company Meinl International Power a little earlier. In 2008 MAI had already been taken over by rebel shareholders, as had Meinl Power.

It paid a special dividend of EUR3.50 per share, or EUR245 million in total, most of its remaining cash pile, and began to sell all its remaining assets. The proceeds and the remainder of the cash were paid out to shareholders, Meinl Power following a similar course of action. The oldest of the trio of Meinl companies, Meinl European Land, was taken over by Israeli real estate investor Gazit Globe in 2008 and renamed Atrium European Real Estate.

Both companies, Airports and Power, had been embroiled in several lawsuits and counter-lawsuits with Meinl Bank, whose Chairman Julius Meinl V was bailed for EUR100 million, after being arrested to face accusations of defrauding investors. At the same time critical shareholders had succeeded in dismissing Directors of both MAI and the Power company at EGMs. Collectively, these events sent a shiver down the spine of investors in other Austrian banks like Erste Bank and Raffeissen, which, like Meinl, are exposed to the collapse of currencies in Eastern Europe where they are heavily involved.

The dispute has rumbled on and as recently as this month (Jun-09) Meinl Bank had offered investors in MAI a ‘peace offering’ - up to EUR432 million (EUR6.27 to EUR6.37 per share certificate) in exchange for an agreement by its ‘rebels’ that they would stop all lawsuits.

MAI had sold its stake in TAV gradually on the Istanbul Stock Exchange, and the buyers are unknown. As per the Capital Market Board regulations there, shareholders are not required to make announcements about their shareholding percentages up to 5%. Information on the fate of the other airports has been more difficult to extract, but there may be investment opportunities there for those wishing to take a gamble. Parma Airport’s ‘Development Plan’ web page states it is ‘under construction’.

Meinl Bank remains confident about the airports sector in CEE and SEE

Before its involvement in MAI, Meinl Bank was active in the airport sector. For example, Meinl Bank was advisor to the Slovak Government in the course of the privatisation of the airports of Kosice and Bratislava. Meinl Bank has a significant expertise in the aviation sector and in Central and Eastern Europe and this sector continues to be a field of activity for the Bank on the advisory side.

On the positive side, Meinl Bank still considers the aviation sector to be an interesting and attractive sector and especially the aviation markets in Central and Eastern Europe and Southeast Europe that are still underdeveloped and therefore have a significant growth potential for the future. A spokesman stated, "While the current overall market situation and financial crisis has an impact on the aviation sector, in the longer term - and every investment in airports has to be considered as long-term investment - the sector offers attractive potential for growth.“

SkyEurope in administration

With MAI gone and a number of stalled projects in the region such as the sale of Prague Airport and slow progress at the competing Vodochody Airport, there is not much joy in the news that the long-troubled LCC SkyEurope has announced that a Bratislava District Court has granted it ‘creditor protection’, a form of bankruptcy avoidance, allowing it to continue to operate while it undergoes a restructuring of its operations. Good news for SkyEurope on the surface, but is the court’s decision no more than the inevitable-delaying application of an injection of Demerol to a well known entertainer in Los Angles?

Under ‘creditor protection’, the carrier can receive up to nine and a half months protection and will continue full operation of scheduled and charter flights, as well as preserving its workforce. The airline said it was still hoping to find investors to provide fresh capital. In an upbeat statement, SkyEurope’s CEO, Jason Bitter, said, "There has been ongoing investor interest in SkyEurope and its business plan, although the company's debt has been a barrier. This period of reorganisation under creditor protection will give the company time to restructure its debt and become attractive for new equity investment."

This is a brave call for a carrier which, at the end of Mar-09, had negative equity of EUR97.6 million, and held cash and equivalents on its balance sheet worth only EUR460,000 - with no light apparent at the end of the tunnel.

Before entering creditor protection, the company had announced that York Global Finance 11, which owns 29.9% of SkyEurope, had again extended the deadline for repayment by the airline of a EUR15 million loan granted in Dec-07 and a EUR10 million loan granted in Sep-08, to 15-Jul-09. The repayment deadline for these loans had already been rolled over five times previously.

SkyEurope features prominently in The Centre's forthcoming Global LCC Outlook 2009 report.

Profitless since its inception

SkyEurope has been profitless since its 2002 inception and continued its dismal record in its reported financial and operational results for the three months ended 31-Mar-09, in which it made a net loss of EUR15.1 million, an EBITDAR loss of EUR3.9 million and a negative 12.1% EBITDAR margin.

Failure to maintain lease payments caused repossession action on seven of its 14 aircraft in early 2009, and, despite subsequent wet-lease arrangements for a further three aircraft, SkyEurope’s fleet was reduced to 10 aircraft by the end of 2Q-09. Consequently it suffered from severe operational disruptions resulting from the repossession of aircraft by leasing companies, and from a failure to satisfy passenger requirements - even when some replacement aircraft were sourced.

In the latest statistics released by SkyEurope, compared to the same months in 2008, passenger numbers in Apr-09 were 202,839, down 27.5%, and in May-09 were 208,121, down 37.5%. However, reflecting the carrier’s route and fleet shrinkage, passenger load factor was improved, for the sixth straight month.

So for now the pioneering Central European LCC lives on against all odds. SkyEurope’s shares plunged 34% on the news of the move into creditor protection, but then retraced most of those losses, as investors cling to a glimmer of hope that SkyEurope can finally get its house in order.

For it to do so is crucial to a number of airports where SkyEurope has a critical mass of frequencies and where it’s image, one that rubs off on those airports, is every bit as important as that of the likes of Ryanair, easyJet, Air Berlin, Clickair, Southwest, Gol and AirAsia in their own countries. Moreover, SkyEurope is a multinational airline in the sense that it is a genuine cross-border multi-base airline – the first in Central Europe - headquartered in Slovakia, with its main base at MR Stefanik Airport in Bratislava, and other main bases in Vienna and Prague. Bases at Krakow and Budapest have been discontinued. It has won Skytrax awards for customer service but they do nothing to tackle the financial situation.

Failure of SkyEurope would have severe consequences for Bratislava Airport

While Vienna and Prague airports, home to powerful carriers Austrian Airlines and CSA, could easily ride the loss of SkyEurope services (as Copenhagen Airport has managed to so since the failure of Sterling), the potential effect on Bratislava’s airport would be much more significant. SkyEurope presently has 38% of all routes at Bratislava, as does Ryanair. It would not quite be as bad as Dublin or Cork airports losing Ryanair (as that airline would probably attempt to fill the gaps, especially as a new terminal there is partially completed) but a serious loss all the same.

SkyEurope, more of a ‘hybrid’ carrier than an outright LCC, with higher costs at multiple CEE bases most of which are primary airports, has been fighting hard to stave off impending catastrophe for virtually since its inception, when it was financed by EBRD and the EU with a contribution from ABN Amro. Battered by high fuel prices for much of 2008, it continues to battle on through difficult circumstances. In Oct-08 its CEO declared that it was working to resolve financing issues and had no plans to declare bankruptcy, but major shareholder YGB has been offering bridging loan facilities with deferred payment schemes.

In December, Longstock SAPO, a new JV set up by travel services company, SAPO International, and Portuguese financial group, Longstock, confirmed it intended to acquire a controlling interest in SkyEurope, subject to regulatory approval. Longstock SAPO also granted a EUR10 million bridging loan to SkyEurope in Dec-08.

The airline deferred publication of its full year accounts for the year to Sep-08. When they were published they revealed a negative EBIT of EUR56.1 million (2007: -EUR20.9 million), and a net loss of EUR59.4 million (2007: -EUR24.1 million) on revenues of EUR260.9 million (+10.5%).

And of course when an airline like this experiences continuing financial difficulties it casts doubt on the business model of similar CEE based airlines like Wizz Air, unfairly or not. Wizz Air’s response, along with the ubiquitous Ryanair, is to examine the possibility of converting the Paris Vatry cargo airport, 160 km to the east of the city, into the low cost airport for Paris. What this says about Wizz Air’s commitment to its ‘home region’ is open to interpretation.

Pulkovo deal concluded

So a major investor in airports is no longer on the scene and the possible failure of an airline threatens the prosperity of at least one airport. But it is not all bad news for the region. Several privatisations are still planned in Hungary, Kosovo, Serbia and Turkish Cyprus, in addition to recently concluded deals in Latvia and Macedonia, both of which involved TAV. Then at the end of Jun-09 it was announced that Fraport had won a 30-year concession for Russia’s Pulkovo Airport. The Northern Capital Gateway Consortium, comprising Fraport AG, VTB Bank and the Horison Air Investments, will focus on constructing a new passenger terminal, expanding ramp areas, developing real estate and modernising the existing airport infrastructure. Two other bidders included a consortium comprising Flughafen Wien, Lider and Gazprombank and another led by Oleg Deripaska's Basic Element and Singapore’ Changi Airport International (CAI).

While organisations like Fraport, Flughafen Wien, CAI and TAV continue to show faith in this region it can continue to have confidence in its future.