Lot weighs IPO if sale talks fail to fly

Polish flag-carrier Lot Airlines is in active talks with operators and private equity groups over a government plan to shift the company into private hands, its chief executive has revealed.

Last year, the troubled airline - which is part of the way through a tough restructuring and state-aid programme - turned its first profit for seven years, raising the prospect of an initial public offering if Warsaw cannot find a buyer, according to Sebastian Mikosz.

"We are actively working on getting private money," he told the Financial Times. "We could also have private equity . . . it can be anyone."

Lot, 99.9 per cent owned by the Polish treasury, has for years been seen as a possible takeover target in Europe's crowded airline market, but legislation previously required the government to hold at least a 51 per cent stake, deterring outside investors.

However, that state ownership law was abolished in 2013, and Lot appointed Rothschild to search for outside capital, as the government became serious about securing a disposal. Since then, numerous potential investors have taken a look at the company, but none have committed.

"Consolidation is completely unavoidable," said Mr Mikosz, a former banker who ran Lot in 2009 and was brought back to the role in February 2013. "There are too many airlines [in Europe]. It is a really challenging environment . . . particularly for airlines the size of Lot . . . We are simply too small."

When asked when he would like to sell the airline, he replied: "Tomorrow."

However, Mr Mikosz highlighted how it was difficult for European flag carriers to merge because governments are keen to see these airlines' brands survive - therefore limiting the room for cost savings in any deals.

"It becomes much more delicate to consolidate [in Europe], because people are very much connected to the brand. It is perceived as a failure if your brand disappears. Look at [collapsed Hungarian airline] Malev . . . it is like Hungary is disappearing."

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But John Strickland, an independent airline industry consultant, said it was unlikely that IAG, KLM-Air France or Lufthansa would feel the need to buy Lot - even though its strong long-haul network, serving large expatriate Polish communities, might appear an attractive asset.

"We are seeing more and more consolidation . . . but I don't see many people needing to buy Lot to get the attributes it has," said Mr Strickland, founder of JLS Consulting. "A trade investment, or an IPO might be more likely. The fundamentals are good, so it just needs someone to sharpen up its act to leverage the potential."

Mr Mikosz acknowledged that a private equity firm or other alternative investor, given their appetite for risk, may be a more likely owner for Lot than an airline group.

"There is not a problem with price . . . there is a problem with risk," he said. "Pitching an airline for sale right now is a very difficult sell."

<>This could start to change following Lot's announcement of a €24m operating profit for 2014, its first earnings for seven years, in a sign that the company's restructuring - helped by €200m worth of EU-sanctioned state aid - is working.

With further taxpayer support ruled out for at least a decade, Lot's restructuring will continue this year, but an expansion plan slated for 2016 is designed to woo would-be investors, and potentially prepare the company for an IPO if none are forthcoming.

"There are alternatives," said Mr Mikosz. "If we do the restructuring well, in 12 months you can have a bond issuing, we can think about an IPO. And in six months time, if we deliver good 2015 results, an IPO looks even better."

Lot's expansion plan, to be announced in the next two months, will see the company take on more long and short-haul routes and aircraft.

While the company has not yet decided the split between long-haul and short-haul growth, Mr Mikosz said he hopes to see expansion of around 20 to 30 per cent a year in available seat kilometres - a measure of airline capacity.

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