Olympic: the thirteenth labour November 1997

Wanted: Chief Executive/Chairman for $1bn–plus EU airline, profitable for two years following restructuring, moving to major new airport in preparation for global sporting event in 2004, fleet renewal plans backed by government guarantees, historic location on Mediterranean coast.

The actual advert, recently placed in leading business magazines, for the position of Managing Director at Olympic Airways didn’t quite put it that way. Rather the requirements for the position emphasised such attributes as a Hellenic University Degree or one recognised by DIKATSA (the Greek authority responsible for certifying non–Greek degrees); fluency in Greek and preferably English; and, disconcertingly, the candidate "should not have committed offences mentioned in article 2.2 of the Presidential Degree 611/77(A198)".

The wording of the advert is even odder given that the reason for its placement was the extension of the time period for applications in order to attract talent from outside Greece. The job was originally advertised late last year as the result of a new law which required that the chief executives of all Greek public companies re–apply for their posts in competition with new candidates in order to weed out unsuitable political appointees.

Jordan Karatzas, the incumbent MD, is a probable re–appointee, but two or three former chief executives are also short–listed. Olympic chief executives may have an excessively short tenure — less than a year on average — but they are recyclable.

Yet Olympic is, on admittedly narrow criteria, the success story among Europe’s state–aided carriers. Between Aristotle Onassis’s sale of Olympic to the State in 1974 and the acceptance by the EC of the airline’s restructuring and recapitalisation plan in 1994, regular heavy losses had reduced the company’s net worth to a remarkable negative Dr2.5bn (i.e. its net debt was three times turnover). This was partly the result of the Greek government charging penalty interest rates (2.5% per month cumulative) on overdue debt theoretically owed to it by the airline. Frankly, it is impossible to unravel Olympic’s accounts from this period — various auditors have suffered nervous break–downs trying to do so.

In any case, the losses definitely came to an end in 1995 with a net profit of Dr7bn ($30m), and the improvement continued in 1996 when profit reached Dr14bn ($60m).

The turnaround plan, backing the Greek government’s 1994 state aid Submission, would appear to have been effectively implemented by Karatzas and his predecessor Prof. Rigas Doganis. Remarkably, it has produced the results forecast in the official Submission to the EC in contrast to most of the turnaround plans accepted by the EC.

However, the turnaround plan was essentially negative — it was designed to extract Olympic from deep, deep trouble, but could not at the time of its formulation set up Olympic as a commercial, market–orientated, niche flag carrier, which was the longer–term aspiration. The turnaround plan’s key elements were:

• Imposition of a three–year wage freeze in an economy with 12%-plus inflation;
• 1,750 redundancies (on generous terms);
• Elimination of loss–making long–haul routes with break–even load factors well above 100% — Tokyo, Boston, Chicago;
• Freezing the fleet and returning two A300s to the lessor.

Now Olympic’s strategy must move into a positive phase without again losing control of costs. The key questions are:

• As Olympic’s permanent management has been in reality the pilots' union, is the airline suitable for an ESOP–based privatisation?
• Can the problem of the inherently unprofitable long hauls (low yield, extreme seasonality, high fixed cost) really be solved by replacing the four 747–200s with A340s? Two firm orders plus two options have been placed with the intention of building up the A340 fleet to 10 by 2004, implying ultimate expenditure of about $1bn on a loss–making sector.
• How to reconcile the investment on longhaul types with the critical need to replace Olympic’s fleet of 11 Chapter 2 737–200s before the 2003 deadline for the elimination of these aircraft? Olympic has to turn its LoI for 4 plus 4 737–800s into a firm order before the end of 1997 in order to take advantage of the remaining $375m in state–backed loan guarantees. The plan is to expand its fleet to 25 737- 800s by 2004 — an investment of about $2bn.
• Given that ground handling is by far Olympic’s most profitable activity, how can it greatly improve service standards and avoid further censure from the EC and a final dismantling of its near–monopoly? A second handler on the passenger side is permitted from next January while ramp side liberalisation starts a year after.
• How can Olympic efficiently market to its major growth opportunity, which is leisure travellers from northern Europe, when its sales operation is so focused on VFR?
• Can it learn to compete on cost and quality with the charters and start to fly where tourists really want to go (Rhodes, Corfu, Heraklion rather than Athens)?
• What happens if other Greek airlines start to compete with Olympic? At present the main competition comes from Crete–base Air Greece in the islands market and Cronus Air with limited 737 service from Athens and Salonika to London Heathrow and Frankfurt, but Stelios Haji–Ianniou of easyJet is known to be interested.
• Will the move from Athens Hellenikon airport to Spata be completed in time for the Olympic Games in 2004, and who will finance the transition, estimated at Dr120bn ($500m)?