Olympic: what can possibly be done? October 2000

Credit Suisse First Boston is the latest investment bank to be charged with finding a trade investor for Olympics Airways, and in theory it has to start up the road–shows within the next month or so. How can one go about selling an airline which is not only consistently unprofitable but also apparently totally resistant to reform?

Last year Olympic was reported to have made a net loss of Dr19bn ($50m) on revenues of Dr345bn ($910m), though there is always considerable doubt about the validity of Olympic’s financial numbers. In any case the airline is performing extremely poorly and its short recovery after being recapitalised in 1994/95 is now seen as just another false dawn. That recapitalisation involved state aid of Dr544bn (nearly $2bn at the time). So outside observers might be wondering where all this money went.

In fact, Dr 491m ($1.65bn) was allocated to write off debt to Greek state–owned banks and corporations (like the oil refining company and the CAA). Olympic didn’t receive direct funding from the state but was allowed to run up overdrafts and unpaid bills, then the Greek government applied penalty interest rates to these amounts — the equivalent of 3% per month or well over 50% per year. Even if the airline managed to break even. its debt continued to grow exponentially.

The other Dr53bn ($175m) was new equity to be paid in three tranches if the carrier met its turn–around plan targets. Permission for the third tranche has been refused by the EC following an implausible plan and forecast submitted by Olympic during BA Speedwing’s brief and ineffectual period in control.

Consequently, the airline risks running out of cash in the winter (traffic to/from Greece is highly seasonal). Already state–owned suppliers are being asked for extended credit. In Athens, there is little hope of an airline solution, following BA’s refusal to take 20% in the carrier, but there is a vague expectation that one of the many successful Greek entrepreneurs, who understand the complex politics of Olympic, will step forward.

Leading contenders include: shipowner Spyros Latsis; Thomas Liakounakos, owner of the most successful of the new Greek independent airlines, Axon; Pericles Panagopoulos, president and major shareholder of quoted ferry holding company, Attica Enterprises; and industrialist, Constantinos Aggelopoulos, who has family interests in the organisation of the 2004 Athens Olympic Games.

The fundamental problem with Olympic is not airline economics but Greco–Balkan politics. Ever since Aristotle Onassis sold his airline to the Greek state in 1974, Olympic has been at the mercy of politicians; it has had to fulfil many roles but none of them have had a commercial aim.

The average tenure of chief executives over the past 25 years has been less than 12 months, and the reasons for their departure or indeed appointment are usually obscure. Similarly, the Shareholders Board (the only shareholder is the Ministry of Finance) constantly changes its membership, and it has proven incapable of attracting and retaining successful businessmen to this vital role.

Managers, some of whom well qualified and talented, are generally unwilling to make any decision on their own, realising that they will receive no credit if things go right and will be scapegoated if things go wrong. On the other hand, senior managers who fall out of favour are rarely sacked, but are "fridged", allocated to a non–existent jobs on full pay.

The unions, particularly the pilots' union, represent the permanent force in the Olympic power structure, in effect controlling many of the airline’s functions. At the same they will resort to strike action whenever their position is threatened. They have also traditionally represented a voter power base for PASOK, the Pan–Hellenic Socialist Movement, the party currently in power (though it must be added that PASOK is now a very different animal from anti–capitalism, anti–EU, pro–cronyism party of the 80s and early 90s — it has made effective moves to modernise the Greek economy).

Changing the Olympic ethos is basically a matter of political will plus charisma on the part of one of the potential Greek entrepreneurs who might bravely take up the challenge. After all, Onassis is still a hero at Olympic. It is not something that can be successfully tackled by investment banks or airline consultants.

A reconstructed Olympic 2000

But, abstracting for a moment from the politics, what could Olympic — or a new Athens based airline called, for example, Olympic 2000 — offer an investor? What we are looking at here is not selling Olympic as an ongoing entity, but the potential for reconstructing Olympic 2000 from elements of the old carrier.

Spata, the brand–new airport outside Athens is the most obvious asset. With two runways and capacity for 16m passengers a year the airport, which has been constructed by the German company Hochtief (which owns about 45%, the other 55% is owned by the government), will open on schedule in March 2001 (sadly the same cannot be said for the road links between Spata and Athens). Olympic will be the incumbent at a brand new, totally uncongested airport with the potential for hub operations.

Ground handling has been Olympic’s most profitable activity, but its monopoly is now being broken with a new handling consortium, Goldair, competing strongly at Athens. Selling off this asset or entering in a joint venture with one of the independent handlers would appear logical. The same applies to the airline’s relatively successful catering subsidiary.

Olympic’s domestic monopoly in a market of about 2m passengers a year was officially ended by the EC in 1997. With the growth of the new entrants such as Aegean, Cronus and Axon, its overall market share has been significantly eroded. Still, Olympic retains a dominant position on key trunk routes like Athens–Salonika. Consolidating these routes while entering into code–sharing/ franchising agreements with the independents would seem to be a way forward.

The European network needs a complete revamp including culling intrinsically unprofitable routes and rationalising the distribution system which is still based on high–commission ethnic travel agents and very expensive airline shops. A major loss making area is Germany, partly because flights from Athens are scheduled through the northern city of Salonika, diluting yields and adding costs. Salonika could be developed as a hub in its own right preferably using Olympic’s low cost subsidiary Macedonian Airlines.

Olympic fails miserably to capture the small business component in the international market which is leisure and VFR dominated. Yet in terms of hard spec the business cabin on A300–600 flights to London, Frankfurt and Paris is the best intra- European product of all. Improve the soft spec and try to come to a deal on FFP miles with non–competing airlines, and Olympic just might find a profitable niche.

In terms of developing a proper hub operation, there is genuine potential in connecting the Eastern Mediterranean (Lebanon, Syria, Israel and Egypt) with Western Europe and beyond. The problem is the excessively low yields of this sixth freedom traffic, which might be mitigated by entering into joint ventures with the national carriers of these countries (and with SAA on the Johannesburg route).

The long-haul dilemma

The long–hauls to Australia and the USA are by far Olympic’s biggest financial headache, producing losses that dwarf those of the rest of the network. Characterised by high seasonality, high costs in terms of flight crew and distribution (some of the commissions Olympic incurs are extraordinary), and low yields because of the VFR and leisure nature of the traffic, these routes are not financially viable under the current Olympic set–up. The change from elderly 747–200s to A340s hasn’t made much difference to the economics because the potential operational cost savings are balanced by much higher capital costs and lower revenues per flight.

Yet to suggest closing or selling the longhaul operation causes political apoplexy as a Greek link to the diaspora is regarded as essential. A radical solution for Olympic would be for this operation to be sold off at a minimal price to the long–haul pilots who would then have the challenge of running these routes on a commercial basis.

It must be said that union enthusiasm for any form of equity participation in Olympic has so far been non–existent. But it is rumoured that the long–haul pilots have very nicely over–funded pension schemes, which were originally set up by Onassis, and these schemes would pay out considerable lump sums if Olympic were to be wound up, so providing a potential source of operating capital for a new venture.

So there could be a future for a restructured Olympic 2000 but it means dismantling the old Olympic first, which means courageous political decision–taking. The alternative — the first official bankruptcy of a European flag–carrier.