FLUG REVUE November 2002: LOT recovers and goes Star

LOT SURVIVES 2001 DOWNTURN

By Andreas Spaeth

Jan Litwinski still has trouble believing it. With a somewhat helpless gesture he asks, "Could you have imagined Swissair going bust? The idea never entered my head, it was an excellent company.” The bankruptcy of the airline icon from Switzerland, to which he entrusted a 37.6% share in his company in November 1999 for almost $184 million, is still a trauma for 54-year old Litwinski, who has worked for LOT for 30 years, serving as its Chief Executive Officer for the last ten.

During this period he had all but brought off the extremely difficult transformation of an eastern bloc state-owned airline into an ambitious company in the heart of Europe equipped with a Western fleet and had finally reached the start of the privatisation process when disaster struck. The major airlines from the West had been queuing up as potential partners.

"Lufthansa wanted to work with us, so did British Airways and of course Swissair with its Qualiflyer alliance,” recalls Litwinski. LOT had been pursued by an army of suitors. After all, it held the key to a market of 40 million people on Germany's doorstep.

From the start the Poles had been very cautious, fearful of being reduced to nothing more than a feeder service supplying the big airlines. It was in this context that Switzerland, being comparatively small, had seemed so attractive. "Swissair's offer was the best for LOT, both financially and also strategically,” says Litwinski, "They saw Warsaw as an important hub in their multi-hub Qualiflyer strategy.”

But the jubilation did not last. "Our first year with Qualiflyer was really good, with Swissair supporting us as a strategic investor, but then it went downhill,” he recalls. Today Swissair's stake in LOT is still in the hands of the bankruptcy administrators. Since the company increased its issued capital, the relative size of the holding has dropped to 25.1%, while the Polish state now owns just under 68%. "Swissair's shares are to be sold in the next few months, but the buyer has to be acceptable to the Polish, it says so in the contract,” Litwinski explains.

In the long-term the Finance Minister is planning to float the company on the stock exchange, and the government itself plans to reduce its holding in LOT to only 10%. LOT's strategic way forward is also clear: in April, Jan Litwinski and Jürgen Weber announced in Warsaw that LOT would probably join the Star Alliance on 1 June 2003 – an important development, as up to now the Alliance has lacked an east European partner. Also Germany is the most important market in Europe for LOT.

"Preparing to join the alliance is a complex process, so I can't guarantee the date of 1 June 2003, but it will certainly be next year,” explained Jan Litwinski in an interview with FLUG REVUE in Warsaw. "The most difficult aspect of harmonisation is the IT systems,” he says, "but the atmosphere of co-operation between ourselves and Lufthansa is excellent.” It is curious to note that the classic LOT logo is a flying crane, the same symbol that adorns all Lufthansa aircraft, and therefore creates a kind of symbolic closeness.

Already this June codesharing began on all connections between Germany and Poland. There are now direct flights between five German cities and six destinations in Poland, including, for example, Hamburg-Danzig and Düsseldorf-Posen. This initial success bodes well for the future. "Just in the first few months LOT has experienced a 35% increase in passenger numbers on its German connections. With a total of 200 weekly flights operated between Lufthansa and LOT, it is simply a much better range of services. We can now offer our passengers a global network.”

The Miles & More programme already applies to LOT flights, and from January 2003 LOT will be offering the Lufthansa frequent flyer programme exclusively. The Lufthansa crane is firmly established with its cousins in Poland, and a lot of basic groundwork has already been accomplished.

Since November 2000 LOT has invested a total of $250 million in the Warsaw hub. Improved connections resulted in an immediate increase in the number of possible transfer connections, which now stands at 2,300 per week, up from 850. For example, there are now three daily services to Milan, compared with three per week before. "Warsaw will become a strong transfer airport for regional traffic in the Star Alliance and complement the existing nearby Star hubs of Vienna and Copenhagen,” says Jan Litwinski.

In fact the Austrians, who themselves fly to four destinations in Poland, were not exactly thrilled when LOT recently began scheduled services to Bratislava in Slovakia, less than 70km away from Vienna Schwechat airport. However, the situation has now been resolved with Austrian Airlines, according to Litwinski, and LOT will continue to fly to Bratislava.

The Polish airline sees itself as ideally positioned for passengers heading for the west and south from the Baltic states, Belarus and the Ukraine. "We are the only airline to offer international services in the Ukrainian city of Lvov, which has 800,000 inhabitants, and we recently began very successful services in the Russian enclave of Kaliningrad. That's only 45 minutes away from Warsaw, but up to now only Aeroflot has flown there from Moscow.”

A lot of travellers from the east prefer to fly with LOT than, say, with Lufthansa, the Poles point out, since Warsaw airport is a more obvious choice for them and, even more important, the Polish staff also speak Russian. But above all the Polish market itself offers considerable growth potential: only 0.7% of the 40 million population at present travel by air, compared with an average 9% in the EU.

"When Poland joins the EU, traffic volume will shoot up overnight,” says Litwinski. Even if the Polish economy is currently stagnating, in 2001 thanks to the efficient hub in Warsaw domestic traffic (including feeder services to international flights) was up 50% on the previous year, at around 600,000 passengers. "Despite our good connections via Warsaw, with a transfer time of only 25 minutes, it is difficult to make profits here due to the enormous competition from the railways,” Litwinski laments.

Although up to 2000 LOT used to regularly make an overall profit, the Polish carrier received a hammering last year. "On top of the recession and the terrorist attacks, our strategic investor Swissair went bust along with the second Qualiflyer pillar, Sabena, and many of our suppliers thought LOT would also go to the wall. But we survived,” says Litwinski defiantly.

"We initiated a restructuring programme immediately, cut back our capacity and shed 15% of our staff.” Slowly the situation improved, and in the first six months of 2002 utilisation rose by 8% to 68.3%, with traffic volume up by 10%. In Warsaw they are especially proud of the clever redeployment they arranged for one of three Boeing 767-300's which could no longer be utilised: along with its crew, it has been leased, initially for a period of nine months, to Universal Airlines in Guyana and is currently being used there to fly a Georgetown-New York service. Thanks to this and other measures, LOT expects to be (just) back in the black again this year, and is hoping to make a significant profit in 2003.

LOT has always had a mind of its own and has often got its own way as well, despite all the pressures that existed in the former eastern bloc. This will not change when it joins the Star Alliance. One of the issues that is not negotiable is LOT's strategy of maintaining and expanding the Warsaw hub, for which a second terminal is currently being built for the exclusive use of Star airlines. When this is completed in 2005, the capacity of the airport will rise from its present 4.8 million passengers to 12.5 million. Then there are LOT's own long-haul connections. Its flights from Warsaw to New York (daily in the summer, alternating between JFK and Newark), Chicago (eight times a week) and Toronto (five times a week) plus, from Krakow in southern Poland, which has a population of 740,000, two non-stop services per week to New York and four to Chicago, are notoriously unprofitable.

"We have a yield problem,” Jan Litwinski admits, "as most of the traffic is generated by the ten million Poles who live in the USA and Canada.” Full fare-paying business travellers are thus the exception, and the Business Class in the Boeing 767, where the seat pitch is 142cm compared with only 122cm at Lufthansa, is correspondingly small – 18 seats in the two 767-300's and only 12 in the 767-200. A new sales channel in the USA is expected to help. This will mean lower commissions payable to travel agents, with more sales on the internet. There are even plans for new Asian services, LOT's one route to Bangkok having been relinquished some years ago. "This would allow us to make up for the seasonal nature of our American long-haul routes and improve utilisation of our 767's,” Litwinski hopes.

Otherwise, they are optimistic about Europe, where the emphasis is less on new destinations (although Venice and Dublin are planned) than on higher frequencies. "Above all else, LOT is a European carrier,” says Litwinski, and on 1 January 2004 Poland will join the common European aviation market, regardless of whether it achieves its hoped-for membership of the EU at the same time or only later.

"This will mean that we have open skies in Poland, and the low-cost carriers will definitely be interested in our market because of its enormous potential, but we are ready for the competition with these new rivals,” says Litwinski.

One resource that will help here is EuroLOT, a 100 per cent owned subsidiary that is nevertheless an autonomous airline. EuroLOT operates all 13 ATR 42's and ATR 72's for its parent company, at wage rates that are 35% below those of LOT. "Even so, labour costs at LOT account for only 15% of total costs, compared with 35 to 45% elsewhere,” says Litwinski. "However, here in Poland wages are a lot higher than in Czech Republic or Hungary.” At any rate Eurolot's role is not yet exhausted, and the question of when LOT purchases some more regional jets could soon raise its head again. Within a short space of time, significant gains in efficiency have already been achieved with the 13 new Embraer ERJ-135's, and a decision now has to be made regarding a 70-seater to enter service at the end of 2003. Although officially the Bombardier CRJ700 is also being put though its paces, the new Embraer 170, which was recently shown off in Warsaw, is probably the favourite. "We could use eight to ten of them and in return we would give back some of the smaller ERJ-135's,” says Litwinski.

A decision also has to be made within the next four years about the new long-haul fleet. The candidates here are the Boeing 767-400 and the A330. Within seven years a decision will then have to be made about a successor to the present Boeing 737 fleet. Here the competition is wide open.

One way or the other, LOT has come a long way since it was founded in 1929. A business that began full of optimism with the Junkers F 13, and later the DC-2 and Ju 52, suffered a long-lasting setback when the German invaded Poland 1939. But already in March 1945, two months before the end of the war in Europe, the first Lisunov Li-2's, the Soviet licensed version of the DC-3, were taken over from the military.

During the Communist era, LOT took liberties in its fleet and route policy that other east European airlines did not enjoy. This was evident in the acquisition of nine DC-3's in 1946, five Convair CV-240's at the end of the 1950s and three Vickers Viscount 804's from 1962. On the other hand, the jet age at LOT consisted almost exclusively of Soviet types. In 1968 the first Tupolev Tu-134's arrived, to be followed at the beginning of 1972 by the Ilyushin Il-62, which was also employed in the USA. From time to time exotic Western planes like the DC-8 and later the DC-10 on short leases were available for services to America, while as early as April 1989, six months before the fall of the Berlin Wall, the first Boeing 767-200 to be ordered in the normal way entered service in Warsaw. At the same time LOT was forced to accept 15 new Tupolev Tu-154M's, even though it could not see what it would use them for.

"My first priority was to get rid of the Russian planes, as we would never be able to attract any customers in the West with them or begin working together with western airlines,” Jan Litwinski recalls. The Antonovs, Ilyushins and Tupolevs spent most of their time on the ground or else they were used on domestic and chartered flights while Western aircraft were leased.

"Among the airlines in the former eastern bloc, LOT underwent the most radical transformation, but it was also very painful for us,” says Litwinski. A Tupolev Tu-154M painted in LOT's colours was the last Russian aircraft to leave Warsaw airport in 1995, marking the end of one era and the start of another.

From page 20 of FLUG REVUE 11/2002

Last updated 1 October 2002

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