Has Zeevi failed to meet its privatisation promises for Balkan Airlines?

Published: 6/1/2000

The Bulgarian Privatisation Agency has been quoted in the Bulgarian media as being unhappy with the privatisation process at Balkan Airlines, believing that the Israeli Zeevi Group has failed to meet its privatisation pledges of paying off the airline's $100 debt and investing $100m in the unprofitable carrier, which has recently experienced an acrimonious nine-day pilot's strike. The Bulgarian state retains a 20% shareholding in the airline along with a further 5% controlled by employees. Among employees particularly there has been a high level of discontent given the potential threats to jobs of 30% cuts and also substantial reductions in pilot's packages. As the cancellation of unprofitable long haul routes over four hours in favour of providing charter flights for tourists to the Black Sea, removed many of the lucrative stop over allowances for the airline's 260 pilots. Andrew Gray, the CEO of the airline, has settled the strike with a 15% pay rise with further negotiations to continue during the season. Given that many commentators have seen the airline privatisation as a relative success for international investors, the reported comments from the Privatisation Agency appear somewhat surprising. The airline is expecting to make operating profits for the year and a net loss of $2m, provided the impact of the strike on volumes has not been too severe according to Gray. These figures will represent the airline's best results in some time and reflect the radical restructuring of the airline's routes, aggressive pricing and marketing. The charge that Zeevi is not investing in the airline also seems curious given the recent introduction of two ATR-42-300s to replace the airline's An-24s and a commitment to the replacement of the airline's Tu-154M fleet with Boeing 737s within three years. This move seems likely to be accelerated due to high fuel cost in the region. The reasons for the state's dissatisfaction with the airline may lie in the vocal complaints of Zeevi that their unsuccessful efforts to avoid Arab action against an Israeli-owned company, by transferring the controlling stake in the airline to a Dutch holding company, have been misinterpreted, although it was technical breech of the rule requiring the Privatisation Agency to be informed of any such transfer. The holdings have now been changed to a Zeevi-controlled Bulgarian entity controlling 26% of the airline's shares and therefore making it a Bulgarian-controlled entity. The company has also objected publicly to the raising of tariffs for the airline at the country's airports. Arguing that the four-fold rises is hindering the carrier's recovery and is not matched by any improvement in the service offered by Sofia Airport, although substantial investment plans exist for the facility. It should be stated however, that prior to privatisation the formerly state-owned carrier paid no fees for using Sofia Airport. Balkan also complain that government ministers are not flying the flag carrier and using other airlines. Additional financing for the airline has also become a point of contention between the airline and state. The airline, unable to find bank lending on its own, has sought government help, although according to reports has not received a government guarantee as yet. Given that many of the other Bulgarian privatisations took the form of management and employee buyouts, which now struggle to develop their business due to lack of funds, an attack on Balkan on the basis of lack of investment seems curiously timed if the current reports are substantiated by government action.

Article ID: 1829