The ongoing saga of the Domodedovo Airlines privatization continues with the General Director of the airline accusing the government of changing its mind (1441 words)

Published: 11/1/2001

In an effort to cast some light, and make a defence of his role in what is fast becoming seen as a leading example of Russian privatization cronyism, the General Director of Domodedovo Airlines, Alexander Akimov, has attempted to outline what the management of the airline believes is the chronology and context of the privatization of the airline that led to the reported sale of a controlling interest to companies controlled by Roman Abramovich. The First Plan Giving a general impression of poor supervision and thought by the Ministry of State Property, Akimov was keen to stress that if the privatization had not gone as the government expected, then it was largely down to its own inability to manage the process. Akimov said that the original privatization plan that had been approved for Domodedovo Airlines in December 1997, encompassing a number of assets including the airline, was subsequently abandoned as it breached the privatization regulations laid down in July of 1997 and the plan that involved the employees getting 25% holding for free was abandoned. The Second Plan A subsequent plan presented by the First Deputy Minister of State Property Medvedev in June 2000 offered employees, according to Akimov, 50% of the company as part of closed subscription, and involved other members of the Domodedovo air company that had included the airline among its holdings. The employees were to be offered 50% of the company at a cost of Rb1 per share, with 25.5% retained by the State Property Fund and 24.5% to sold to outside investors in the latter part of 2000. According to Akimov, this second plan also breached a new law in that, if employees gained a 10% holding in a company, then it was considered privatized and the balance of shareholdings had to be acquired at a market value, so forcing the airline to be the first to revalue its shares. Using a list provided by the ministry, the airline selected a consultant to establish and coordinate this with Alexander Borodin responsible for transport at the ministry and, on 25th January 2001, the consultant EKSO(Expertise of Property with Trade Industrial Chamber) concluded that the shares were worth Rb17.5($0.6) a share, a valuation that was approved on 19th February by the board of the airline dominated by figures from the ministry, the Ministry of Transportation and regional government, with Akimov the only DAL employee present. It was also agreed that if an employee wished to buy more than 90 shares, a deposit with the registrar MDM Bank would be required. The Transfer A team was also established to organise the restructuring the capital of the airline, and convert 1,948,759 non voting preferred shares to ordinary shares adding to the 5,846,275 on issue. The team, operating with help from the ministry, submitted its plan and waited for the ministry to respond as it was required to do within seven days, by instructing the State Property Fund to negotiate with the other participants in the closed subscription. At this point, however, according to Akimov, the ministry claimed that, as half the preferred shares had not been converted into ordinary shares, (which he claims was their responsibility) they refused to sign the agreement that would have transferred the share to the airline's employees, despite the fact that monies had been paid. According to Akimov, the airline then went to court on 14th June 2001, that decided in its favour and ordered the ministry to transfer the shares within five days. At the same time, the employees' trade unions went to court to block votes by the airline's shareholders on the basis they had been disenfranchised by the ministry's delays. The court also banned further shareholder votes until the employees had received their shares, therefore preventing the election of the airline's board that was due to have occurred in early August to coincide with the end of the board's term, after which he says the board was no longer properly constituted under Russian law covering joint stock companies. The ministry, however, refused to comply and on 13th August, court officers forced the ministry to issue documents transferring 3.448m shares to employees, although it was subsequently discovered that the document did not have the official stamp and, according to Akimov, the court officer then spent a further 20 days getting them so authorized. Further efforts were then made to cancel the papers according to Akimov and on 21st August, despite a court ban on the 20th, Vladimir Mamigonov, Chairman of DAL and the Deputy Minister of State Property, called a board meeting and cancelled the decisions of a board meeting on 19th February 2001, including the transfer of the shares. The matter was then taken back to the courts by DAL's employees, who again obtained an order for the transfer of the shares. The ministry then complied with the order, but simultaneously went to court itself arguing that the original closed subscription was illegal and should nullified. This lead to the specific events of the last few weeks, as the shares are reported to have been sold on by the company's management to companies controlled or close to Roman Abramovich. This is, however, challenged by Akimov who claims that senior managers bought only 18% of the available shares, 3% each, and did so because they believed in the future of the company. Deadlock The privatization is now in limbo with the ministry attempting to void the process and the employees defending it. An illegal board meeting occurred on 26th October according to Akimov, although when questioned Mamigonov said it was not a board meeting, but merely "discussions". However, a shareholders meeting to fire Akimov before the expiration of his term in April 2002, has been scheduled for 17th December 2001. It is unclear what the outcome of this situation is going to be. A court hearing on 31st October to lift the ban on shareholder votes left the ban in place because the ministry did not attend the meeting. A new meeting has been scheduled for 27th November, but even if the ban was lifted at that point, no meeting can take place until 27th December, as all shareholders have to be given due warning of 30 days. Akimov said that they intend to ask the courts to declare the October board meeting illegal and to achieve the transfer of the shares and elect a new board. Unsurprisingly, he says defiantly that Borodin has told him that the problem is the price of the deal, as the $2.3m is too cheap and should be closer to $4.5m that the ministry now believes represents fair value. For Akimov, more than 240 employees have committed at the original price and in some cases have borrowed to buy. He also believes that when the government originally decided to privatize in 1998, when the airline had only seven out of its 23 Il-62s flying, compared with the current 16 after five aircraft were written off, there was no demand for the airline's stock, but now that conditions are improved, it has decided it wants a better price and seems confused about the airline's underlying asset value. Aircraft on the balance sheet may in theory be worth $75m, but in reality given low demand are worth virtually nothing. Improving Performance While accepting the key points in Akimov's argument, there is little doubt that the procrastination has seen a considerable improvement in the airline's performance over the last three years, when large sections of the fleet were out of action and the slowness of payment by the Ministry of Defence resulted in the airline's operation resulted in the ceasing of operation altogether for a period. Revenues in 2000 according to Akimov were $88.8m and this year the airline is expecting $120m, with a pre-tax profit of $1.2m in the first nine months equal to all of 2000. He also believes that the Ministry is working counter to the state's best interests, as a successful airline will generate considerably more in tax payment than the difference in the sale price. The airline's traffic for the first 8 months of 2001 was up by 41.6% at 394,798 passengers, which Akimov says reflects new routes and increased frequencies. Akimov added that the airline remains, in contrast to Aeroflot, happy with the Il-62, Il-86 and Il-76 and will continue to operate them. He added however, that the airline had left the alliance of airlines led by Krasair as the Siberian carrier has received licences for routes that they operate.

Article ID: 2876