— Coalition rift affects airline decision —
— Bankruptcy cost higher than new plan —
The fate of state-owned carrier Eurocypria lies in the hands of Thursday’s plenary session of parliament which was widely expected to approve a capital increase plan of 35 mln euros, until rival airline trade unions started flexing their muscles to torpedo the deal and ensure the charter airline went bust.
Such an outcome would only benefit Cyprus Airways staff and management and not the tourism industry, with the two hotelier groups saying that both airlines should be allowed to operate, or the tourism industry could face losing 300,000 visitors.
A negative vote on Thursday and the carrier could close as early as Friday which is the deadline for settling loans that have been rolled over since last October and November, while the next payments are already due to the aircraft leasing companies.
The issue has also taken a political dimension following Monday’s walk-out by junior coalition partners Socialist Edek, while centre-right Diko are still contemplating whether to continue sharing power with the communist Akel, with the latter being the only voice in support of Eurocypria.
Diko vice president Nicholas Papadopoulos, who chaired Monday’s session of the House Finance Committee where Eurocypria’s capital increase bill was tabled in a fast-track motion, seemed indecisive as the party’s future in the coalition obviously has precedence.
Opposition Disy is in principle opposed to anything this administration does, with deputy leader Averof Neophytou suggesting that no aid be given to Eurocypria or that it shuts overnight and restarts the next day as a different entity, similar to the reincarnation of Swiss from Swissair.
MOF DELAYS
Company insiders are upset over the Ministry of Finance dragging its feet with the capital increase plan, an issue that the airline’s chairman raised more than a month ago.
Concerns of defaulting on loans and credit facilities were often appeased by senior Ministry officials who have also told Eurocypria’s management “not to worry” with state guarantees as new tenders have been issued to aircraft suppliers in order to secure fresh leases for five aircraft from 2012 onwards. Deposits are expected to be paid in March, albeit at lower lease rates that will make the new aircraft cheaper to operate, and Ministry officials still seem unconcerned.
“It’s an investment, not expenditure, and thus will not appear in the government deficit,” an airline industry analyst told the Financial Mirror.
“However, if Eurocypria goes bankrupt it will cost the state far more than the 35 mln euros it is being asked to invest. The airline’s contractual obligations to tour operators and to the aircraft leasing companies could result in much higher penalties, closer to 40-50 mln euros,” the analyst added.
Executive chairman Eleftherios Ioannou has been credited with extensive cost cutting, turning Eurocypria into a lean operation, far more efficient than Cyprus Airways and ready for a quicker rebound to profits from current losses of 13 mln euros.
Responding to management and trade union criticism from Cyprus Airways that the charter airline should close down, Ioannou said that Eurocypria’s operating cost is 30% below CAIR and thus more attractive to tour operators.
Eurocypria operates six aircraft with 250 staff and crew and has a turnover of 100 mln euros, placing it on a path for quicker recovery than Cyprus Airways that is burdened with higher staff costs and loss-making routes.
According to the charter airline’s chairman, the company has already sold 70% of its seat capacity for 2010 and is expected to complete its programme for the whole year.
This has attracted interest from overseas investors, such as Poland’s Itaka, that is keen to take a minority stake in the charter airline in order to secure favourable arrangements to its own destinations in the Mediterranean and northern Africa.
NEW ROUTES
Eurocypria also plans to open up new routes of its own to Tehran and Kenya.
But the government has also imposed on the airline’s management to conclude deals with major tour operators on unfavourable terms, such as one from the UK that could cost several million in losses, despite carrying about 100,000 holidaymakers to Cyprus.
Industry analysts are also perplexed by the unusual silence from Eurocypria’s 250 staff and trade unions, suggesting that a behind-the-scenes deal may have been offered by the Cyprus Airways unions.
The Ministry of Finance said that a number of alternatives were discussed in the past including a possible re-merge with Cyprus Airways or even having Eurocypria declare a controlled bankruptcy whereby some of its assets would be transferred to the national flag carrier.
Marfin CLR analysts note that the option of the merger of the two air carriers is not permissible by the European Commission, leaving very little room for manoeuvre by the Ministry of Finance. The two options are either to close down by Friday or get the capital injection approval and stay alive.
If the company ceases to operate by Friday, it would be a major blow to local tourism, unemployment will deepen further and an enormous amount relating with state revenues from tourism will disappear, hindering further fiscal economics.
HOTELIERS SUPPORT BOTH
The Cyprus Hotel Association (Pasyxe) and the Association of Tourism Enterprises (STEK) issued a joint statement on Friday saying that “the contribution of both airlines to the tourism sector is very important and any support to both Cypriot airlines should be unconditional.”
The joint statement also criticised the public row over Eurocypria’s closure or not as “unnecessary” calling for a need to “maintain a constructive spirit and cooperation between them.”
