SAS balks at airline privatization

  • 2003-05-01
  • Steven Paulikas

The lone qualifying bidder in the public tender for Lithuanian Airlines has backed out of the process, forcing the government to retain control of its national carrier and return to the drawing board for a new privatization plan.

On April 25, representatives from Scandinavian Air Systems, the largest airline in Scandinavia, flew to Vilnius and informed officials from the State Property Fund of their intention to withdraw from the tender.

In a statement to the press, a SAS official said that the company made its decision after having performed legal and financial due diligence that demonstrated a lack of upside for the Lithuanian airline.

Otherwise, SAS officials refused to provide details.

"I cannot comment on the specifics of our decision because of the confidentiality agreement we have signed with the State Property Fund," SAS Vice President Jens Larsen told The Baltic Times.

"However, we will continue to consider the Baltic states an important market and one of special interest to us," he said.

SAS currently owns 47.2 percent of AirBaltic, Latvia's national carrier.

The public tender for a 66 percent stake in Lithuanian Airlines began on Jan. 6 when the State Property Fund began distributing information to potential buyers and soliciting applications.

When the initial phase of the process ended on Feb. 6, SAS was left as the only airline that both had an interest in the 100 percent state-held carrier and met the requirements of the tender.

In the wake of SAS's pull-out, the State Property Fund, the agency responsible for privatizing state-owned enterprises, said that it will prepare analytical material and hold a review of the situation before making any decision about a renewed public tender attempt.

"Lithuanian Airlines remains on the list of companies the government has designated for sale," said Jolanta Varapnickaite-Mazyliene, press representative for the State Property Fund.

"Nonetheless, it is too early to say at this point if Lithuanian Airlines will be offered once again in a public tender, or what the conditions of that public tender would be," she said.

Analysts had been critical of the first phase of the process for having put the government in the undesirable position of dealing with only one bidder in an auction, and they viewed the collapse of the privatization as a consequence of the narrow conditions set out for potential purchasers.

"When the government first started selling off state-owned companies, it would basically sell indiscriminately to the highest bidder," explained Remigijus Simasius, senior expert from the Lithuanian Free Market Institute.

"The State Property Fund has now swung radically in the opposite direction, setting extremely high standards that only one or two companies can meet."

As Simasius said, "It is quite possible that there was a perfectly good airline out there that would have made a good match for Lithuanian Airlines but was immediately disqualified from the process because of the conditions."

According to tender conditions, a potential buyer had to be an airline carrying at least 1 million passengers per year and have its home base in a country that is a member of the Joint Aviation Authorities or the Federal Aviation Authority.

Furthermore, the investor had to be a member of an international airline alliance, such as STAR Alliance or SKY TEAM.

Simasius pointed out the inauspicious timing of the tender, in light of the recent global downturn in air passenger traffic due to terrorism fears and as of late, the SARS disease.

"Generally speaking, business prospects for any airline at this point are unclear, so this is not the best time for a company like SAS to be risking capital on an investment like Lithuanian Airlines," he said.

Had SAS declared an intention to continue with the process, it would have been required to submit a final bid by June 25.

Upon settling on a final price with the government, the Scandinavian air carrier would have received an immediate 34 percent stake in Lithuanian Airlines, followed by the receipt of another 32 percent after two years.

The government was targeting a total investment of around 12.3 million litas (3.6 million euros) from the tender offer.

Lithuanian Airlines currently boasts a fleet of seven planes, consisting of four Boeing 737s and three smaller Saab 2000 propeller-engine craft. The airline flies to 15 destinations in 14 European countries, carrying 304,300 passengers in 2002.

The Lithuanian state carrier posted a much higher than expected audited net profit of 39.9 million litas for 2002, grossing a total of 266.3 million litas.