MIAMI — LOT Polish Airlines is focused on building off its $8.6 million net profit in 2013, aiming for operational profitability in 2014 before a resumption of growth in 2015.
In a press briefing in Chicago this past Monday, LOT Polish Airlines CEO Sebastian Mikosz outlined the steps that the beleaguered Polish national carrier plans to take in order to return to profitability after five years of consecutive losses and a government loan in 2012 that helped the carrier stave off insolvency.
LOT’s restructure is centered on a mixture of cost discipline and revenue strengthening initiatives. The company has initiated a new cost-reduction drive, including changing its employee compensation structure from salaries to an hourly-pay system and eliminating several positions altogeter. LOT has also focused on improving fleet utilization through increased charter flying, and Mikosz noted that LOT has increased utilization of its Boeing 787-8s to nearly 19.5 hours per day with charter flights supplementing an already aggressive long haul flight program with service to New York JFK Chicago O’Hare, Toronto, and Beijing.
On the revenue side, LOT has a myriad of new initiatives such as the aforementioned charters and LOT Travel, a new sales and distribution platform aimed at boosting bundling of third party services with LOT’s core product. Charter services in particular have been lucrative for LOT, who is banned from launching new scheduled long haul routes due to the pending action of the European Commission. During the winter, LOT allocated nearly two airplanes to its nascent charter operations for the winter season extending from November to March. The carrier served charter destinations such as Sri Lanka, Vietnam, Mexico, and Cuba, and managed to sell out its entire inventory to the two largest Polish tour operators, who entered into some of these markets. Mikosz spoke glowingly of the success of charter operations, noting that “[Our charter success] is very much due to the arrival of the Dreamliner. We can operate at very competitive prices for our tour operators… We have been very successful operating winter charters from Warsaw on direct flights in 2013.”
The airline is also moving towards a more complex fare structure that will allow it to boost revenue by more effectively matching price and inventory. LOT has seen a substantial increase in its cargo revenues, thanks in part to the expanded cargo capabilities of the 787. Mikosz noted that the belly cargo capability of the 787 was strong, with twice daily flights to Chicago offering LOT the equivalent cargo capacity of one daily dedicated freighter service. Mikosz stated, “It [the 787] gives us a push in the cargo market which is a very important market. It’s not visible, but cargo is still a substantial revenue stream, and our cargo benefits have increased in a very significant manner in the past year, more than three times over.”
LOT’s financial improvements are certainly tangible, and the carrier expects to achieve operational profitability for 2014 after achieving net profitability in 2013 and a narrowed operating loss of just US $1 million. According to Chief Commercial Officer David Garcia, LOT is currently on track to meet these goals for 2014. He described LOT’s first quarter financial performance as “on-budget,” noting that April’s results were particularly strong. Garcia pointed to LOT’s network strategy of growing connectivity in Central and Eastern Europe as a key driver behind the financial turnaround.
LOT has already begun to look forward into the future, with growth prospects focused on its Warsaw hub. According to Mikosz, Warsaw is amongst the most efficient hubs in Europe, with a minimum connecting time of just 30 minutes. Warsaw is currently undergoing a major expansion to increase annual passenger capacity from 10 million passengers per annum to 23 million, and Mikosz believes that LOT is well positioned to take advantage of the growing local market. Thanks in part to a series of investment in new premium services on the ground in Warsaw, Mikosz hopes to maintain LOT’s 50 percent market share in the Warsaw market. LOT will achieve this goal in part by continuing its laser focus on Central and Eastern Europe, while also growing long haul services with the delivery of two additional Boeing 787-8s and the freeing of two of LOT’s existing 787s for expansion.
The challenge for LOT of course is the pending investigation from the European Commission (EC). The EC is investigating the 400 million zlotys (US $130.8 million) government loan that LOT tapped in 2012 to avoid bankruptcy. This loan to the 93% state-owned carrier may have violated European Union rules and has already necessitated contraction on the part of LOT.
Mikosz is optimistic that LOT will receive a favorable decision from the European Commission, stating:
We ask the Commission to give us a decision this summer, allowing us to rebuild our balance sheet completely, which would be a conversion of the first tranche into equity and additional money from the state to finance the restructuring, which of course would end these turbulent times. This is why I mentioned 2014 as the year of breakthrough going into 2015 where I could announce a consistent path to improving financial results. As soon as we have the decision, which should be the at the end of August or in early September, we will announce an overall end of restructuring with deadlines approved by the European Commission.
Once the European Commission’s decision is finalized, LOT plans to move ahead with plans to privatize the company, which would give the carrier additional capital with which to pursue expansion.
LOT’s 2013 financial performance was a strong, if somewhat symbolic indicator of the company’s path from a $240 million net loss in 2008 to break-even in 2013. The company has infused it’s management team with new blood from airlines across Europe and has implemented several initiatives aimed at restoring profitability. Whether these initiatives can deliver long term results remains to be seen, but for a carrier that at times seemed downright incompetent over the past decade, even a clear financial plan for the future represents indelible progress.