Serbia attempts another JAT Airways sale – third time lucky?

The Serbian government has launched its latest search for an investor in struggling flag JAT Airways. The most recent attempt failed in 2008, when the government launched a similar process, aiming to sell a 51% stake price at EUR51 million. JAT, the former Yugoslavian national carrier, is largely a relic of the region's socialist and unstable past and has been unprofitable since the 1990s and recently borrowed EUR100 million from the government to renew its fleet.

The airline has a fleet of 10 B737-300s and four ATR 72-200s. It operates to 32 destinations. JAT made a loss of EUR16.5 million in 2010 and borrowed heavily to finance its operations. Partial privatisation and an experienced partner would help turn the carrier around, the government believes.

Deloitte is advising in the sale and search for a strategic partner, a process the government aims to have completed by 2012. The new airline would be renamed, the government says, to complete the transition and shake off its past. The new national airline would take over JAT's slots, employees and route network and the new owner will also be required to purchase new aircraft.

The tender process will be open until 30-Sep-2011 and the government has provided a list of prerequisites for any interested parties. In order to qualify, bidders must be either a commercial airline of financial enterprise with a least a 5% exposure of their investment portfolio in the airline business, a requirement aimed at allowing JAT to tap into managerial and financial expertise in airline operations. The bidder must also have a consolidated balance sheet of at lease EUR200 million and any would-be airline suitor must have carried more than 1.5 million passengers in 2010.

Would-be suitors

Secretary for Aviation Miodrag Miljkovi stated the tender would take place when sufficient interest is shown. However it remains unclear as to whether the sale will generate much interest among either the aviation or finance community. Conditions at JAT have not changed dramatically over the past two years, with the exception of JAT's growing debt burden and increasing interest from low-cost carriers in moving into the market. While there has been plenty of speculation the past several years about various big name airlines with an interest in JAT and the wider Balkan region, these companies have repeated denied their interest and quashed media reports of an impending offer.

Air Berlin, Air India, Air One (now part of Alitalia), Icelandair, Lufthansa, Aeroflot and Turkish Airlines have all been linked to the airline at various points over the past five years, but it is interest from the latter two that is believed to be the most credible.

Aeroflot's hands full

Serbia's government in Jun-2011 said it will try to endorse JAT to Aeroflot, its second time in three years, after the government's offer generated little interest elsewhere. Aeroflot CEO Vitaly Savelyev said in May-2011 that airline no longer has any interest in acquiring stakes in carriers outside Russia. Aeroflot was reported to have considered purchasing shares in Alitalia, Austrian Airlines and JAT. The SkyTeam member has its hands full with dramatic changes in the Russian market, as it takes control of six regional carriers from state technology company Rostekhnologii and merges them into Aeroflot mainline. "I don't see the point in buying minority stakes in foreign companies," Mr Saveliev has said. "In order to be leader in the world, you need to be leader at home."

The Turkish saga

Turkish Airlines, on the other hand, has been toing and froing about an acquisition for several years. The Star Alliance member in Apr-2010 said that acquisitions in Europe would help in its drive to become Europe's third-largest airline, and in reference to a possible JAT acquisition, Turkish CEO Temel Kotil said "it's true that we can create a great synergy from a merger in that region", but added the airline would give priority to organic growth.

Speculation mounted throughout 2010 that a JAT acquisition would be part of Turkish Airlines' ambitious growth plans, allowing it to dramatically increase its footprint in the fast-growing eastern European market. In Jul-2010, Turkish Prime Minister Recep Yayyip Erdogan weighed in on THY-JAT speculation, pledging to accelerate talks for the merger of the carriers. "We are ready for steps that will make that cooperation possible," the Prime Minister said. "I am promising to do my best that the people of Serbia have links to every corner of the world through our two companies."

In Feb-2011, Turkish Airlines was reportedly prepared to enter an arrangement with JAT, which would see the creation of a new airline, born out of JAT's ashes, to be known as Balkan Airways. Serbian and Turkish authorities denied the reports, with Turkish Airlines saying it was only still considering an acquisition. The airline was also said to be interested in further assets in Serbia, including a stake in Belgrade Airport, to sweeten the deal. The Serbian government, however, said it would not offer Belgrade Airport with JAT in its ongoing talks with Turkish.

But a recently as Jul-2011, Turkish has said that there was still "no progress" in its talks to acquire a controlling stake in JAT. Mr Kotil said that the airline was looking at increasing co-operation with Star Alliance partners in Europe, but confirmed "there are several carriers in Europe and the Balkans that are seeking partners but our board hasn't made a strategic decision to look for a partner at the moment".

Turkish likely to remain the target bidder

With few alternatives, at least to have announced themselves, the Serbian government is likely to be hard at work over the next two months, hoping to secure an investment in JAT from Turkish Airlines. The repeated lack of public interest in the JAT sale, although sending poor signals about outside views of the carrier, could play into the hands of a would-be suitor such as Turkish Airlines. With little competition, Turkish is in a much more powerful bargaining position with the Serbian government.

But to generate more interest among the investment community, the government may be required to make the deal more appealing to investors, something that Turkish attempted with its request for a stake in Belgrade Airport. Combining the JAT stake with an asset that boasts much more stable cash flows and earnings, such as an airport serving a capital city, would lower the risk of an investment in the airline, particularly in light of JAT's deteriorating position in recent years.

The government has expressed its willingness to split JAT Airways into various units as part of the process, which could see the airline's charter arm spun off, with the successful bidder to invest in the mainline operation. JAT could also be spun off into profitable and unprofitable units. It has not been made clear which parts of the business are making money and which are not, but the government confirmed the new airline would continue co-operation with JAT Technika, an MRO unit, and JAT Catering, both of which were separated from JAT Airways several years ago. Another idea floated by the government is to mirror the restructuring and relaunch of Greece's Olympic Airlines. Serbia would thus take on JAT's debt and pay for any redundancies that arise due to the broad restructure. Serbia's Prime Minister Mirko Cvetkovic in 2010 stated that the situation at JAT had become so dire that "not only will no one give you a single penny, but you will have to pay someone to come in". This time around, thankfully, the terms of the tender are "extremely flexible", the government claims.