Lot Polish Airlines (Polskie Linie Lotnicze S.A.) Business Information, Profile, and History

Company Perspectives:

Air carriers operate in a highly competitive environment, and the airline business has been largely deregulated. Like any other provider of services, an air carrier depends for its existence on the buyers of its services: passengers and cargo forwarders. It is the customer who chooses the carrier, and this choice is influenced mainly by the quality and pricing of the product. Quality means first of all safety, punctuality and efficient service. It also means comfort and a professional and friendly approach. Providing our customers with services of the highest quality is seen by the management of LOT Polish Airlines as our top priority. We shall pursue our quality enhancement policy to the best of our abilities, to ensure customer satisfaction, loyalty and trust, which will result in more and more people making LOT their carrier of choice.

History of Lot Polish Airlines (Polskie Linie Lotnicze S.A.)

Polskie Linie Lotnicze S.A., or LOT Polish Airlines, was the first airline in Eastern Europe to ditch its fleet of old Soviet jets in favor of a modern, all-western one. Customer service was also retooled. While deregulation has opened Poland's frontiers to aggressive international competitors like Lufthansa, LOT has aimed beyond its traditional captive audience to international business travelers and ethnic Poles abroad--ten million in North America alone. Alliances with top-flight competitors British Airways and American Airlines and a new strategic partnership with SAirGroup ensure LOT a place in the global market.

Origins

While many European countries sponsored state airlines after WWI, the Republic of Poland was only just establishing its own independence. Although the Austrian military did supply air mail service (possibly Europe's first) in 1918, Warsaw's first scheduled air service came from the Compagnie Franco-Roumaine de Navigation Aérienne (CFRNA) in April 1921. Poland subsidized this foreign-owned company with free fuel.

The next year, local oil interests joined the German Junkers industrial group in founding Aerolloyd Warszawa. Warsaw-Lvov and Warsaw-Gdansk service began in September 1922. Flights to Krakow and Vienna were added in subsequent years. Aerolloyd flew Junkers F-13 aircraft and three-engined, Fokker F.VII planes, although the company switched to Dutch-designed Fokkers exclusively after ending its relationship with Junkers. (Some of the Fokkers were made in Poland under license.)

Aerolloyd Warszawa became an entirely Polish-owned joint stock company in the spring of 1925. It was joined soon by a new competitor, Aero T.Z., operating routes between Warsaw, Poznan, and Berlin. In 1928 the newly created Civil Aviation Office fostered a merger between Aerolloyd Warszawa and Aero T.Z., creating Linie Lotnicze (LOT) on December 28. Only a couple of local governments were able to contribute to the company's PLZ 8 million ($1.2 million) capitalization. (Polish currency, the zloty, was designated as PLZ until 1995 when the country re-denominated its currency and changed the zloty symbol to PLN.) In the end, the Polish government owned 86 percent of the shares, Silesia owned ten percent, and the cities of Bydgoszcz and Poznan owned two percent each.

Bydgoszcz was rewarded for its investment by new air service after LOT commenced operations on January 2, 1929. So was Silesia, whose regional manufacturing center Katowice was connected to the existing network. At the end of 1929, a year that marked the signing of the historic Warsaw Convention on international air traffic, LOT prefixed its name with 'Polskie' and adopted its crane logo.

In the 1930s, the new carrier became a conduit not so much between east and west as between north and south, connecting the Baltic with the Mediterranean. LOT's fleet reached 33 aircraft in 1934. By the end of the decade, it was operating an 18-strong fleet made up mostly of Lockheed Electras, and its network extended as far as Helsinki and Beirut. LOT also flight tested routes to the Americas and Africa.

LOT penetrated the Western European market modestly, operating flights to Berlin, Paris, and London in conjunction with Deutsche Lufthansa, Air France, and British Airways, respectively. LOT did not manage to turn a profit before World War I, however, and received $1 million (PLZ 6.5 million) worth of government subsidies in 1938 alone, when it had nearly 700 employees and carried 65,000 passengers a year between 25 cities. The airline's operations were stopped by the Nazi blitzkrieg that razed Poland in September 1939. Many personnel escaped to Great Britain where they joined the Royal Air Force.

Cold War Realities

Poland was left under Soviet control after World War II. The provisional government's first act on March 6, 1945 was to take over the airline. By the end of the month, LOT had acquired aircraft allowing it to resume service to some of the larger Polish cities. New territory ceded from Germany (Gdansk, Wroclaw) was also immediately incorporated into the network. Transporting government officials was one of the carrier's chief duties, and LOT cooperated closely with the Polish military. The airline received its first six-year plan in 1960. Like Aeroflot, LOT was given responsibility for domestic forestry and agricultural projects in addition to passenger services.

By 1946, the airline owned 39 planes, mostly Douglas C-47 transports and their Soviet-built copies (Lisunov Li-2s). In 1949 LOT acquired five of the slightly more refined Ilyushin Il-12s for high-profile international routes (such as Paris, Stockholm, and Prague). These planes replaced five obsolete French Sud-Est SE.161 Languedocs bought two years earlier. In 1955 the improved Il-14P replaced the older Ilyushins.

LOT and the Czech airline CSA were the only two Soviet bloc carriers regularly flying to the West in the 1950s. A rise in nationalist politics in the middle of the decade gave LOT more freedom to raise fares on domestic routes and to provide more links to western Europe. Poles themselves, however, had little freedom to choose airlines other than the official state carrier. In the last half of the 1950s, LOT had about 1,500 employees. It carried 200,000 passengers and 3,333 tons of cargo in 1956. By 1966, it was carrying nearly 500,000 passengers and ten tons of cargo a year.

The Jet Age

Unlike its Czechoslovakian counterpart, LOT was slow to invest in new jet aircraft. Instead, it used prop-driven planes bought secondhand from western airlines, such as Sabena and British United, to cover its bases until the introduction of Ilyushin's Il-18 turboprop. Turboprops, which use a jet turbine to drive a propeller, were more efficient to operate on shorter routes than pure jets. After two of its Viscounts crashed, LOT replaced them with Antonov An-24s, which became the mainstay of its fleet. LOT finally bought a jet, the Tupolev Tu-134, in 1966, and used a handful of them for medium-range routes.

A 1963 pricing agreement between Bulgaria, Czechoslovakia, the German Democratic Republic, Hungary, Romania, and Poland set air transport rates at half those of the International Air Transport Association, the western airline cartel. LOT could not recoup its costs under these low fares and posted a PLZ 271 million operational loss in 1966.

LOT's passenger count exceeded one million in 1971. Soon, a bilateral accord gave LOT access to the American market. It shared a Warsaw-New York route with Pan American Airways. LOT bought nine Il-62M jets within the decade for such long-range routes, which soon extended to Canada and Asia. International traffic grew by 30 percent a year. By 1976, LOT was carrying 1.5 million passengers a year and 22,000 tons of cargo.

In 1978 CSA gave LOT some serious competition from behind the Iron Curtain when it began operating a route between Warsaw and Bratislava, a $5 bus ride away from Austria, which LOT also served. CSA ended this controversial service, seen as a threat to socialist brotherhood, a few years later. LOT's passenger count stood at 1.7 million in 1981, although cargo tonnage had fallen to less than 12,000 tons. Revenues were PLZ 10,000 million.

Jerzy Slowinksi replaced the previous, politically appointed director in 1986 as LOT became more commercial in its focus. Although the company ordered 14 flexible, mixed-use Tupolev Tu-154M jets the same year (deliveries of which continued into 1991), it was aggressively pursuing opportunities to buy more efficient and reliable western-made aircraft. A disastrous series of crashes, including one of an Ilyushin Il-82 en route to New York that killed 183 people in 1987, reinforced the desire for modern western planes.

The defeat of the United Workers Party in the elections of 1989 by Solidarity was the first, and perhaps most significant, event leading toward LOT's privatization. The Sejm (Polish parliament) voted to allow LOT to become a joint stock company. That year, revenues at PLZ 454,400 million were up nearly fourfold from the year before, when they had doubled 1987's results.

In light of such promising performance, a complex financing arrangement among 17 banks (led by Citibank) allowed LOT to lease a couple of Boeing 767s beginning in 1989. The 767s were attractive, as they carried more payload while using 50 percent less fuel and offered better range than the Airbus A310 and McDonnell Douglas DC-10 also considered.

After 1989, LOT began to westernize its fleet full-force. It chose Franco-Italian ATR-72 turboprops over the Canadian de Havilland Dash-8 in part because of reciprocal orders at Polish aviation plants. The relatively small amount of financing needed was arranged by just two Paris banks. With the help of American financiers, LOT also was able to lease a few Boeing 737s in the early 1990s, the biggest order in its history at $300 million. With debts of $500 million, LOT then unloaded as many Russian aircraft as it could on former Soviet republics.

A work force reduction plan began in 1991, reducing employment of 7,300 by 40 percent in three years. In December 1992 LOT was reorganized as PLL LOT SA, capitalized at PLZ 2 billion ($150 million). LOT's commercial director, Jan Litwinski, was subsequently named president and CEO. In the run-up to privatization, ground handling and other businesses were sold. LOT Ground Services became a wholly owned subsidiary in July 1992, and a 49 percent interest was sold to the national airport company, PPL (Przedsiebiorstwo Panstwowe Porty Lotnicze). American Airlines parent AMR Corp. was contracted to manage the new company through a joint venture known as AMR Polska. Similarly, LOT had SAS run its catering operation. Poor results among European airlines in the mid-1990s kept stock prices down and conspired to postpone LOT's privatization. Investments in tourism and petroleum kept LOT viable during this protracted process.

LOT lost PLZ 471 billion ($44.2 million) in 1991. LOT's new director, Bronislaw Klimaszewski, was able to guide the airline to a PLZ 63 billion ($3.4 million) profit in 1993 even as the value of Polish currency plunged. The company launched an unprecedented advertising campaign to identify itself as the Polish flyer's 'home away from home' (dom poza domem). It launched a frequent flyer program in 1991, signing up 4,000 business-class members within three years. In 1992 LOT contracted with KLM's Pegasus Ltd. to train 1,400 employees how to deliver customer service with a human face.

Before the collapse of the Soviet Union, LOT had dominated traffic between Poland and the western Soviet republics, which had a sizable population of ethnic Poles. Although the business was wiped out when artificially low fares were removed, LOT was able to rebuild it quickly after Poland signed a series of cooperative agreements with several Baltic states. Still, the Russian market remained the most important part of its eastern network, accounting for 40 percent of income there.

LOT installed business class seating on its ATR-72 turboprops to capitalize upon the strength of the business segment in the Russian market. It faced serious competition, however, from the highly sophisticated operations of Lufthansa, Air France, and British Airways, each of which carried many more passengers in the eastern market. Lufthansa had five times LOT's passenger volume there. The resulting tension prompted quibbles over market access with Britain and The Netherlands. Nevertheless, LOT succeeded in rebuilding market share in the east. Profits from that market rose 50 percent in 1994.

A new passenger terminal at Okecie Airport allowed LOT to begin developing Warsaw as a hub between east and west. The company developed relationships with the newly created airlines of the Commonwealth of Independent States (CIS), which provided feeder traffic into Warsaw. It pooled equipment with Air Ukraine on flights to and from Kiev and Lvov; contractual capacity restrictions limited its growth, however. LOT entered other cooperative alliances with Tatra Air (Slovakia), CSA, Swissair, Austrian Airlines, and Lufthansa.

LOT sought to join one of the new mega-alliances both to gain access to a computerized reservations system and to attract potential investing partners. The coming liberalization (deregulation) of the European Community's civil aviation market made it all the more imperative for LOT to find strong partners. LOT signed an extensive code-sharing agreement with American Airlines in May 1994. The U.S. Congress refused to allow the alliance on antitrust grounds, however, until the Poles opened their home market more to outside competitors.

By 1995, LOT's annual passenger count had recovered at 1.8 million. Cargo tonnage was 17,000. Trade with the United States accounted for half of this volume and was growing at an incredible clip--50 percent a year. Shipments to France and other countries were also up. A new department was created to expedite these operations: the Office for Cargo and Mail. LOT's new Boeings could carry nine tons of cargo each in addition to their typical passenger loads, while the Soviet jets could carry only a tenth as much. LOT refinanced the 767s with five Japanese banks in 1995, reducing its interest payments by $5 million a year.

Late 1990s

Traffic did not quite meet projections in the late 1990s, leaving the carrier with excess capacity. LOT had spent about $1 billion on new planes, and interest payments wiped out profits in 1996 and 1997. Privatization, ardently desired, would allow LOT to pay off some of its debts. Government officials slowed the process, however, as CSA and the Hungarian carrier Malev saw their partnerships with western airlines (Air France and Alitalia) fizzle. LOT's own management sought an investor outside the airline industry, to reduce the potential for power struggles. In July 1998, LOT refinanced $100 million of its debt through a five-year Eurobond.

LOT created EuroLOT, a lean, low-cost domestic carrier in 1997. It also was planning to spin off its charter operations (mostly tourist flights to the Mediterranean). British Airways tapped LOT in early 1998 to help it compete with the United Airlines/Lufthansa/SAS-led STAR Alliance. (By 1999, LOT also would ink deals with Iberia and Finnair.) Traffic figures were up, and LOT showed a modest profit (PLN 2 million or $521,000) in 1998, albeit in large part due to a change to western accounting methods (changing the amortizing period from 12 years to an average of 22).

In 1999 the Polish government again asked for bids in another attempt to privatize LOT. The first stage would be the sale of ten percent of the company, with money going to the treasury. Next, the strategic investor would recapitalize LOT and increase its holdings to 38 percent. Finally, an IPO was planned for 2001. The list of potential investors was narrowed to British Airways, Lufthansa, and SwissAir by September.

Operationally, LOT brought in new Embraer ERJ 145 regional jets to increase the number of flights a day it could offer business passengers to western Europe. Poland's new membership in NATO increased business traffic to Brussels; joining the European Union would do the same for traffic to many other commercial centers.

In October 1999, Poland picked SAirGroup as LOT's strategic investor. The group, which had recently lost a long alliance with Austrian Airlines, offered up to $30 million for the initial ten percent stake. The Polish government planned to retain 51 percent of shares.

Principal Subsidiaries: LIM (50%); Casinos Poland; PetroLOT (49%); EuroLOT; Amadeus START Polska (25%).

Principal Competitors: Austrian Airlines; Malév Plc; Deutsche Lufthansa AG; Air France; CSA; Tarom; Scandinavian Airlines Systems.

Chronology

• Key Dates:

• 1929: LOT, formed out of two existing airlines, makes its first flight.
• 1938: Prewar operations peak at 65,000 passengers a year.
• 1945: LOT comes under Soviet control.
• 1963: Six Eastern European nations set low air rates.
• 1973: LOT begins scheduled flights to New York.
• 1989: LOT begins expensive transition to all western-made fleet.
• 1999: SAirGroup picked as LOT's strategic partner.