master thesis copenhagen business school 2016

WhatarethecriticalfactorsbehindthefailureofEurope’sstate-ownedairlines? MScIBS‘16

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MScinEconomicsandBusinessAdministrationSpecialization:InternationalBusiness(IBS)

MasterThesisCopenhagenBusinessSchool2016

WhatarethecriticalfactorsbehindthefailureofEurope’s

state-ownedairlines?

ThecaseofLOTandAlitalia

Author:AdamWojciechDuzynskiSupervisor:BjörnPruessNumberofSTUs:146,768(excl.bibliography)Numberofstandardpages:78+bibliographyHand-indeadline:December1st,2016


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ExecutivesummaryThe purpose of this thesis is to evaluate what factors caused failures of Europe’s

nationalcarriers,basedonthecomparisonofLOTPolishAirlines,thenationalcarrierof

Poland and Alitalia, which is the national carrier of Italy. Both airlines belong to the

groupofso-calledlegacycarriers–airlinesthatwerethecountries’onlycarriersbefore

the liberalizationof theairlinemarket.However,neitherof themwas fullyprivatized

(Alitalia andLOTare51%and100%government-owned, respectively)norbecamea

partofanybigEuropeanairlineholdingssuchasLufthansaGrouporAirFrance-KLM.

PaoloBeria,Hans-MartinNiemeier andKarstenFrölich in their article “Alitalia –The

failure of a national carrier”, published in 2011 in the Journal of Air Transport

Management, argued that the chief reason for Alitalia’s lack of success was the

interferenceofpoliticians.Thatbroughtmismanagement, influencebyvested interest

groups (including labor unions) and chaos in the airline’s choice of its fleet and hub

strategies(Beria, Hans-Martin, & Froelich, 2011).Thispaperwillfocusonansweringthe

questionwhetherornotthereasonsbehindthefailureofAlitaliaarejustasimportant

inthecaseofanotherEuropeanstate-ownedairline-thePolishnationalcarrierLOT.

Theanalysiswillbecarriedoutinsixparts.Inthefirst,introductorypartissuessuchas

motivation and problem discussion will be presented. In the second part the

methodology used in this paperwill be talked over. In the third part the authorwill

discussinshortthedynamicSWOTanalysisconcept,and,inmoredetail,thetheoryof

Beria, Niemeier and Frölich on the failure of Alitalia,which is the centerpiece of this

paper.Thischapterwillalsobrieflypresentsomeothertheoriesthatwillbediscussed

in the next part. In the fourth part a thorough analysis of LOT will be performed,

including the historical and financial analyses. This chapter will also include a more

detailed presentation of the airline industry as a whole. The fifth chapter, finally,

containsadynamicSWOTanalysis thatwillbe implementedand thatwillbe lateron

used to compare the cases of LOT andAlitalia. Itwill also evaluate other papers and

theories thatareshortlypresented in the fourthpart.Lastly, in theconcludingpart,a

summarywillbegiventhatwillthenanswertheresearchquestion.


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TableofContents

EXECUTIVESUMMARY 1

PART1:INTRODUCTORYSECTION 41.1 LISTOFTERMSANDABBREVIATIONS 41.2 MOTIVATION 51.3INTRODUCTIONTOTHEEUROPEANAIRLINEINDUSTRY 61.4BACKGROUNDANDPROBLEMDISCUSSION 91.5PROBLEMSTATEMENTANDRESEARCHQUESTION 121.6STRUCTUREOFTHEPROJECT 13

PART2:METHODOLOGY 152.1RESEARCHMETHOD 152.2SELECTIONOFDATA 202.3DELIMITATIONS 212.4METHODOLOGYCRITICISM 212.5SOURCECRITICISM 23

PART3:THEORYOVERVIEW 253.1THEORY-FINDINGPROCESS 253.2SWOTANALYSIS–THEUNUSUALUSEOFTHELITTLEBIGTOOL 273.3“ALITALIA–THEFAILUREOFTHENATIONALCARRIER” 283.4SUPPORTIVETHEORIES 323.5THEORYCRITICISM 34

PART4:LOT–COMPANYOVERVIEW,DATA,FACTS&FIGURES 364.1LOT–COMPANYOVERVIEW 364.1.1HISTORICALBACKGROUND 364.1.2PURCHASINGWIDE-BODYAIRCRAFT 364.1.3LOTSTATERESTRUCTURINGAIDCRISIS(2012-NOW) 374.2.4LOTTODAY-THEAFTERMATHOFTHE2012CRISIS&SUPREMEAUDITOFFICEREPORT 394.1.5OWNERSHIPANDMANAGEMENT 414.1.6PRIVATIZATIONOFLOT 424.1.7ACTIVITIESOFTHEUNIONS 454.1.8FLEET 464.1.9DESTINATIONS 464.1.10FINANCIALANALYSIS 474.2POLANDANDTHEEUROPEANAVIATIONMARKET 474.3LOTANDTHEEUROPEANAIRLINEINDUSTRY 514.5LOTANDTHEPOLISHAVIATIONMARKET 55

PART5:APPLICATIONOFTHEORIES 595.1SWOTANALYSISOFLOT 595.1.1STRENGTHS 595.1.2WEAKNESSES 605.1.3OPPORTUNITIES 615.1.4THREATS 625.2SWOTANALYSISOFALITALIA 635.2.1STRENGTHS 635.2.2WEAKNESSES 64


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5.2.3OPPORTUNITIES 655.2.4THREATS 665.3DYNAMICSWOTCOMPREHENSIVETABLE 665.4WHYALITALIAANDLOTFAILEDANDWHATWERETHECRITICALFACTORSBEHINDTHEIRFAILURE675.5OTHERTHEORIES-ARESTATE-OWNEDENTERPRISESDOOMEDTOFAILURE? 69

PART6:CONCLUSION 726.1FINALREMARKS&DISCUSSION 726.2RECOMMENDATIONS 756.3FURTHERRESEARCH 76

BIBLIOGRAPHY 79


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Part1:Introductorysection

1.1 Listoftermsandabbreviations

ASK -AvailableSetKilometer

Big3 -LufthansaGroup,AirFrance-KLM,InternationalAirlinesGroup

CASK -CostperAvailableSeatKilometer

CEE -CentralEasternEurope.InthispaperthetermCEEconsistsofthe

followingcountries:Bulgaria,theCzechRepublic,Croatia,Estonia,

Hungary,Latvia,Lithuania,Poland,Romania,SloveniaandSlovakia

LCC -LowCostAirlines.LCCsinPolandareinthispaperdefinedas:Air

Berlin,easyJet,Norwegian,RyanairWizzair

Legacyairlines -Aegan,Alitalia,Finnair,LOT,TAPPortugal,SAS

PAX -passengers

RPK -RevenuePassengerKilometer


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1.2 Motivation

Theauthor’sdeep,long-standingpersonalinterestintheairlineindustrydatesbackto

his time inhigh-school.Thus, theauthorof thispaperhasneverhaddoubtsuponthe

choiceofthetopicforhisgraduatethesis.

Theselectionofthecompany–LOTPolishAirlines-maynotseemlikeanobviousone.

AlthoughtherearemanythesesatCopenhagenBusinessSchoolaboutairlines,mostof

themcoveronlytwoNordicairlines–SASorNorwegianAirShuttle–or,occasionally,a

LCCsuchasRyanair.Thesecompaniesareundoubtedlyinteresting,yettherehasbeen

littlewrittenaboutlegacycarriers(otherthanSAS),letaloneacompanythatoriginates

fromtheCentral-EasternEurope.

Whatismore,notonlyhastherebeennopaperwrittenatCBSaboutanyairlinefrom

theCentralandEasternEuropebuthardlyanythingcanbefoundonthesubjectinthe

CBS’svastdatabase.Thelibrary’srecordsdocontainahandfulofpapersthattacklethe

issue of some legacy carriers, but typically they are limited to few large European

(Lufthansa,AirFrance-KLM,etc.)orAmerican(Delta,United)carriers.

Lastly, the topic itselfwas chosen carefully, bearing inmind the specifications of the

InternationalBusinessprogramatCBS–aprogramwhosemainteachingobjectivesare

internationalization and business strategy (Copenhagen Business School, 2016). The

internationalization criterion ismet almost bydefinition – airlines inEurope operate

mainly on the international scale, and the paper does compare two companies that

originatefromtwoverydifferentcountries–PolandandItaly.Thepaperalsocontainsa

business strategy tool in the form of the dynamic SWOT analysis. On top of that, a

selection of academic papers related to business strategywill be used to answer the

paper’sResearchQuestion.


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1.3IntroductiontotheEuropeanairlineindustry

On February 3rd, 2012 MALEV, a Hungarian national air carrier, ceased all its flight

activities (The Guardian, 2012).MALEVdidnotgobankrupt literally– itwas forced to

stop flying by the European Commission, which did not eventually fall in with the

financialaidthattheairlinegotfromtheHungariangovernment(European Commission,

2012).Whenitturnedoutthattheairlinecouldnotmeetitsfinancialdemandsandthus

meet its creditors’expectations, itwas forced tostopall itsoperations (The Guardian,

2012).

Thismoment, thoughpredicted,was still a shock formany, not only inHungary. Yet,

MALEV was not by any means the only airline that had, or right now has financial

problems.Carriersallovertheworldstruggletomakeanyprofit–themargins inthe

industryareknowntobeinmanycasesalmostnon-existent.Infact,MichaelPorterin

his famouspaper“TheFiveCompetitiveForcesThatShapeStrategy”ranksairlinesat

thebottomofthelistof31mostprofitableindustries.AccordingtoPorter’sstudy,the

profitabilityoftheairlineindustrybetween1992and2006was,onaverage,morethan

sixtimessmallerthantheprofitabilityofsoftdrinksorsoftwareproducers(Porter M.

E., 2008).From2006to2014thesituationdidnotimprove,asthetablebelowshows:

Table1:Changesinrevenues,passengerscarried(PAX)andaveragenetprofitmargins

inglobalcommercialairlines

2006 2007 2008 2009 2010 2011 2012 2013 2014

Revenues in USD

(2006=100)100 110 123 103 122 138 152 155 162

Passengers carried

(2006=100)100 107 110 110 120 127 133 140 147

Net profit margins,

average,%1.1 2.9 -4.6 -1.0 3.1 1.3 1.3 3.4 4.1

Source:Owncalculationsbasedon(IATA, 2016)


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Although the number of passengers and dollar-denominated revenues in 2014were,

respectively, 47% and 62% bigger than in 2006, the average net profits margins

remained tiny. What is more, these small profit margins are not evenly distributed

between the regions. In2012, the year inwhichMALEVwentbankrupt, the total net

loss of Europe’s airline industry amounted to 1.2bn EUR (Forbes, 2012). Air travel is

indeedanindustryofparadoxes,whereonasinglebusinesswebsiteonecanreadabout

record-highturnoutatvirtuallyeveryairportintheworld,andjustnexttoitanarticle

aboutyetanotherrecord-lowyearforthesuccessiveairlines.

The European airlinemarket consists of fourmain parts. The first group ismade of

three large international airline holdings: Lufthansa Group which also owns Swiss

International Airlines and Austrian Airlines, as well as a 45% share in the parent

company of Brussels Airlines), Air France-KLM (with their subsidiaries) and

InternationalAirlinesGroup(whichismadeofBritishAirwaysandIberia,aswellasthe

Irish national carrier Aer Lingus, and their subsidiaries). All these three holdings are

fullyprivately-ownedandare listedon stockexchanges (Lufthansa, 2016) (Air France-

KLM, 2016)(IAG, 2016).ThesecondgroupcontainsformerEuropeannationalcarriers

thatdidnotjoinanyoftheaforementionedholdings.Airlinesthatbelongtothisgroup

include SAS, Finnair, TAP Portugal, Alitalia, LOT, CSA, aswell as a few small airlines

fromEasternEurope.Asof2016,everyairlineinthisgroupisgovernment-owned(i.e.

government-owned entities control more than 50% of shares in these companies).

Interestingly, TAP Portugal had been privatized in 2015 only to be renationalized in

February2016 (Bloomberg, 2016).The third–and fastestgrowing–group ismadeof

low-costandsemi-low-cost carriers, suchasRyanair, easyJet,WizzAirandNorwegian

AirShuttle,thatwereestablishedaftertheEuropeanairlinemarkethadbeenliberalized

inthe1980sand1990s(European Low Fares Airline Association, 2004).Thelastpartof

theEuropeanairlinemarketbelongstocarriersfromtheeasternpartofthecontinent.

Althoughtheyhaveexistedasnationalcarriersforalongtime,onlyrecentlyhavethey

startedtogain themarketshareveryrapidly.Thisrefersmainly toAeroflotofRussia

and Turkish Airlines of Turkey. The graph below presents the number of carrier

passengersbymajorEuropeanairlinesin2014,aswellastheirrevenues.


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Graph1:RevenuesandPAXoflargestairlinesinEurope,2014

Sources:Revenues:companies’annualreportsfor2014,Wizzair:(Center For Aviation, 2015),LOT:(EMIS

Professional , 2016), Alitalia: (italy24, 2015). PAX: Companies’ annual reports for 2014 and national

aviationregulators.

One can see that the three largest airlineholdingsdominate themarket, especially in

termsofrevenues.Ryanair,thoughwithmediocrerevenues,carriesasmanypassengers

asthebigplayers.Thesmall,state-ownedlegacycarrieslagbehindboththe“Big3”,as

well as some low-cost carriers. Interestingly, all of Europe’s major “legacy carriers”

combined1,carrylesspassengersthantheLufthansaGroupalone.Thegapevenwidens

when it comes to revenues – all of Europe’s major non-aligned carriers combined

generate less revenues than any of the “Big 3” airline holdings (and twice less than

Lufthansaalone).In2015thisgapprobablywidened(therewerenofull,credibledata

foreachairlineavailablefor2015atthetimeofthewriting)asAerLinguswasacquired

byIAG(BBC, 2015).

Thesecondgraphbelowshows thegrowth inpassengerscarried(PAX) from2006to

2014,with2006standingfor100%.Airlinesinthelegendarelistedfromthosewiththe

strongestgrowthonthetoptothosewiththeweakestgrowthatthebottom.

1SAS,Alitalia,TAP,Finnair,AerLingus,BrusselsAirlines,AeganandLOT.

6.1 10.213.9

6.7 9.8

24

9.6 11.423.227.3

31.7

86.4

65.3

34.7

54.8

104.3

77.387.4

105.9

0

20

40

60

80

100

120

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Revenuesin2014(mEUR) Passengerscarriedin2014(m)


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Graph2:GrowthinPAXinthelargestEuropeanairlines,2006-2014

Source: Own calculations based on companies’ annual reports and national aviation

regulators.

Clearly,thelegacycarriersgrowmuchmoreslowlythananyothermarketgroup.4out

of 5 carriers with the slowest growth are those small, non-aligned former national

carriers. Alitalia is the only airline that actually contracted in terms of carried

passengersintheexaminedperiodof8years.Ontheotherhand,bigemergingcarriers

(AeroflotandTurkish)andlow-costcarriersgrowatthefastestrate.

1.4Backgroundandproblemdiscussion

This paper will focus on LOT Polish Airlines and its inability to adapt to the ever-

changingandever-more-competitiveairlinebusiness.Theairlinewillbecomparedwith

Alitalia – Italy’s national carrier and the reasons for its failure, based on the analysis

conductedbythreescholars-PaoloBeria,Hans-MartinNiemeierandKarstenFrölichin

theirarticle“Alitalia–Thefailureofanationalcarrier”publishedin2011intheJournal

ofAirTransportManagement(Beria, Hans-Martin, & Froelich, 2011).

There are four reasons behind choosing LOT as an airline to compare with Alitalia.

Firstly, LOT comes from the author’s country of origin, which easies the process of

-4%0%1%1%9%18%19%22%

61%65%65%

98%98%106%113%

224%299%

371%427%

535%

-100% 0% 100% 200% 300% 400% 500% 600%

AlitaliaAirEuropa

AegeanAirlinesSASGroup

FinnairBrusselsAirlines

AF-KLMIAG

AirBerlinGroupLOT

TAPPortugaleasyJet

LufthansaGroupS7

RyanairTurkishAirlinesAeroqlotGroup

NorwegianWizzAir

PegasusAirlines


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gatheringandeditingdata.Secondly,LOT’srecentdifficulties–forexampleitsdispute

with the European Commission over the state aid it received from the Polish

governmentorattemptstoprivatizethecompany–areverysimilartothetroublesthat

Alitaliaexperiencedalreadyyearsearlier,andthataredescribedinthepaper“Alitalia–

The failure of a national carrier” (Beria, Hans-Martin, & Froelich, 2011). Thirdly, both

airlines are independent (i.e. they are not a part of any big airline conglomerate),

government-ownedandalsorelativelysmall–thegapevenbetweenAlitalia,alargerof

thetwoairlines,andLufthansaGroup,isvast(seegraph1).

Lastly,bothairlinescanquiteunarguablybedescribedas“failures”.Ofcoursethereare

many definitions of “success” – for example, an airlinewith a bad safety recordmay

consideroneyearwithoutanymajoraccident“successful”.However,acommonwayto

assess the success of companies is tomeasure their profitability – for example their

EBITDA or net profit. As the graph below shows, neither LOT nor Alitaliawere even

closetobeingcalled“successful”intermsofprofitabilityintherecenthistory.Between

2001 and2007Alitalia did not have a single yearwith a positiveEBTmargin (Beria,

Hans-Martin, & Froelich, 2011).ThetablebelowshowsthatLOTinitsrecenthistoryalso

hasnotbeenableprideitselfonparticularlygoodrecordonprofitability.

Graph3:LOTnetprofit(notnormalized)2

2010 2011 2012 2013 2014

Netprofitmargin,% -5% -4.2% -4.6% 0.1% -8.1%Source:(EMIS Professional , 2016)

Nevertheless, despite the above-mentioned similarities between LOT and Alitalia, no

twoairlinesandnotwobusinesscasesareexactlythesame.LOT’shubinWarsawhasa

different geographical location than Alitalia’s hub in Rome. They also have different

historical backgrounds. LOT originates from a high-growth Polish economy, which

potentially givesmoreopportunities for growing its business,whereasAlitalia comes

from Italy, which was one of the slowest-growing economies in Europe in the past

decade(World Bank, 2016).Moreimportantly,Alitaliaisasignificantlylargercompany

2Notnormalizeddoesnottakeintoconsiderationchangesincurrencyexchange,i.e.inthecaseofpurchasingfuel


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thanLOT–in2014itcarriedfourtimesasmanypassengersandhadfourtimeshigher

revenuesthanLOT.

Despite the above-mentioned rationales, there are a few other troubled, state-owned

airlines that in theory could be used to examine this paper’s RQ and could serve as

valuable objects of research. Firstly, the airline that could be compared toAlitalia is

undoubtedlySAS,whichhasalsoexperiencednumerouswoesinitsrecenthistory–the

airline has been notoriously plagued with strikes and lack of profits (Reuters, 2016)

(SAS, 2016).ThemainreasonfornotchoosingtheNordics’flagcarrieristheabundance

ofpapersonSASintheCBS’archives.

Swissaircouldalsoserveasanexampleofamajorfailurethatledtoitsbankruptcyand

liquidation (Telegraph, 2001). But the collapse of the Swiss national carrier happened

already 15 years ago, as the aftermath of the crisis in the airline industry caused by

9/11attacks.This seemed tobeabit too remote to comparewithLOT,whosemajor

crisishappenedmorethanadecadeaftertheSwissairhadgonebust.

Lastly, MALEV, Hungary’s national carrier that went bankrupt in 2012 could be

examined instead of LOT. However, given the author’s nationality it would be much

moredifficulttoacquireaccuratedataforMALEVasmostoftheanalysesandstatistics

are available only in Hungarian3. Moreover, MALEV was even smaller than LOT –

because ofHungary’s size the airline didn’t offer any domestic flights –whichwould

makethecomparisonwithmuchlargerAlitaliaevenlessaccurate.

Moreover,sofarverylittlehasbeenwrittenonLOT,oranyotherairlinefromCentral

and Eastern Europe. Hence, this paper not only covers all CBS’ requirements with

regardtothecontent(internationalizationandbusinessstrategy)butalsoevaluatesa

companythatprobablyhasneverbeenanalyzedatCBSbefore,andhasnotdrawnmuch

attentioninthewideracademicworldeither.

3ThesamegoesforAlitaliawithmuchmoredataandanalysesavailableinItalianthaninEnglish.Butinthiscasethe2011paperarticle“Alitalia–Thefailureofanationalcarrier”servedasasourceofdataforthepurposeofthisresearch.


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1.5Problemstatementandresearchquestion

Themainpurposeof thispaper is to investigate ifLOTPolishAirlines’ failurehadthe

samestrategicrationalesasAlitalia‘swoesdescribedandstudiedinthepaperofPaolo

Beria, Hans-Martin Niemeier and Karsten Frölich “The failure of a national carrier”

publishedin2011intheJournalofAirTransportManagement.LOT’scanarguablyalso

be presented as a failure of a similar kind, given its poor financial performance

epitomizedby thecompany’s2012call for thestatesupport.Thispaperwillevaluate

whetherornotthe factorsthat ledtobothfailuresweresimilar.Thefinaloutcomeof

theanalysisofthisthesiswillgivetheanswertotheResearchQuestionofthispaper:

WhatarethecriticalfactorsbehindthefailureofEurope’sstate-ownedairlines?

ThecaseofLOTandAlitalia

The conclusion – and the answer to the RQ - will be followed by some brief

recommendationsconsideringwhatshouldLOTdotoavoidsomeofthemistakesthat

Alitaliamadeinthepast.


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1.6Structureoftheproject

The thesis is divided into six parts. Every part is then divided into chapters, and

subchapters.Afterthefirst, introductorypart,themethodologyusedinthispaperwill

bediscussed.ThethirdpartwillfirstlyexplainandchallengetheSWOTmodel,andthen

talkoverthecoretheorythatischallengedinthispaper-Beria,NiemeierandFrölich

paper onAlitalia. This chapterwill also contain presentations of someother theories

thatcanbeusedtoassesscriticalfactorsbehindthefailureofstate-ownedairlines.The

fourthpartwillpresent the caseofLOT, includinghistorical and financial analysesof

thecompany.ThePolishairlinemarketwillalsobeexamined.

Inthefifth–andarguablythemostcomprehensive–chapter,theSWOTmodelwillbe

implemented in order to see the strengths,weaknesses, opportunities and threats of

bothAlitaliaandLOT.However,insteadofimplementingthemodelinastandard–i.e.

static–way,theSWOTanalysisinthispaperwillbeusedinamoredynamicway,taking

into account a coupleof years’ periodspreceding the airline’speakyearsof troubles.

Thischapterwillalso finallycomparetheargumentationusedbyBeria,Niemeierand

FrölichwithregardtothecaseofLOT.Thecomparisonwilluse,butwillnotbelimited

to,thepreviouslycarriedoutimplementationofadynamicSWOTmodel.Thefifthpart

willalsopresentacoupleofothertheoriesthatcanbeusedtoassessthefactorsbehind

thefailuresofAlitaliaandLOT.

The final, concluding part will answer the research question and thus provide the

reader with the summary of whether the arguments behind Alitalia’s troublesome

situationthattheauthorsof“Thefailureofanationalcarrier”citearethesameinthe

caseofLOT.Somethoughtsonthefurtherresearchthatcanbecarriedoutwithregard

to the failures of state-owned airlines in generalwill also be presented. Lastly, some

recommendationsonwhatLOTcandointhefuturetoavoidfurthermistakesthathave

beenalreadymadebyAlitaliawillbegiven.


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PART1:INTRODUCTORY

SECTIONMOTIVATION

INTRODUCTIONTOTHE

EUROPEANAIRLINEINDUSTRY

BACKGROUNDANDPROBLEMDISCUSSION

PROBLEMSTATEMENT

ANDRESEARCHQUESTION

PART2:METHODOLOGY

RESEARCHMETHOD

SELECTIONOFDATA DELIMITATIONS SOURCE

CRITICISM

PART3:THEORYOVERVIEW

THEORY-FINDINGPROCESS

SWOTANALYSIS–THEUNUSUALUSEOFTHELITTLEBIG

TOOL

“ALITALIA–THEFAILURE

OFTHENATIONALCARRIER”

THEORYCRITICISM

PART4:LOT–HISTORICALOVERVIEW,

DATA,FACTS&FIGURES

LOT–COMPANYOVERVIEW

POLANDANDTHEEUROPEANAVIATIONMARKET

LOTANDTHEEUROPEANAIRLINEINDUSTRY

LOTANDTHEPOLISHAVIATIONMARKET

PART5:APPLICATIONOFTHEORIES

SWOTANALYSESOFLOTANDALITALIA

SWOTCOMPREHENSIVE

TABLE

WHYALITALIAAND

LOTFAILEDAND

WHATWERETHE

CRITICALFACTORS

BEHINDIT

OTHERTHEORIES-ARESTATE-OWNED

ENTERPRISESAREDOOMEDTOFAILURE?

PART6:CONCLUSION FINALREMARKS RECOMMENDATIONS FURTHERRESEARCH


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Part2:Methodology

Thisthesisistobeaconsulting-styleacademicpaper.Itsaimisnotsolelytopresenta

directrecommendationortoextrapolatedatafromthepastcases.Instead,thisproject

examinesthecasesofotheracademicpapersandstudieswhetherornottheirfindings

can be applied to a different company that operates in the same industry, but in

differentcircumstances.

Theaimofthispaperisnottotreatanotherworkliterally,asamathematicalequation,

andonlytochangevariablesinordertoseewhathappenswiththeoutcome.Instead,it

takes business concepts, primarily Beria, Niemeier and Frölich’s “The failure of a

national carrier” as the benchmark and the answer to the question what were the

factorsbehindthefailureofAlitalia.Partlybecauseofthequalitative,andthusdifficult

tocomparedirectly,characterofthethreeacademics’paper,theanalysisofLOTwillbe

runsomehowindependently.Thedatagatheredbyanalyzing“Thefailureofanational

carrier” and, autonomously, LOTwill be thenused to create adynamic SWOTmodel.

Onlythenwillthetwocasesbecomparedwitheachother.Theoutcomeoftheanalysis

willalsobeusedtoshortlyevaluatewhether itprovestobetruewhenchallengedby

someothertheories.

This partwillmainly use Bryman and Bell’s book “Business ResearchMethods” as a

mainpointofreferenceissuesrelatedtothemethodology.

2.1Researchmethod

BrymannandBellpointoutthatabusinessresearchisamessyprocessand,asaresult,

an author should stay flexible and adapt their business research methods as

opportunitiesandproblemsarise(Bryman&Bell,2015).Asthischapterwilloutlinethe

themainprinciplesconcerningmethodologyinthispaper,onehastoacceptthatthings

donotalwaysgoentirelyasplanned.


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Thisresearchisaclassic,empirical,deductivestudy.Asopposedtoaninductivestudy,

where a certain phenomenon is observed and then inferred from the theory, a

deductive study inmore straightforward (Bryman&Bell, 2015). It implies beginning

withpresenting a theory – in this case an academicpaper onwhyAlitalia failed as a

company.Thetheoryhasbeentakenfromanacademicpaper,whichisalsothebasefor

the further analysis. This paper purposely does not include a hypothesis as it may

narrow the field of research by suggesting the focus of the study. In this project, a

potential hypothesis could be: „The reason for a state-owned airline’s failure is the

interferencebypoliticiansandothervestedgroups”.However,usingsuchahypothesis

could cause a certain bias while researching the case. Thus, no hypothesis was

suggested at the beginning, and the conclusion will involve only the answer to the

research question. A research question provides an explicit statement of what the

researcherwants toknowabout(Bryman&Bell,2015).Thispaper includesonlyone

researchquestion,whichisthenfollowedbyasubtext.Theconclusionwillincludeboth

the answer to the research question, and some theoretical glance regarding the final

usefulnessoftheoutcome.

Theauthorofthepaperintheinitialphaseoftheresearchwasalsoconsideringusing

abductive reasoning s a primary methodology framework to deal with the case of

flawed, state-owned airlines such as LOT. Yet, the abductive reasoning - where the

project starts with describing a phenomenon that no existing theory can explain -

turnedouttobeoflittleuseinthecaseofLOT,asthereareplentyofpaperscontaining

theoriesthattheauthorwasseekingtochallenge(Bryman&Bell,2015).Thepaperon

AlitaliabyBeria,NiemeierandFrolichisonlyoneofmanyresearchprojectsonflawed

state-ownedcompaniesthatcouldhavebeenusedinthisthesis.

This research is a case study. Case studies entail detailed and intensive analysis of a

singlecase.Duetotheirusefulness,casestudiesareoneofthemostcommonwaysto

examinebusinessandmanagement issues.Casestudyresearchersaimtogeneratean

intensive examination of a single case in relation towhich they engage a theoretical

analysis.Centraltothisisthetheoreticalreasoninginwhichthecasestudyresearcher

engages(Bryman&Bell,2015). Thispaper’smaincaseofstudyisapaperwrittenby

Beria, Niemeier and Frolich on Alitalia. The case that was researched by the


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aforementioned scholars will be incisively examined, and comparedwith the case of

anothercompany–thePolishLOTairlines.

The last–andperhapsthemostprofound– issueaboutthemethodologyusedinthis

paper is that it as amainlyqualitative analysis. Thequalitative analysis is a research

strategy that, putting it simply, emphasizes words rather than quantification in the

collectionandanalysisofdata.Bryman&Bell(2015)emphasizethatotherkeypointsof

thequalitativeanalysisare:

- aninductiveviewoftherelationshipbetweentheoryandresearch

- interpretivism that brings understanding the social world through an

examinationoftheinterpretationofthatworldbyitsparticipants

- constructivism that entails the notion that the order stems from interactions

betweenindividuals,notbypre-existing,theoreticalphenomena

Theauthororiginallywantedtoconductamorequalitativeresearchwithintheareaof

analyzingtheailingstate-ownedairlines.Thisapproach,however,soonbecameunlikely

for three major reasons. Firstly, since both LOT and Alitalia are almost state-owned

companies,withnopubliclytradedshare,neitherofthempublishanyharddataabout

revenuesorthenumberofcarriedpassengers.Thesenumbers,alongwithsomeothers,

wereeventuallyfiguredoutbytheauthor,buttheircredibilityandamountwouldnot

makeitplausibletoconductafull-scalequantitativeresearch.Secondly,thearticlethat

isaprimaryfocusofthisresearch-Beria,NiemeierandFrolich’sstudyofAlitalia-isa

qualitativeresearchinandofitself.Consequently,itwouldnotbereasonabletoconduct

aquantitativeresearchandthencompare it toaqualitativeone.Lastly,even ifall the

financialand industrialdatawerewidelyavailable– in theauthor’sopinion thehigh-

level examination of failures of state-owned enterprises is a peremptorily qualitative

process.Therearecertainlynumerousstudiesexaminingwhetherornotfullormixed

stateownershipinfluencesfactorssuchasprofitabilityorstockprice–forexample,the

work by Ben-Nasr and Jean-Claude Cosset, who in in amassive investigation of 482

companies from 41 countries find out that continued government influence impact

stock infromativeness negatively and thus may work against the achievement of

privatization objectives such as the expansion of capitalism and the development of

local capitalmarkets (Ben-Nasr & Cosset, 2014). Yet, these kinds of studies, although


18

oftenconductedonasizeablesample,donotemphasizetheprocessesthattakeplacein

state-ownedcompanies,operating indifferenteconomiesandunderdifferentpolitical

regimes.

A qualitative research is on principle unstructured (Bryman & Bell, 2015). There is,

however,astandardplanthatroughly formsanoutlineofaqualitativeresearch.This

ouline is presented below. Each part of the outline has a corresponding part in the

research.

Inaway,oneofthereasonsforusingthedynamicSWOTinthispaperwastostructure

theoutcomeoftheresearchbetter,astheanalysisfocusesmoreonfindingdescriptive

policy details rather than on comparing hard data, such as stock prices.More on the

selectionofdatawillbewritteninthefollowingchapter. Bryman&Bell(2015)point

outthatqualitativeanalysesareoftenfullofapparentlytrivialdetails–andthispaper

followsthatrule.Yet,thesedetailsarefrequentlyimportantforthequalitativeanalysis

becauseoftheirsignificancefortheirsubjectsandalsobecausethedetailsprovidean

account of the context within which people’s behavior takes place. This is a very

importantpartofthequalitativeanalysisthatwillbedoneinthispaper.Althoughthe

mainpurposeof thispaper is to findoutwhat thereasonswerebehind the failureof

Generalresearchquestion

Selectingrelevantsitesandsubjects

Collectionofrelevantdata

Interpretationofdata

Conceptualandtheoreticalwork

Writingupfindings/conclusions

Part4–LOT–acompanyoverview

Part1–Introductorysection

Part5–Applicationoftheories

Part6-Conclusions


19

Europe’s state-owned airlines, the analysis covers a lot of issues that are not strictly

company-specific,suchastheanalysisoftheEuropeanairlinemarket.Thiswillbedone

precisely due to the need to give a reader a broader perspective on the situation in

whichLOTfounditself–afterall,PolandandItalyaredifferenteconomiesandcertainly

differentairlinemarkets, thoughwithsimilarpan-Europeanregulationsregarding the

airlinetraffic.

Thelast–andprobablythemostessential-featureofthequalitativeanalysisisthatit,

according to Bryman & Bell (2015), emphasizes the process. A qualitative research

tends to view social life in terms of processes. This is because one of the most

fundamentalpurposesofthequalitativeresearchistoshowhowprocessesunfoldover

time. This paper will do just that – it will explain how a variety of processes have

determined the fate of the two examined companies. Time is a key ingredient of an

organizational life, sonot taking it intoaccount is tomissonsomething that isat the

coretoorganizationalreality.

There isalsoonekeyissuewithregardtothemethodology.Theinabilitytocollector

calculate some crucial factors, such asASK, did not allow the author to examine LOT

usingexactlythesamemethodologyasBeria,NiemeierandFrolichintheirpaper.Thus,

the article “The failure of a national carrier” was usedmore as a source of findings,

ratherthanaformulainwhichonecancopypastedifferentnumbersandseewhether

ornotthefindingsremainthesame.

That said, this researchhas somepartsof aquantitative analysis.Theauthor aimsat

collectingasmuchcredibleandaccuratedataaspossible,andsomeofthesenumbers

willbepresented in the4thpartof theanalysis, inwhichLOTand theeconomicand

politicalsituationaroundwillbediscussed.AsthecomparisonbetweenLOTandAlitalia

will be chiefly qualitative, the quantitative part will be focused on somewhat more

distant aspect of the analysis, which is the study of the Polish and European airline

markets.TheanalysisofthesenumberswillbethenusedtoconductthedynamicSWOT

analysisofLOTandtocomparethemwiththeequivalentanalysisofAlitalia.


20

2.2Selectionofdata

Thispaperwilluseexclusivelysecondarydata.Thatwasnotoriginallytheauthor’splan

–initially,itwasintendedtogathersomeprimarydatabyreachingouttoLOTinorder

interview one of themanagers responsible for changemanagement in the company.

Unfortunately,thiswasnotpossible.

Asithasalreadybeenmentioned,neitherLOTnorAlitaliaarepubliccompanies.Hence,

theyarenotobligedtopublishanycomprehensiveannualreports.Asaresult,datain

thispaperhadtobecollectedbyusingothersources.AsforAlitalia,theyauthorrelied

almostsolelyonthepaperbyBeria,NiemeierandFrolich.WithrespecttoLOT,mostof

thedatarelatedtofinancialandoperationalresultscomefromtheInternetdatabases,

typically accessed through Copenhagen Business School library’s network. These

includeEIMSandFactivia, twoof thebestonlinedatabasesthatprovidestudentsand

academicswith information on companies, especially thosewhich originate from the

emergingmarkets. The history of LOT and the process of its failurewas, however, a

matter of the collection of various pieces of information from the Internet’s open

sources,suchasnewspapersorinformationagencies.Theauthor,however,putagreat

dealof cautionwhilecollecting thesedata.Onlydata thatcame fromthemostwidely

acknowledged sources, suchasReuters,Newsweekor theFinancialTimes, aswell as

someleadingPolishnewspapersandnewsmagazines,hasbeenusedinthispaper.

Nevertheless,thismethodofdatacollectiondoesnotallowtocarryoutevenalimited

quantitative analysis, especially within the operational area. It does not allow, for

example, to estimate even some basic factors such as available seat kilometer (ASK),

oneofthecrucialelementsoftheanalysisofanyairline,andasomehowimportantpart

oftheBeria,NiemeierandFrolichpaperonAlitalia.Thelackofsufficientdatahasmade

theproject leaningevenmore towards thequalitativeanalysis, rather than towardsa

comparisonofharddata.


21

2.3Delimitations

Theauthorofthispaperwaslimitedbytwomajorfactors:availabledatabaseandspace.

The database issue is covered more broadly in the next chapter. Both factors have

alreadybeendescribedinthepreviouspartsofthisproject.

Thispaperwillfocusondescribingandcomparingfactorsthatinfluencedtheprocessof

disintegrationoftheairlinecarriers–LOTandAlitalia.Theemphasiswillbeputonthe

process,ratherthanontheanalysisofharddata.ThedataforLOTthathaseventually

beenpresentedwilltypicallyinclude2014asthelastyearoftheanalysis.Althoughthe

paperhasbeenwrittenin2016,manydatafor2015wasreleasedinthefinalmonthsof

2016.So,inordertomaintaindatacohesion,2014waschosenasacutoffdateforLOT’s

financialandoperationalanalyses.AsforAlitalia,theauthorreliesexclusivelyonBeria,

NiemeierandFrolichpaperasasourceofdata.Hence,theanalysisofItaly’sflagcarrier

usesdatathatcomefrom2010,orearlier(thepaperwaspublishedin2011).

WhenitcomestoanalyzingbothLOTandAlitalia’sresults,thispaperwillfocusonlyon

thebasicdatasuchasrevenues,profitsandnumberofcarriedpassengers.Airlinesare

complexenterprisesandtheirrevenuescancomefromvarioussources,notnecessarily

from the sales of tickets. Airlines carry out cargo and charter operations, and can be

organizedinmanyways–sometakein-houseapproachandownplanesandtechnical

services, some are leasing their aircraft. As a result, this paper will not carry out

calculationssuchasRevenuePerPassengerorCostPerPassenger,astheseitwouldnot

bepossibletocalculatethem.

2.4Methodologycriticism

BrymanandBelloutlinethefourmainissuesthatflawthequalitativeresearch.Firstly,

theypointoutthatqualitativeresearchistoosubjective.Forexample,researcherscan

strikeuppersonalrelationshipswiththepeopletheystudy(Bryman & Bell, 2015).This

is,however,notaprobleminthispaper,aseventuallynofirst-handdatahasbeenused.

Whatismoreimportantinthispointisthatthequalitativeresearchtypicallybeginsin

anopen-endedway, and then is graduallynarroweddown to the conclusion,without


22

muchtakeonwhyparticularareasofstudieswerechosen(Bryman & Bell, 2015).This

problemcanoccurinthispaper,preciselybecauseoftheverynatureofthequalitative

analysis. The analysis began with the hypothesis that the ownership was the major

problem for both airlines and the rest of the analysis, somehow arbitrarily, follows

through.

The secondpointofqualitativeanalyses critique is that theyaredifficult to replicate.

BrymanandBellpointoutthatthecollectionandselectionofdataareuniquetoevery

qualitativeresearchandarebynaturelessstructuredthanaquantitativeanalysis.Itis

justtoooftenimpossibletoreplicateananalysisthatissupposedtonottobebasedon

hardnumbers(Bryman & Bell, 2015).However,theauthorofthispaperdoesnotbelieve

thatthisismuchofanissueinthisproject.Thewaythisresearchhasbeencarriedout

involves analyzing a scientific paper that tackles the issue of an unsuccessful, state-

owned airline and challenging the findings by determiningwhether or not the same

conclusionscanbedrawnafterinvestigatinganothersimilarcompany.Fairlyeasilyone

can either choose another paper or take the same academic paper on Alitalia and

compareitsfindingswithadifferentairline–thiswillbedescribedfurtherinthenext

chapter.

The third problem associatedwith the qualitative research is generalization. Bryman

andBellsuggestthatit isdifficultforonlyoneortwocasestoberepresentativeofall

cases (Bryman & Bell, 2015). However, this refers mainly to an interview-based

research,whichthispaperisnot.Aboveall,thepurposeofthequalitativeresearchisto

generalize theories, not populations. This paper is just that – a generalization of a

certainqualitativetheory,notapurestatisticalanalysis.

Lastly, Bryman and Bell note that a qualitative research might bring about lack of

transparency. It can be difficult to figure out how an author reached a certain

conclusion. The process of qualitative data analysis is frequently unclear (Bryman &

Bell, 2015). The author of this paper is aware of the challenges that this analysis can

raisequestionsconcerningthewayitisstructuredandmethodsthathavebeenusedto

reachfinalconclusions.Thatiswhyasubstantialamountofspaceinthispaperhasbeen


23

dedicated to present and describe first the methodology, and then the theoretical

conceptbehindtheauthor’swayofanalyzingthecasesofAlitaliaandLOT.

2.5Sourcecriticism

Oneofthemainconcernsoftheauthorofthispaperwastoensurethatthequalityof

the data is as high as possible. Thus, the secondary data used to develop this thesis

containsonlysourcesofthehighestpossiblecredentialsandcomefromhighlyregarded

sources, suchas renowneddatabases, industry journals, government statisticsoffices,

companies websites and data intelligence agencies. Moreover, the data used in this

paper are almost always up-to-date. The world and the airline industry itself are

changing at an unprecedented speed. The author is aware that data from before the

financial recession of 2007-08 can be considered to be ancient, and thus cannot be

possiblytakenasabenchmarkforcreatingscenariosforadecadelater.Hence, inthis

papermostofthedatacomefrom2014,or,insomecases,2015.

Thatbeingsaid,thepapercontainsonlysecondarydata.Thereasonwhythisisthecase

ischiefly thenatureof theResearchQuestion, inwhichcrediblestatisticsandvarious

analyses provided by well-regarded data providers offer a much higher degree of

confidence than any sort of realistically obtainable primary data. Additionally, due to

theageandthelifesituationoftheauthoritwouldbenexttoimpossibletoacquiredata

from a sample group that would contain satisfying ranges of interviewees regarding

theirage,jobpositionandtravellinghabits.

Althoughthesecondarydataonaviationstatisticsthatarequotedinthispaperareof

the ultimate quality, there was a significant problem with attaining actual data,

especially when comes to finances, of LOT Polish Airlines itself. Astonishingly, state-

owned enterprises in Poland are not obliged to publish any detailed financial data.

Consequently,most of the financial data about LOT come from restricted-access data

andbusinessintelligenceproviders,suchasFactiviaorEIMS.Thesesources,however,

haveextremelygoodreputation in the industryand, in fact,manyscholars invarious

journalsdomakeuseofthesedataprovidersintheirresearches.


24

Theauthordid,however,trytocontactLOTPolishAirlinesaboutthefinancialdataof

thecompany,offeringtosignaNon-DisclosureAgreementwiththecompany.Initially,

inJanuary2016,theauthordidmanagetoestablishaplatformforaccordwithPoland’s

national carrier. Yet, the time was by far not favorable. In October 2015 Poland’s

governmentchangedandstartedtoforcedeepandseriouschangesinthemanagement

of state-owned enterprises. Already in January the contact with the company

deteriorated,andthescheduledmeetingwaspostponedtwice.OnJanuary28th2016the

Treasury Minister appointed a new CEO of LOT, and the contact with company was

withheldcompletely.


25

Part3:Theoryoverview

3.1Theory-findingprocess

The principal academic paper used in this thesis is the article by Paolo Beria, Hans-

Martin Niemeier and Karsten Frölich: “Alitalia – The failure of a national carrier”,

published in 2011 in the Journal of Air Transport Management. In their paper the

authorsexaminewhyAlitalia,Italy’snationalcarrier,failedtobeprofitableinthelong

term. The author of this paper has found Beria’s, Niemeier’s and Frolich’s article a

brilliantbaseforthecomparisonofLOTandsomeotherEuropeanlegacy,state-owned

carriers.ThereareafewacademicarticlesabouttheproblemsofSAS,anationalcarrier

ofDenmark,NorwayandSweden.JustasLOTandAlitalia,SAShasalsobeenravagedby

various crises – from notorious crew strikes to ever-too-high costs and the ever-

recurring issue of privatization. Yet none of those papers seemed to be as

comprehensiveandstraightforwardasthepaperofPaoloBeria,Hans-MartinNiemeier

andKarstenFrölich.

SWOTanalysishasbeenchosenasasupportivetool.Itsroleistohelptoevaluatethe

failure of LOT. It is a widely used business strategy tool whose strength lies in its

simplicity – it enables the reader to have a quick overview of a given issue. Its

popularityalsogivesanotherbonus–onecaneasilytaketheSWOTanalysisofLOTand

fairly straightforwardly compare it toother analyses thatwere conducted in thepast

aboutanyotherairline,orairlinemarket.

The author is aware that there are other business strategy theories andmodels that

couldbeusedinthispaper.SOARmodelcouldbeusedinsteadofSWOT.SOARanalysis

assessesstrengthsandopportunities,aswellasaspirationsandresults.Thoughuseful

in describing a static picture of a company, it is more problematic to be used as a

dynamicmodel in away that SWOT canbeused. SOARmodel alsodoesnot allow to

analyzetheweaknessesofacompany,whicharefundamentalintheexaminedcase.


26

TheauthorwasconsideringusingtheclassicPorter’sFiveForcesmodel inthispaper.

PorterFiveForcesisabusinessmodeldevelopedbyaHarvardprofessorMichaelPorter

(2008)andwasbroadlytaughtonmanycoursesatCBS.Basically, initsoriginalform,

themodelarguedthatthecompetitiveenvironmentofacompanydoesnotconsistonly

of the company itself and its direct competitors. Instead, apart from the direct

competitionthereareotherforcesthatdriveprofitability:bargainingpowerofbuyers

and suppliers, threat of new entrants and substitutes. This analysis seemingly fits

almostperfectly to theairline industry–MichaelPorterhimselfmentions itonmany

occasions as a reason why airlines so often perform badly in terms of profitability

(Porter M. E., 2008).Nonetheless,theauthorrejectedtheopportunitytoimplementthis

theoryintothepaper,mostlybecauseoftheconcernthattheforcesthatactuallyimpact

airlineindustriesinPolandandinItalyaresimilar.Ontheotherhand,SWOTanalysisis

more focused on specific companies, and thus better reflects differences in their

behaviorandresults.

PESTLEanalysiscouldarguablybeusedasasubstituteforFiveForces.Theanalysisof

political, economic, social, technological, legal and environmental factors could be

helpful, yet Porter’s simple model of Five Forces is more focused on what actually

mattersmuchmore–theunderlyingstructureoftheindustry,whichthenwillallowto

findoutwhy themarket situationofLOT looks theway itdoes.On topof that, some

factors of PESTLE analysis, such as the technology or the environment play only a

marginalroleindescribingairlinemarkets.

DuetoSWOTmodels’simplicityandanumberofpapers inwhichithasbeenusedso

far,theauthorwillnotdescribeitindetail.Instead,therewillonlybeaquickreminder

ofwhatthemodelstandsfor,andhowitcanbeused.Forthepurposeofthispaperthe

SWOT analysiswill be explained on the basis of the 2014 article in the International

JournalofInnovativeandAppliedResearch.


27

3.2SWOTanalysis–theunusualuseoftheLittleBigTool

SWOTisasimple,butnotsimplistic,business tool.Asa tool,SWOThasgonethrough

certaininflation,itisstillclaimedtobeaversatiletoolforinvestigatingproblemsfroma

strategicperspective (Pesonen & Horn, 2014).

Themodelconsistsoffourfactors,whichcombinedgiveanuncomplicatedbutefficient

pictureofasituationacompanyfounditselfin.Thesefactorsare:

- Strengths:tangibleorintangiblequalitiesthathelpacompanytoaccomplish

itsmission.Theyincludehumancompetencies,processcapabilities,financial

resources, products and services, customer goodwill and brand loyalty.

Examples of organizational strengths are huge financial resources, broad

productline,nodebt,committedemployees,etc.

- Weaknesses: on the other hand, weaknesses are qualities that prevent a

companyfromachievingitsfullpotential.Theyarethefactorthatacompany

doesnotmeeteventhoughitshould

- Opportunities:competitiveadvantagesaremadethroughusingopportunities.

Theyareembracedwhencompaniesexecuteproperstrategies

- Threats:areinternalofexternalfactorsthatendangeracompany’sposition,

stabilityorthefuturedevelopment.

SWOT model assumes that successful strategies are based on a good fit between

internalresourcesandexternalpossibilities (Ravikant, Grassl, & Pahl, 2012).Itisalmost

by definition a picture taken in a given situation. Ifediora Christian Osita, Idoko

Onyebuchi R. and Nzekwe Justina in their paper “Organization’s stability and

productivity: the role of SWOT analysis an acronym for strength, weakness,

opportunities and threat”, published in InternationalJournalofInnovativeandApplied

Researchargue that “Thepurpose of SWOTanalysis is to gather, analyze, and evaluate

informationandidentifystrategicoptionsfacingacommunity,organization,orindividual

atagiventime”(Ifediora,Idoko,&Nzekwe,2014).Butforthepurposeofthisresearch

thisparadigmwill be stretched. Insteadof taking a simplepictureof onemoment, in

this paper SWOT will be used in a more dynamic way. SWOT model will assess

strengths,weaknesses,opportunitiesandthreatsthatLOTnotonlyencountersnow,but


28

alsothatthecarrierhasbeenencounteringfortherecentyears.Thiswillmakeitmuch

easier to compare the “dynamic SWOT” with the analysis of Alitalia by Paolo Beria,

Hans-MartinNiemeierandKarstenFrölich.

It is worth noting that the dynamic SWOT analysis has been analyzed by multiple

researchersandscholars,withdifferentoutcomes.Oneofthemostprofoundworkson

the topic is Richard Dealtry’s book “Dynamic SWOT Analysis - Developer's Guide”.

Dealtrymoves thebasicprocessof SWOTAnalysis forward, strategicallyupgrading it

and refining the basic process so that it takes amore comprehensive form (Dealtry,

2013).TheSWOTanalysisinthispaper,however,doesnotderivedirectlyfromDealtry

concept. It isamoresimplisticviewofaSWOTanalysis thatcapturesasituation ina

certainperiod,ratherthanpoint,oftime.

3.3“Alitalia–thefailureofthenationalcarrier”

The research carried out by Paolo Beria, Hans-Martin Niemeier and Karsten Frölich

examinesthecaseofAlitalia–anationalcarrierofItaly,whosecompetitivepositionhas

beensteadilydecliningsince1990s.

In the first, introductory chapter the authors note that in the 1990s there was an

expectationthatairlinesinEuropewouldmergeandformthreeorfourmegacarriers.

Themergingprocesswasstillbeingcontinuedin2011.Alitaliacouldhaveplayedavital

role in that process as a major carrier in 1990s – but failed to do so and ended up

cutting costs and raising capital to upgrade the carrier’s fleet. Over the course of the

followingyears,theItalianstatemadeseveralcapitalinjectionstorescuethecarrier.

ThesecondchapterprovidesreaderswithahistoricalanalysisofItaly’sfailednational

carrier. Alitaliawas established in 1947 and until 1991 had no domestic competitor.

Somecompetitionemergedafterwards,whichledtoadropofmarketsharefrom100%

in1991to80%in1996.Itwasonlyin1996whenAlitaliamadeitsfirst-everbusiness

plan.


29

Theperiodbetween1998and2001wasthenailinthecoffinofAlitalia.InOctober1998

a new airport in Milan – Malpensa – opened to traffic, where Alitalia moved all its

activities from theother airport inMilan–Linate, aswell as its hub fromRome.The

switchwasakeypartofamergeragreementbetweenAlitaliaandKLMfromJanuary

1999, scheduled to start by the end of 2000. However, in September 1999, Alitalia

stopped the relocation program because of the strong opposition from Italian

politicians.InthesamemonthItalianauthoritiesfinedthecarrierforanti-competitive

behavior. In August 2001 KLM denounced the merger deal, officially because of the

carrier’s incomplete privatization. Alitalia started to operate a double-hub structure,

carryingpassengersbothfromRomeandMilan.Amonthlater,the9/11attacksinNew

YorkCitybeganacrisisintheaviationindustryallovertheworld.

In 2003 another attempt at privatization failed because of the opposition from the

unions.Thecarrieralsocutitsintercontinentalconnectionsby41%andfocusedmore

onshort-haulflights,butcouldnotfightoffthecompetitionformLCCs.In2004Alitalia

was once again subsidized by the Italian state. This time the European Commission

appliedthe“onetime, last time”rule.Thenextyear,however,Alitaliawasaidedonce

again,thistimeonthepretextofapartialprivatization.Theauthorsstatethatthemove

wasmadeonlytoguaranteethesurvivalofthecompanyuntiltheelectionsin2006.

InMarch 2006 Ryanair began offering domestic flights between Rome Fumicino and

Milan Bergamo, as the very first foreign airline to do so. Also in 2006 the Italian

governmentwasfinallydeterminedtoselltheremaining40%ofsharesinAlitalia,butit

turnedoutthatnoonewantedtopurchasetheairlinewithbrokenfinances,highcosts

and almostworthless brand. Its only assetswere slots atmajor airports and a semi-

monopolistic position at some domestic routes. The next rescue plan was issued. In

August2008,AlitaliadroppeditshubinMilan,andlateronthecarriersoldsomeslots

at LondonHeathrow airport. InMarch 2008 Air France-KLM agreed to purchase the

remaining government shares of Alitalia, provided the airline underwent a serious

restructuring process. Yet, after the political turmoil it caused, the Franco-Dutch

companyhadtodropthedeal.


30

InMarch2008Alitaliawasrestructured.A“good”partofthecompanywasturnedinto

a “newAlitalia”,withnewconditions forpilotsandcrew.A“badAlitalia”wascreated

withdebtandunnecessaryemployees.However,attheendof2008,thefinancialcrisis

brokeoutandtheindustryexperiencedanothercrisis.

In the third chapterof theirpaperonAlitalia the researchers focusonqualifyingand

explainingthepoorperformanceofAlitalia.TheauthorsofthepaperonAlitalia’sfailure

citesomeotheracademicworkswhichstatedthattheairline’sproductivitywassteadily

declining from1998 to 2002. The airline experienced losses even between 2001 and

2007, when the European economy was growing. The authors point out that the

airline’sfailurewasaresultofanumberofmanagerialmistakes,including:

- lackofconsistenthubstrategy

- lackofconsistentalliancestrategy

- inefficientcostcontrols

- issuesconcerningownership

- politicalinfluence

Beria, Niemeier and Frölich refer also to the classic Porter’s model of competitive

advantage inwhicha firmcangaincompetitiveadvantagebyeitherdifferentiating its

products or becoming the cost leader. However, Alitalia failed to prevail in both

categories.Itdidn’tbecomeahigh-qualitycarrierwithfrequentflightsandglobalreach.

Italsocouldnotfindageographicalnichetooperatein.Frequentchangingofhubs(4

strategiesinjust5years)didnothelpittobecomeareliablepartnereither.Moreover,

Alitalia’s notoriously high costs and low productivity did not allow it to become an

effectivecompetitorofLCCs.

As for privatization, although the authors acknowledge that the change of ownership

doesnotguaranteehigherefficiency,inthecaseofAlitaliapoliticalinterferencedidnot

evenallowforcarryingoutprivatizationprocessinthefirstplace.Allfourprivatization

attemptsfailed,mainlybecauseofthelackofdeterminationofthegovernmentowners.

The firstattempt in2006failedbecause itwasaimedonlyatmaximizingthevalueof

the firm without changing its structure. The problem was that Alitalia was not a

valuablecompany.ItsonlyvirtueswerethemonopolisticpositionontheItalianmarket


31

andpoliticalprotection.The secondattempt faileddue to thepoliticalprotectionand

agreementswithvariousvestedgroups.Inthethirdattemptpoliticianswereprotecting

theso-called“Italiancharacter”ofthecarrier.Thefourth,partiallysuccessfulattemptat

privatizationalsocrashedagainstthewilltopreserve“theItaliancharacter”.Between

thesecondandthethirdattempttheofferfellfromE1.7btoE1b.

ThefourthchapteraimstosummarizetheroleofthestateinAlitalia’sfate.Theauthors

ofthepaperbaldlypointoutthatItaly’snationalcarrierwasaconstantsourceofrent

seeking by politicians with little regard for customers or taxpayers. Various vested

groupswere continually being protected. The first three privatization attemptswere

flawedwith the clash of interests of different groups. Even after the last, technically

successful attempt (the Italian state in theory did not have the influence on the

companyanymore)politicianswerestillindirectlyinterferingintheoperationsofthe

company in two ways: media manipulation and interfering in mediations between

stakeholders.

Inthelast,concludingchapter,itisstatedthatthereformsofEuropeanaviationmarket

has in fact leadtothecreationofwinners,suchasmanylow-costcarriers,andlosers,

suchasOlympicAirlinesandAlitalia.

Theauthorsconcludethatthemain, fundamentalreasonforthefailureofAlitaliawas

thepoliticalinfluencethatbroughtaboutthreemajorconsequences.

1. Themanagementnotattunedtothemarketforces

2. AfleetnotsuitedtothenewdynamicsofEuropeanaviation

3. Anetworkdesignedtomeetpoliticalratherthancommercialagendas.

Thetwootherknock-oneffectsofthegovernmentinterferencewere:

1. theinterferenceofvariousgroups,notonlylaborunions

2. theinabilitytointroduceaworkinghubpolicy

3. thenever-accomplishedprivatization.

Finally, theauthorsnote that in fact,Alitalia ceased toexistasamajorcarrier (Beria,

Hans-Martin,&Froelich,2011).


32

3.4Supportivetheories

Therearemanyarticlesandtheorieswrittenonthesubjectsthathavebeenbroughtup

in thispaper– fromairlinemanagement to stateownership.This chapterwill briefly

presentandexplainafewtheoriesthatintheauthor’seyesarerelevanttothetopicof

thispaper.Lateron,inthefifthpart,thesetheoriesandfindingswillbeappliedtothe

corecaseofthispaper–thereasonsbehindthefallofAlitaliaandLOT.Theaimofthis

chapteristogatherallpertinentsidetheoriesinoneplace–partlyinordertokeepthe

structureofthispaperclearandlucid,andpartlytogiveareaderabetterperspectiveof

variousacademicfindingsthatarenotthecorepartofthisthesis.Also,thischapterwill

somewhat focus on theories related to the notion of ownership, and in particular to

stateownership–acorethemeintheresearchonAlitalia’sandLOT’sfailures.Whatis

important, thischapterwillnotexplainthemethodologybehindeachtheory indetail.

Instead,onlykeyconclusionsofseveralacademics’researcheswillbepresented.

Thereisnogeneralagreementontheroleofthestateinfirms.Someacademicsprove

that state ownership has an unequivocally negative role in companies results, while

otherspraisethebenefitsthatanactiveroleofastatecanbringabout.Thelatterbelief

is exemplified by Gillanders& Billonwho claim that in the traditional public finance

approach,theinterventionofthestateisoftenseenasanefficientcuretosolvemarket

failures such as the inadequate provision of public goods or the presence of

externalitiesintheconsumptionorintheproductionofaprivategood.Inthisview,the

objectivesofpoliticianswho influencepublicenterprisesare in linewith thoseof the

general public and state-owned enterprises help to maximize social welfare as they

internalize the social cost in the decision process of production, yielding an efficient

outcome(Gillanders&Billon,2016).

Ontheotherhand,aHarvardprofessorAnreiSchleiferinoneofhisrecognizedarticles

talks strongly in favor of private ownership, which should be preferred to public

ownership. Nonetheless, he points out that private firms can, in fact, fail to address

‘’social goals’’, but this issue can be addressed through regulation and government

contracting,withoutresorttogovernmentownership(Schleifer, 1998).


33

The notion of state ownership naturally brings about the issue of privatization. The

troubledhistoryofprivatizationofAlitalia iswidelyexplained in thepaper “Alitalia–

the failure of a national carrier”. Also, LOT’s privatization efforts will be

comprehensivelypresented in the fourthpart of thispaper. Privatization is clearly a

vitalchoiceinanystate-ownedcompanyhistory.Itcanbringaboutdevelopment,orit

canleadtobankruptcy.Forexample,KaufmannandSiegelbaumintheir1990sstudyof

privatizationofstate-ownedenterprises in theCentralandEasternEuropearguethat

privatizationswere often accompanied by a substantial increase in the perception of

corruptionaswellastherelativeimportanceoftheunofficialeconomy.However,they

alsopointoutthatitispossibletodesignoptimalprogramsofprivatizationthatreduce

the opportunities for corruption by government officials, and that, eventually,

privatization is the “lesser evil” than keeping enterprises in state hands (Kaufman &

Siegelbaum, 1996).

Not only academic works lean towards the notion that privatization is generally

beneficial tocompanies.TheEconomistcarriedoutan interestingstudyback in1994.

The newspaper found out that operating costs at Europe's airlines (that were, back

then,almostentirelystate-owned)were48%higher thanatAmerica's(privateones),

primarilybecauseofexcessemployment (The Economist, 1994).However,mattersnot

alwaysaresoclear-cut.ShleiferandVishnycreatedamodelsuggestingthatfirmswith

morestateownershiptendtopaylessinbribesbutdonothaveadifferentexperience

ofcostlyobstaclesimposedonthembypoliticians(Shleifer & Vishny, 1994).Thisstudy

was further developed by the already-cited academics Steve Billon and Robert

Gillanders,whodiscoveredthataonepercentagepoint increase instateownership is

associatedwitha$125reductioninthetotalannualinformalpaymentofthefirmand

witha0.5%decrease in theprobability thata firmwill considercorruption tobean

obstacletotheircurrentoperations(Gillanders & Billon, 2016).

There is strong academic evidence that state-owned companies work less effectively

than those enterprises that are privately owned. Public enterprises in many cases

produce goods desired by politicians rather than by consumers (Shleifer & Vishny,

1994).Nonetheless,thereareplentyofexamplesthatprivatizationinandofitselfdoes

notsolvealltheproblemsacompanycanface–thisfactisstronglyhighlightedinthe

“AlitaliaeThefailureofanationalcarrier”,whereBeria,NiemeierandFrölichpointout


34

thatprivatizationassuchdoesnotnecessarilyincreaseefficiencyunlessitchangesthe

natureof competition.Thisobservation canbe strengthenedbymanyacademics that

generally agree that in the airline industry the effectiveness of the business models

appliedtoair transportdependsonmanyfactorssuchastheexternalderegulationof

thesectorandinternalrestructuring(eg. Pereira & Caetano, 2015).

3.5Theorycriticism

Althoughthechoiceoftheorieswasthoroughlycarriedout,everyconceptorpaperhas

someflaws.Thischapterwilltakeacriticallookatthetoolsusedinthispaper.

SWOT,despiteitsmerits,containssomesimplificationsandotherweaknessesthatwere

thesubjectofmanyresearchpapersandbooks.ThedeficienciesofSWOTanalysishave

promptedsometoimproveitandotherstodiscarditasamethodforcraftingstrategy

(Ravikant,Grassl,&Pahl,2012).SomescholarsactuallycriticizeSWOTanalysisfornot

beinganaccurateandeffectivemeansofanalysisofcorporatestrategy.Theyarguethat

SWOTinandofitselfshouldbereplacedasthecurrentmodel“passeditssell-bydate”(

Hill&Westbrook,1997).An interesting studywasconductedbyDutchscholars from

ErasmusUniversityRotterdam.InaresearchinvestigatingthesuitabilityoftheSWOT-

analysisinthestrategicanalysisforhealthcareorganizationstheyarguethatinorder

to be suitable for the health care sector the SWOT-analysis has to be rethought and

restructured by incorporating the characteristics of the sector but keeping the

possibility for rational analysis by also using empirical data. In their eyes, a strategic

analysis in health care should involve a confrontation between stakeholder

expectations, resources, and developments of contextual factors. Based on this

confrontation it is much clearer to identify what are strengths, weaknesses,

opportunities, and threats (van Wijngaarden , Scholten , & van Wijk , 2012). This

approach, although very interesting, does not seem to be very advantageous when

analyzingstate-ownedairlines.Firstly,thisapproachisstaticanddoesnotincludethe

process of going fromonepoint to another. Secondly, airlines, as probably any other

industry,hasitsowndemandsandonecanarguethatfocusonstakeholders,andalmost

entire elimination ofmarket forces such as opportunities and threats, is not the best

idea.


35

The article byBeria,Niemeier and Frölich, althoughwell-suited for this paper, is not

freeof someweaknesses.The largest flawcanbeassociatedwith thepaper’s relative

reliance on qualitative, rather than quantitative data. It is not necessarily

disadvantageousbyitselfasithelpstounderstandabroadercontextoffailuresuchas

political pressure ormanagerial sorrow, butmakes the papermuchmore difficult to

compare inadifferentenvironment. Theauthorsdo take into consideration theEBT

andEBITDAratesandmargins,aswellastotalcostsperpassenger,inordertoquantify

Alitalia’sperformance,but,possiblybecauseof the lackofdata,notmuchmore.They

focusmoreonthequalitativesideoftheanalysis,suchasanalyzingtheroleofstate.

The second major flaw concerns the paper’s relative facileness. The paper is not

lengthy, and there are many aspects that were only rushed through, were they

mentionedatall.Thechoiceofabusinessmodeliscentralforeverycompany’ssuccess.

Airlines often struggle between the choice of being a hard low-cost carrier or a full-

serviceairline (Alderighi, Cento , Nijkamp , & Rietveld, 2012).Nonetheless, the termis

onlybrieflymentioned inthepaper.Thepaperalmostdoesnot take intoaccountany

external factors such as the economy, whichmight have had a significant impact on

Alitalia’s performance, considering the ever-recurring crisis of the Italian economy. It

alsodoesnotprovidereaderswithanymajorcomparisontoanyothersimilarcase,nor

doesitexpresshowsuchacomparisonmighthavebeencarriedout.

Lastly,onecanquestionthewaythepaper’sanalysiswascarriedoutinthefirstplace.

TheauthorsuseagreatdealofspacetryingtoquantifyAlitalia’sperformance,andafew

times less space on describing the role of state in the process. Yet, the data analysis

failedtopresentanymeaningfuldifferencebetweenAlitaliaanditsdirectcompetitors

in termsof factors suchas costs.This information is veryhelpful, however, a slightly

deeperfocusontheactualprocesscouldhavebeenmade.Asitwasmentionedearlier,

the article is not particularly lengthy, so this indecisiveness in terms of the research

methodmakesareaderlongforsomemoredecisiveandcomprehensiveanalysisofthe

roleofthestate,whichwouldmaketheanalysismoreesteemed.


36

Part4:LOT–companyoverview,data,facts&figures

4.1LOT–companyoverview

This part will deal with LOT – Poland’s national carrier, as well as its competitive

environment – namely – the European airline market. This part will gather both

qualitative,suchashistoryofthecompany’sprivatizationefforts,aswellasquantitative

data.

4.1.1Historicalbackground

LOT’s history dates back to the interwar period, as it is the case with many other

European flag carriers. In fact, itwas foundedalready in1928 inWarsaw.Twoyears

later, LOT joined the already-established IATA.Within the following decade LOTwas

openingbothdomesticandEuropeanroutes,aswellasaroutetoAmerica.

AftertheSecondWorldWar,LOTcontinueditsexpansion,althoughtheairlinemarket

was not booming as much as in Western Europe. After the fall of communism, LOT

quickly replaced its entire fleet, composed mainly of Soviet-built aircraft, with new

planesmanufactured byBoeing. In 1994 LOT had the youngest fleet in theworld. In

2000 LOT started offering connecting flights – before that all flights had been

exclusivelypoint-to-point.In2005LOTdecidedtopurchaseBoeings787Dreamliner–

andbecametheveryfirstairlineinEuropetousethem.BecauseofBoeing’sproblems,

thedeliverywasbelatedbyalmost3years–thefirstscheduledflighttookoffonly in

2012.LOT’scurrentfleetofsix787sservesallofthecompany’sfivelong-haulroutes–

toNewYork,Chicago,Toronto,BeijingandTokyo(LOT,2016).

4.1.2Purchasingwide-bodyaircraft

In September2005LOTdecided topurchase sevenBoeings787s to replace its aging

fleet of Boeings 767.Unlike their predecessors, 787s are considered to be one of the

mostefficientaircraftevermade(Forbes, 2014).Theplanesweretostartflyingatallof

LOT’s long-distance routes from2008 (BBC,2005). LOTwas tobe the firstEuropean


37

(andtheworld’ssecond)carriertoflywithBoeing’slatestaircraft.Yetthedeliveryhad

beenpostponedseveraltimesuntil2012,whenLOTreceivedthefirstfullyfunctioning

aircraft.ThefirstcommercialflighttookplaceonDecember14th2012–morethanfour

yearsafter the initialdeliverydateof summer2008 (Forbes,2012).Thiswasnot the

endofthetroubles–inJanuary2013JapanAirlinesreportedafuelleakage(WallStreet

Journal, 2013).Aweek later theEuropean SafetyRegulators grounded all 787s – but

LOT’s two Dreamliners were the only such planes operating in Europe at that time

(Reuters, 2013). All 787 went back to Boeing’s factory near Seattle for a 5-month

service.LOTfinallylaunched787ontheroutetoNewYorkinJune2013–fullfiveyears

after the initial first scheduled plan (tvn24, 2013). Shortly afterwards, all 767swere

finally phased out. LOT received six 787s till May 2014, and is going to get two

additional planesby the endof 2016 (tvn24, 2014). In January2014, LOT received a

22.5mEUR(incl.15mEURincash)compensationfromBoeingforgroundingtheplanes

in2013(Newsweek,2014).

4.1.3LOTstaterestructuringaidcrisis(2012-now)

2012wasadifficultyearfortheEuropeanairlineindustry.Hungariannationalcarrier,

MALEV, aswell as Spanair of Spainbothwentbankrupt. Itwas also a yearof ahuge

crisisinSAS.AccordingtoIATAestimations,theentireEuropeanairlineindustrymade

a net loss of 1.2bnUSD in 2012 alone (Forbes, 2012). As for LOT, in order to remain

solvent,theairlinesoldahugechunkofitsassets,suchascateringservices.Technically

thoseassetsweresoldintheofficialtenders,buteventuallytheywereallpurchasedby

other state-owned entities. That case had been investigated by the European

Commission,which inNovemberultimately agreed that nowrongdoingwas involved

(EuropeanCommission, 2012).

On December 12th 2012, PolishMinistry of State Treasury4announced that it would

giveLOTatotalof1bnPLN(approx.240mEUR)ofstateaid,withthefirsttrancheof

100m EUR to be paid immediately. The airline responded with a short-term

restructuringplan that included, amongother things, letting goof 600workers.Both

statementscameasasurprise,as inSeptember2012the then -CEOofLOTpublically4PolishMinistryofStateTreasuryisresponsibleformanagingalmostallstate-ownedenterprisesinPoland,includingtheprocessoftheirpotentialprivatization


38

declared that LOTwas in a good financial shape (Forbes, 2012). Any country that is a

memberoftheEuropeanUnionmustreportallcasesofanystateaid(giventoaneither

state- or a private-owned enterprise) to the European Commission (EC) whichmust

thenapprove thishelppackage.Thishappensonly if a soundplanof restructuring is

implemented (European Commission, 2004). On May 2013, the European Commission

conditionallyagreedtothe100mEURofstateaidgiventoLOTinDecember2012,on

the condition that the company accepted a detailed two-and-a-half year (ending in

December 2015) restructuring plan by the end of July (Newsweek, 2013), (European

Commission, 2013). InNovember2013theECopenedthein-depthinquiry into200m-

eurostateaidrestructuringofLOT(European Commission, 2013).

OnJuly29th2014,theEC’sinquirywasfinalized.TheCommissionconcludedthat“LOT's

restructuring plan will allow the company to become viable in the long-term without

undulydistortingcompetitionintheSingleMarket”.TheECalsopointedout thatLOT’s

financial results in 2013 were better than expected. (European Commission, 2013).

Indeed, in2013LOThad anoperational loss of ‘only’ 4mPLN, but overall the airline

madeanetprofitof26mPLN(Forsal, 2014).However,asapartofthecompensationfor

the disruption of the free market caused by the state aid, LOT had to temporarily

withdrawfromsomeofitsprofitableroutes,aswellastoreturnseveralslotsatsomeof

themostcongestedairports(EuropeanCommission, 2014).Additionally,asapartofthe

restructuring plan, LOTwas obliged to lay off a total of 833workers, standardize its

fleet(lessplanesbutmoreseats),renegotiatefueldeals, increaseitsshareofbusiness

travellers, and implement a new IT system. The airline also pledged to limit its

expansionoutsideofEuropeby theendof2015.However, theECdidnotaskLOT to

withdrawfromAsianandNorthAmericanroutesthattheyhadalreadybeenoperating

(Onet News, 2014).InDecember2014LOTannouncedthatitwouldonlytake30outof

200meuroof thesecondstateaidtranchethat theEuropeanCommissionhadagreed

for,asthefinancialsituationofthecarrierwassteadilyimproving(Polish Press Agency,

2014).

InApril2014LOTrevealedthatin2013theairlinemadeanoperationalprofitof99m

PLN – 30m more than expected in the restructuring plan the EC approved in 2013

(Polish Television, 2015). In July LOT, as a part of the restructuring plan, suspended


39

someof itsprofitableroutes, includingall routes thatdidnotoriginate fromWarsaw,

suchasGdańsk–KrakówandGdańsk–Frankfurt (Polish Press Agency, 2015). In June

2015 LOT unveiled that from January 2013 it would open a route fromWarsaw to

Tokyo. It would also open a few new European routes, and reinstate the suspended

ones. The airline’s CEOalsomade a commitment that by2020LOTwouldhavebeen

carryingatleast10mpassengersayear(Polish Press Agency, 2015).Itwasalsopledged

thatby2020therewouldhavebeen75-80destinationsintotal,upfrom49atthetime

ofannouncingtheplaninmid-2015.Whatismore,LOT’srevenueswouldhaverisento

9bnPLN,from3.5bnin2014(Onet, 2015).

4.2.4LOTtoday-theaftermathofthe2012crisis&SupremeAuditOfficereport

In2015,thesituationwasworsethanithadbeenexpected.Althoughfullfinancialdata

isunavailableatthetimeofthewritingofthispaper,itwasexpectedthattheoperating

losswouldbe25mPLN,whereas the totalnet loss in2015wouldrise toawhopping

0.25bn PLN. The new CEO claimed, “LOT must actively seek for new solutions, as its

positionisailing”(Polish Press Agency, 2016).

InApril2016NajwyższaIzbaKontroli(SupremeAuditOffice–thePolishequivalentof

theUK’sNationalAuditOfficeorGermany’sBundesrechnungshof)releasedan in-depth

analysis of LOT’s restructuring efforts from2009 onwards. The report is particularly

highly critical of LOT’s restructuring actions before 2012. It points out that the

consecutiverestructuringplanswerepreparedwithoutnecessaryin-depthanalysesof

the real causes of the past failures. Financial plans, both on the side of costs and

revenues,werenotoriouslyunrealistic.When the companydidnotmeet them, itwas

onlyselling itsnon-coreassetstocover losses.Overall,LOTsoldalmostallof itsnon-

coreassetsfor1.3bnPLNfrom2009to2015(Supreme Audit Office, 2016).

ThebigrestructuringplanfromJune2013didimprovethesituationofLOT,according

totheSupremeAuditOffice.However,theOfficepointedoutthat,aspreviously,many

oftheassumptionswereoverlyoptimistic,especiallywithregardtoplannedrevenues

fromsalesofthetickets,initiativesthatwereaimedatloweringthecostsofpurchasing

fuel and using slots at airports. A profit of 2014 was achieved partially due to

implementing some reforms (such as loweringwages anddismissing someworkers),


40

but alsobecause someactions thatwoulddemandadditional costs, such as returnof

someaircraft,wereputaside.Oneshouldnotforget,however,thatthiswoulddemand

additionalcostsinthefuture(Supreme Audit Office, 2016).

The report points out that the most fundamental problem of the company is an

inadequate level of revenues compared to costs that must be borne. Revenue per

passenger is steadily decreasing. Other problems include high debt that limits

investmentsandlackofmodernnarrow-bodyaircraftsuchasB737orA320.Allthose

problems were pointed out in the restructuring plan in June 2013, and were still

presentinApril2016–almost3yearslater(Supreme Audit Office, 2016).

The Supreme Audit Office was also very critical of the usage of external consulting

services. The improprieties in this regardwere frequent and systemic, and stemmed

fromtheexcessivefreedomofpurchasingandappraisingsuchservices.Manycontracts

for services costing more than 1m PLN were signed without a prior proper tender.

Instead, the consulting firmswere chosenbased on the internal procedures. Also the

signed contracts in many cases did not unequivocally stated the final price for

consultingservices,andthusmadeitimpossibletokeeptrackofexpendituresonsuch

services.(Supreme Audit Office, 2016).

Thereportconcludes that the firsthalfof2016willbehighlycritical to thecompany.

The2.5-yearrestructuringplanwasfullyimplementedbytheendof2015,andin2016

theairlinemustdevelopmainlythroughincreasingsales,whichcanbedifficultasthe

marketremainscompetitive(SupremeAuditOffice,2016).

Sixdaysafter theSupremeAuditOffice’s reportwasreleased,LOTannounced that in

thefirstquarterof2016theairlinecarriedover1mpassengers–anall-timerecordfor

theairline(Forsal,2016)


41

4.1.5Ownershipandmanagement

WhenwritingaboutLOT,oneofthekeyissuestobeconcernedaboutistheownership

andmanagementofthecompany.TheseissuesarguablyplayabiggerroleinLOTthan

theydoinmostotherairlines.

LOTwas established in1992as a100%state-owned commercial enterprise, andhas

operated like this ever since. In fact, in 2016 the PolishMinistry of Treasury owned

99.82% of LOT’s shares, and the state-owned investment fund TFS Silesia controlled

0.144%ofthecompany.Theremaining0.036%belongedtothecompany’semployees

(LOT, 2016).

This ownership structure made the airline prone to political influence. Since Poland

joinedtheEuropeanUnionin2004,LOThashad14CEOs.Onaverage,aCEOinLOTwas

inchargeforaboutoneyear.Thisnumberincludesalso“actingCEOs”–afterlettinggo

ofaCEO,hisassistantwouldusuallytakethepostover.Intheorytheyweretoactonly

temporarily. In practice those acting-CEOs were often in charge just as long as the

“regular”CEOsasitwasdifficulttofindasuitablereplacement.(Dziennik Polski, 2016).

Typically,consecutivegovernmentswerechangingCEOs for tworeasons.Firstly, they

werereplacedsimplybecauseagivenpartywon theelection.Thiswas thecaseafter

the elections in 2005, 2007 and recently in 2015 (Wirtualne Media, 2006),

(Rzeczpospolita, 2008),(Reuters, 2016).MinistersalwaysdismissedLOT’sCEOswithout

havingareadysubstitute. In2006thepositionofLOT’sCEOwasgiven toWładysław

Bartoszewski, the 82-year-old Polish distinguished politician, social activist, historian

and a former prisoner of Auschwitz concentration camp, but also a person,who had

neverheldabusinesspositionbefore(Wirtualne Media, 2006).

Secondly, LOT’s CEOswere dismissedwhen the companywas announcing its lack of

profitsaftertheendofeachfinancialyear.ThispracticedidnotallowvirtuallyanyCEO

toimplementanylong-termrestructuringplan.Suchasituationoccurredin2012when

LOT’sCEOannouncedinDecemberthatthecompanydesperatelyneededgovernment

aidtosurvive.ThathappeneddespitethefactthatonlyinSeptembertheverysameCEO

wasdeclaring that thecompanywas inagoodshape (Forbes, 2012). SebastianMikosz


42

was appointed as a new CEO, and then led the company through the 2-year

restructuringplan.Yet,inAugust2015MrMikoszresignedarguingthattheMinistryof

State Treasury declined the long-promised privatization of the carrier, despite the

appearanceofaprospectivebuyer–theparentcompanyofWizzair(Newsweek, 2015).

Amemberof theBoardofLOT,anda formerCEOofPolishRailways, tookoverasan

actingCEO.Histermlastedonly6months.InJanuary2016thenewlyappointedPolish

governmentchoseyetanotherCEO–fourteenthsince2004(Polish Press Agency, 2016).

4.1.6PrivatizationofLOT

Although the consecutive governmentswere constantly influencing theway LOTwas

managed, there were many attempts to privatize the company. The first act of the

privatizationtookplace in1999.Until thenLOThadbeena100%-state-ownedentity.

OnNovember18th1999thePolishStatecontrolledonly52%ofthecompany’sshares.

37.6%weresoldtoSAirGroup–aparentcompanyofSwissair,whichresultedinjoining

thenow-defunctQualiflyeralliance.Theremainingsharesweredealtoutamongstthe

company’s employees.Before thepartialprivatizationLOThadalreadybeen in2.7bn

PLN debt. That had not allowed for an IPO on theWarsaw Stock Exchange (TVN24,

2011).

Themoveturnedoutnot tobeaspromisingasplanned.Afterthe9/11attacks inthe

United States many airlines faced troubles. Swissair went bankrupt, and so did the

entire Qualiflyer alliance. LOT began negotiations with Lufthansa about the strategic

partnershipandinApril2002LOTjoinedtheStarAlliance.PolishgovernmentgaveLOT

aone-timestateaidof400mPLN5tosavethebankruptingairline.37.6%ofshareswere

soldfor136mPLN,sothestatelostmorethanaquarterbillionPLNonthetransaction

intwoyears(TVN24, 2011).

In 2011 a report from the Supreme Audit Office on the privatization of LOT was

released. The paper was highly critical of the process of 1999-2001 changes in the

5PolandjoinedtheEuropeanUniononlyin2004,soin2002itdidnothavetoobtainanypermissionforthestateaid


43

ownershipstructureofLOT.Itpointedoutthatnotonlywasthetransactioninviablefor

LOT,butalsothattherewasalotofinfringementinvolvedintheprocess.Forexample,

the former Board of LOT was paid 1m CHF for consulting services, which was

noncompliant with the law. The report also pointed out extraordinarily costly

consulting contractsand freeairline tickets thatweredishedout toemployeesof the

MinistryofInfrastructureandothergovernmententities(TVN24, 2011).

Much earlier, in 2003, Ernst & Young prepared a report about the bankruptcy of

Switzerland’sformernationalcarrier.Thepaperrevealedlettersinwhichthethen-CEO

of SAirGroup offered the then-CEO of LOT a compensation of 60.5-87.5k CHF paid

monthlydirectlyontohisaccountinCreditSuisse.Technically,themoneywaspaidfor

“consulting services”, but no details of the scope of such service had ever been

determined.PolishMinistersoftheStateTreasuryclaimedthattheydidnotknowand

didnotallowtheCEOofLOTtoreceiveanymoneyfromSAirGroup(Gazeta Wyborcza,

2003).

ThefateoftheprivatizationofLOTthendependedontakingoverthecompany’sshares

thatSAirGrouppurchasedin2001.ItonlyhappenedinMay2009(pasazer, 2009)–the

Polish state, after almost a decade, controlled more than 99% of LOT’s shares.

ConsecutiveMinisters of State Treasury and CEOswere claiming that LOTwould be

privatizedfirstlyby2008,thenby2011andfinallyby2012.In2011MorganStanley,an

Americaninvestmentbankthatwasthechiefadvisorintheprivatizationprocess,made

adetailedreportonthechangeinLOT’sownershipstructure(Onet, 2011).However,no

suchchangesoccurredinthefollowing5years.

In 2010 Christoph Franz, the soon-to-be CEO of Lufthansa claimed that the German

carrier might be interested in purchasing LOT once it was privatized. (Süddeutsche

Zeitung, 2010; Süddeutsche Zeitung , 2010).However, inDecember2011, thesameCEO

statedthatLufthansawasnotinterestedinpurchasingsharesofLOT(Forbes, 2011).

InApril2012TurkishAirlinesdeclared interest inbuyingLOT.TheTurkishcompany

carried out a due diligence of the Polish national carrier (Forsal, 2012). InMay 2012

LOT’sCEOMarcinPirogtoldCNN“Ibelievethatbetweennowandtheendofsummer


44

oneof them<thepotentialbuyers>will signexclusivityagreement” (CNN, 2012).Yet,

only 9 days after the CNN’s interview, Turkish Airlines officially withdrew from the

processofacquiringsharesofLOT(Newsweek, 2012).InMay’sinterviewtheCEOofthe

Polishcarrieralsostatedthat“Wearenotonlythestrongestplayerinthispartofthe

world,centraleasternEurope,butwecanbea...verygoodpartnerforoneofthebiggest

airlines and profitable airlines in the industry” (CNN, 2012). In December 2012, 7

months after the interviewwith CNN, LOT asked for 100m EUR of state aid and the

privatizationprocesswasceasedforgood(Polish Radio, 2012).

Oneof thebiggestobstacles thatwasnotoriously scarringoffpotential investorswas

thefactthataspeciallawpassedinthe1990sdidnotallowthestatetosellmorethan

49% of shares in LOT. That law was finally changed in 2013, in the middle of the

financial crisis in the airline (Polish Ministry of State Tresury, 2013). Still, no potential

buyeremergedatthattime.

AfterthefinancialcrisisinLOT,in2015IndigoPartners,anAmericaninvestmentfund

thatwasalsoashareholderinWizzair,a low-costcarrierfromHungary,expressedits

interest inpurchasing sharesof LOT.However, in September2015PolishMinister of

State Treasury denied the possibility of selling any shares to the fund and froze the

privatizationprocess.After this information theCEOof thecompanyresigned (Gazeta

Prawna, 2015). In September the acting CEO of LOT argued that finding a suitable

investorwouldstillbehispriority(Gazeta Wyborcza, 2015).

In January 2016, Polish Minister of State Treasury appointed by the newly elected

government claimed that “LOT is in a very difficult condition and the previous

government is fully responsible for that situation” (Gazeta Wyborcza, 2016). He also

stated that “LOT is in a very bad situation and needs a rescue plan quickly” (Forsal,

2016). In April 2016, the deputyMinister of State Treasury claimed that theMinistry

“grants thepermission for theprivatizationofLOT”,butonly if the state controls the

majorityofshares.Additionally,heclaimedthattheprivatizationwouldbecarriedout

‘onlywhenLOT’svaluerespondedtoitspotential”(Forsal, 2016).


45

4.1.7ActivitiesoftheUnions

In2012,atthepeakoftheLOT’sfinancialtroubles,Poland’snationalairlineemployed

2063 workers, which gave a ratio of 3053 passengers carried annually per one

employee(Forbes, 2013).IncomparisonwithRyanair,whichisconsideredtobeacost

leaderintheindustry,thisratioin2012was8983(Ryanair, 2013). Ontheotherhand,

SAS, the national carrier of Sweden, Denmark and Norway, which also received

governmentstateaid,carriedonly1893passengersforeachworkeremployedin2012

(SAS, 2013).

Strikes of the personnel are common in the aviation industry. Michael Porter in his

famous paper claims that one of the reasons for airline industry’s notoriously poor

profitability is theexceptionallyhighbargainingpowerof labor.Airline’spersonnel is

particularly highly unionized and has a lot of clout. A short, even a couple-hour long

strikecanbringaboutmillionsoflossesinanindustrywhosemarginsarealreadythin

(Harvard Business Review, 2016).

Oddlyenough,LOTexperiencedasurprisinglysmallnumberofstaff-related issues. In

fact, unlikemost of its competitors that are notoriously being tarnishedwith strikes,

LOThasnever experiencedanygeneral strike, or evenwork-to-rule.All disputeshad

beensettledeitherbeforeanystrikeoccurred,orwithinhoursfromawarningstrike.

In2001employeesconductedashort,2-hourwarningstrike,buttheirissueregarding

payriseswassettledwithinafewdays(Wyborcza, 2001).Asimilarwarningstrikewas

carried out in 2010 (TVP Info, 2010). In 2011 a strike proposal was voted amongst

employees inareferendum,buteventually failedto takeplace (wprost, 2011). In2012

severalemployeesofLOT’sdaughtercompanyAircraftMaintenanceServicesconducted

a strike, which was then considered to be illegal by the court in Warsaw. As a

consequence,theorganizersofthestrikeweredismissed(tvn24bis, 2012).InNovember

2015theairline’sstaffplannedanotherwarningstrike,butthecasewassettledbefore

thestriketookoff(tvn24bis, 2015).


46

4.1.8Fleet

Table3:FleetofLOTasofApril2016 Boeing

787-8

Boeing

737-400

Embraer

195

Embraer

175

Embraer

170

Numberin

fleet

6(8incl.

orders)

3 6 12 6

Seating 250 162 112 82 70

Source:(LOT, Fleet, 2016)

OneofthebiggestissuesofLOTisitsfeet.InApril2016LOThad33planes(LOT,2016).

Although six of them were modern Boeings 787s Dreamliner (with two more to be

deliveredbytheendof2016)theairline’sproblemisitsshort-haulfleet.LOThasonly

three Boeings 737-400 that are themost popular short-haul planes in theworld. All

three aircraft were built in the early 1990s. The rest of the fleet consists of aging

Brazilian-madeEmbraers.In2015LOT’sCEOsaidthatthecompanyshouldorder15-20

newnarrowbodyaircraft.Additionally,smallEmbraers170shouldbephasedout–but

theproblemisthatnobodywantstobuythem(Forsal,2016).

4.1.9Destinations

Table4:LOT’sdestinationsPoland Western

EuropeEasternEurope&Balkans

Middle-East NorthAmerica

Asia

8 19 26 2 3 36Source:LOT

InApril2016LOToperated60regularroutesaswellas15seasonalcharter

connections.ThevastmajorityofroutesarewithinEurope.LOThasonly7non-

Europeanconnectionstothreegeographicalregions-theMiddleEast(BeirutandTel

Aviv),NorthAmerica(NewYork,ChicagoandToronto)andAsia(BeijingandTokyo)

(LOT, 2016).

6Thethirdlong-haulroute,betweenWarsawandSeoul,launchesinOctober2016(BusienssTraveller, 2016)


47

4.1.10Financialanalysis

Table5:FinancialdataofLOT

2007 2008 2009 2010 2011 2012 2013 2014 2015

Totalrevenues(bnPLN) 3.15 3.02 2.87 3.18 3.5 3.47 3.27 3.37 3.48

Salesrevenues(bnPLN) 3 2.9 2.72 2.96 3.16 3.3 3.15 3.23 n/a

EBITDA(mPLN) 73 -109 -220 -163 -158 -147 -4 99 -25

Netnon-adjustedprofit

(mPLN)158 -732 -168 -52 -147 -157 26 -263 -250

Source:(LOT, 2015; Bankier , 2016; wprost, 2016; Polityka, 2012; Gazeta Wyborcza, 2014; Forsal, 2015; parkiet, 2010; EMIS Professional , 2016; Polish Market of Airline Transportation, 2011)

4.2PolandandtheEuropeanaviationmarket

Graph3:PAXper1000inhabitants,weeklyaverageASKpercapita(2014)

Source:owncalculationsbasedon(World Economic Forum, 2016; United Nations, 2016; Marketline, 2015; Eurostat, 2015)One can clearly see that figures for both the number of air passengers in selected

countries per 1000 inhabitants and the average weekly number of available seat

kilometers (ASK) per capita tend to rise linearly, with some exceptions whose

explanationisnottheverycorepartofthisresearch.ForinstanceAustraliamayenjoy

exceptionally high ASK per capita because of the sheer distance between Australian

largest domestic airports, as well as between Australia and virtually any airport

0

20

40

60

80

100

120

140

160

180

200

0

1000

2000

3000

4000

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India

Argentina

China

POLAND

Brazil

Russia

Mexico

CzechRepublic

Japan

Korea,South

Turkey

Italy

Belgium

Germany

France

Malaysia

MEDIAN

Austria

Portugal

Netherlands

Canada

Finland

UK

Sweden

Greece

Spain

USA

Denm

ark

Switzerland

Ireland

Australia

Norway

PAXper1000people,2014 ASKpercapita,weeklyaverage2014Linear(PAXper1000people,2014) Linear(ASKpercapita,weeklyaverage2014)


48

overseas.Polandperformsrelativelypoorlyinbothcategories,butclearlyitisalsoone

ofthe least-developedcountriesthatareexaminedinthisgraph.Thenexttwographs

willthusexaminetherelationshipbetweentherealGDPpercapita,andthepopularity

offlyinginselectedcountries.

Graph4:GDP(PPP)percapitaandweeklyaverageASKpercapita,2014

Source:owncalculationsbasedon(International Monetary Fund, 2016; World Economic Forum, 2016; United Nations, 2016)Graph5:GDP(PPP)percapitaandPAXper1000inhabitants,2014

Source:owncalculationsbasedon(Eurostat, 2015; International Monetary Fund, 2016; Marketline, 2015; United Nations, 2016)As it stems frombothgraphs, countrieswithhigher realGDPper capita tend tohave

both higher ASK per capita, aswell as their airports tend to servemore passengers.

Nevertheless, Poland’s airline statistics look uniquely bad compared to its relative

wealth.RealpercapitaGDP inFranceandGermany is50-55%higher than inPoland,

but both countries in both airline statistics perform at least four times better.

NorwegiansaretwicericherthanPoles,butonaveragefly16timesmoreoften.Evenin

0

50

100

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India

China

Brazil

Mexico

Turkey

Argentina

Malaysia

Russia

Poland

Greece

Portugal

CzechRepublic

Spain

Korea,South

Italy

Japan UK

Finland

France

Belgium

Denm

ark

Canada

Germany

Sweden

Austria

Australia

Netherlands

Ireland

USA

Switzerland

Norway

GDP(PPP)percapita,2014 ASKpercapita,weeklyaverage2014Linear(GDP(PPP)percapita,2014) Linear(ASKpercapita,weeklyaverage2014)

05001,0001,5002,0002,5003,0003,5004,0004,5005,000

$0

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India

China

Brazil

Mexico

Turkey

Argentina

Malaysia

Russia

Poland

Greece

Portugal

CzechRepublic

Spain

Korea,South

Italy

Japan UK

Finland

France

Belgium

Denm

ark

Canada

Germany

Sweden

Austria

Australia

Netherlands

Ireland

USA

Switzerland

Norway

GDP(PPP)percapita,2014 PAXper1000people,2014

Linear(GDP(PPP)percapita,2014) Linear(PAXper1000people,2014)


49

thecomparisonwithcountrieswithasimilar levelofdevelopment,suchasArgentina,

Malaysia, Russia, Greece or Portugal Poland’s performance looks bleak. The Czech

Republic,acountrywithasimilargeographiclocationandstrongculturalandeconomic

tieswithPoland,isonly20%richer,butitsairportsservetwicemorepassengersthan

their northern neighbor. China, a country still more than twice poorer than Poland,

managedtohaveasimilarPAXrate,anda10%highernumberofASKpercapita.

Graph6:Airlineindustrysizepercapita(USD)and%oftheairlineindustryinthe

nominalGDP,2014

Source:owncalculationsbasedon: (Marketline, 2015; International Monetary Fund, 2016; United Nations, 2016)

Poland has one of the smallest values of airline industry per capita amongst all

examined countries – almost ten times smaller than Australia’s per capita industry

value.Thisfactor,forobviousreasons,issomehowrelatedtothewealthofindividuals.

Moreimportantly,however,Poland’svalueofairlineindustryasthepercentageofGDP

isalsosmallerthaninmostexaminedcountries–in2014itwasresponsiblefor0.43%

of the country’s overall GDP. In Denmark, the Czech Republic, the Netherlands and

Germanythisratiostoodat0.55%,0.57%,0.66%and0.73%,respectively.Amongstthe

31examinednationsonlyairlineindustriesinIndiaandArgentinawereresponsiblefor

asmallershareofnominalGDP(0.4%and0.37%respectively).Althoughhistoricaldata

are difficult to obtain, this statistics strongly shows the potential that the Polish

industry market has – even if GDP doesn’t grow that fast in the future, at least the

marketwillgrowalongwithitsshare–perhapstillitreachesthemedianof0.65%.

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

$0

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$200

$300

$400

$500

$600

$700

India

Argentina

China

Brazil

Poland

Mexico

Russia

CzechRep.

Turkey

Malaysia

Italy

Japan

Greece

France

Belgium

Sweden

MEDIAN

UK

Germany

Denm

ark

Austria

Korea,S.

Finland

Netherlands

Portugal

Spain

Canada

USA

Ireland

Switzerland

Norway

Australia

AirlineindustrysizepercapitainUSD,2014 %ofairlineindustryinnominalGDP,2014


50

Graph7:CAGRofGDP(PPP)percapita,PAXandindustryvalues,2010-2014

Source:owncalculationsbasedon:(Marketline, 2015; International Monetary Fund, 2016),

RealGDPpercapita inPolandgrewattheaverageannualrateof4.6%between2010

and2014,whichwas the fifth best score amongst the assessednations. Yet, Poland’s

growthinPAXwasninthintheranking,andinASKtenth–onlytenth.Somedeveloped

airlinemarkets–suchasthoseinNorwayandinBelgium-actuallygrewalmostjustas

Poland’s aviation market. It means that although the gap between Poland and the

leadersintheaviationmarketisnotwidening–itisnotshrinkingeither.

Graph8:DifferencebetweenCAGRinGDP(PPP)percapitaandCAGRinPAXper1000

inhabitants,2010-2014

Source:owncalculationsbasedon:(International Monetary Fund, 2016), (Marketline, 2015)

ThegraphaboveshowsthedifferencebetweenthegrowthofPAXper1000inhabitants

and GDP (PPP) per capita between 2010 and 2014. For example, Japan’s PAX was

-05%

00%

05%

10%

15%

20%

25%

30%

CAGRGDPPPPpercapita,2010-2014 CAGRofPAX2010-2014CAGRofindustryvalue2010-2014 Linear(CAGRofPAX2010-2014)Linear(CAGRofindustryvalue2010-2014)

-04%

-02%

00%

02%

04%

06%

08%

10%

12%

14%

Japan

CzechRep.

USA

India

Germany

Spain

Ireland

Australia

Austria

China

Argentina

Korea,S.

France

Canada

Italy

Denm

ark

Poland

UK

Switzerland

Sweden

Netherlands

Finland

Mexico

Norway

Belgium

Malaysia

Portugal

Brazil

Greece

Russia

Turkey


51

growing annually by a mere 0.1%, whereas its income was rising by 2.9%. Similar

situationcanbeobservedintheCzechRepublic,theUS,India,Germany,Spain,Ireland

andinAustralia–inthesecountriesrealincomeswererisingfasterthantheiraviation

markets.On theother sideof the spectrum, inTurkeyandRussia, thegrowthofPAX

massivelyoutperformed thecountries’–howeverdecent–economicdevelopment. In

thisrespect,Polandachievesanaverageperformance.

Graph9:Shareofdomestictrafficinthecountries'totalairtraffic

Source:owncalculationsbasedon:(Marketline, 2015)

Poland’sshareofdomesticflightsinthetotalairlinemarketisnottoobig,comparedto

othercountries.EvensomehowgeographicallysimilarGermanyhasmorethantwice

highershareofdomesticflights.

4.3LOTandtheEuropeanairlineindustry

Graph10:RevenuesandPAXofEurope’slargestairlines

Source:(Air France-KLM, 2016; Aegan, 2016; Aeroflot, 2015; Air Berlin, 2016; Brussels Airlines, 2015; EMIS Professional , 2016; Easyjet, 2015; Compagnia Area Italiana, 2015; Finnair, 2016; IAG, 2016) (Lufthansa, 2016; NAS, 2016; Ryanair, 2016; SAS, 2016; TAP Group, 2014; Turkish Airlines, 2016; Wizzair, 2016; Civil Aviation Authority of Poland, 2016)

91% 90% 86% 78% 78%60% 56%

39% 36% 33% 30% 22% 16% 12% 10%

0%20%40%60%80%100%

6.1 10.213.9

6.7 9.824

9.6 11.423.227.3

31.7

86.4

65.3

34.7

54.8

104.3

77.387.4

105.9

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35,000

Revenuesin2014(EUR) Passengerscarried(2014)


52

Graph11:TotalrevenuesofEurope’smajorregularairlines,2014

Source:(Aegan, 2016; EMIS Professional , 2016; Brussels Airlines, 2015; Finnair, 2016; Compagnia Area Italiana, 2015; TAP Group, 2014; SAS, 2016; IAG, 2016; Air France-KLM, 2016; Lufthansa, 2016)In2014Europe’s airlinemarket consistedof fourdifferent typesof airlines.The first

group,so-calledBig3,comprisesLufthansaGroup(whichalsoownsAustrianAirlines

and Swiss International Airlines), Air France – KLM and IAG (International Airlines

Group that owns British Airways, Iberia and a semi-low cost airline Vueling). These

threecompanies in2014generateda staggering82%ofallof industry’s revenues. In

termsofpassengerscarriedtheirdominanceisnotthatvisible–Ryanair,forexample,

carriesmorepassengersthanbothAF-KLMandIAG–butitslevelofrevenuesisnotso

high. The second group of airlines can be named as “the new Europe”. The group

includesTurkishAirlinesfromTurkey,andAeroflotfromRussia.Theseairlinesdonow

have the clout of the “Big 3” players, but they are already way ahead of any other

traditional carrier in Europe, both in terms of revenues and passengers carried. The

third group comprises low-cost carriers (LCCs). 20 years ago a niche in the airline

industry, in2014RyanairwasEurope’s second largest carrier in termsofpassengers

carried, only after the Lufthansa Group. Easyjet, with revenues slightly higher than

Ryanair’s and a significantly smaller number of passengers carried, is the continent’s

second-largest LCC. Other LCCs such as Norwegian and Wizzair, are substantially

smaller.Thelastgroupofairlinesincludesso-calledlegacycarriers–airlinesthatused

tobecountries’nationalcarriers,buthavenotconsolidatedintothethreelargestairline

groupsthatmakethe“Big3”.ThispartoftheindustryincludesairlinessuchasAlitalia,

SAS,Finnair,TAPPortugal,BrusselsAirlines,AeganandLOT.Theirscaleislimited–all

legacycarriers’combinedrevenuewasone-thirdsmallerthanthatofIAG–thesmallest

ofallofthebigcarriers.

LOT1%

Aegean1% Brussels

1%AerLingus

2%Finnair3%

TAPPortugal3%Alitalia

3%SAS4%

IAG22%

AF-KLM27%

Lufthansa33%


53

Graph12:GrowthinPAXinthelargestEuropeanairlines,2006-2014

Source:(Aegan, 2016; Aeroflot, 2015; Air Berlin, 2016; Air France-KLM, 2016; Easyjet, 2015; Finnair, 2016; IAG, 2016; NAS, 2016; SAS, 2016; TAP Group, 2014) (Lufthansa, 2016; Turkish Airlines, 2016; Italian Civil Aviation Authority, 2016; Civil Aviation Authority of Poland, 2016; Supreme Audit Office, 2009; Puls Biznesu, 2012; Lotnicza Polska, 2008)ThechartsaboveshowthatEuropeanlegacycarriers–regardlessoftheirsize–grow

muchmoreslowlythanLCCsortheairlinesfromtheEast(Turkish&Aeroflot).Infact,

outof20examinedairlines,6thatgrewthefastestbetween2006and2014wereeither

low-costcarriers,or “newairlines” (TurkishandAeroflot).Carriers thatstruggled the

most were traditional legacy carriers. In fact, Alitalia in 2014 carried 4% less

passengersthan8yearsbefore,andthe figure forSAS improvedbyonly1%.LOTdid

not perform badly – it carried 65% more passengers in 2014 than in 2006 – but

arguably not enough to catch up at least with other legacy airlines from Western

Europe.

-100% 0% 100% 200% 300% 400% 500% 600%

AlitaliaAegeanAirlines

SASGroupFinnair

BrusselsAirlinesAF-KLM

IAGAirBerlinGroup

LOTTAPPortugal

easyJetLufthansaGroup

RyanairTurkishAirlinesAeroqlotGroup

NorwegianWizzAir

PegasusAirlines


54

Graph13:GrowthinrevenuesinselectedEuropeanairlines,2010-2014

Source:(Turkish Airlines, 2016; Aeroflot, 2015; NAS, 2016; Wizzair, 2016; Ryanair, 2016; Easyjet, 2015; IAG, 2016; Air France-KLM, 2016; TAP Group, 2014; Lufthansa, 2016) (SAS, 2016; EMIS Professional , 2016)Intermsofgrowthinrevenues,TurkishandAeroflotmassivelyoutperformedanyother

examined airline – their revenues in USD grew by almost 200% between 2010 and

2014. All assessed low-cost carriers performed better than any legacy carrier. LOT’s

performancelooksparticularlyfeeble–theairline’srevenuesgrewonlyby2%between

2010and2014–thesecond-worstperformanceafterSAS,whoserevenuesactuallyfell

by7%.

Graph14:ProfitmarginsofselectedEuropeanairlines,2010-2014

Source:(Air Berlin, 2016; NAS, 2016; TAP Group, 2014; SAS, 2016; Air France-KLM, 2016; Lufthansa, 2016; Aeroflot, 2015; Turkish Airlines, 2016; Easyjet, 2015; Ryanair, 2016) (EMIS Professional , 2016; Polish Market of Airline Transportation, 2011; Polityka, 2012)

-7%2%

12%13%13%14%19%

36%52%

68%70%

132%173%

187%

-50% 0% 50% 100% 150% 200%

SASLOT

AirBerlinFinnair

LufthansaTAP

AF-KLMIAG

EasyjetRyanairWizzair

NorwegianAeroqlotTurkish

10%10%09%

05%03%

00%-01%-02%-02%

-05%

-08%-09%-10%

-05%

00%

05%

10%

15%

2010 2011 2012 2013 2014

Ryanair Easyjet Turkish IAG Aeroqlot LufthansaAF-KLM SAS TAPPortugal Norwegian LOT Airberlin


55

Ryanair’sprofitmarginisoneofthehighestintheindustry–itwasconsistentlyhigher

than10%,andwasthehighestamongtheexaminedairlineseverysingleyear.Only4

otherairlineswereabletoretainpositiveprofitmarginsinthewholeperiodbetween

2010and2014–Easyjet,Turkish,AeroflotandLufthansa.Bycontrast,AF-KLMdidnot

break-evenonceintheresearchedperiod.LOTmanagedtodeclareprofitonlyonce–in

2013-butin2014itendedupwithsecond-worstprofitmargin,at-8%.

4.5LOTandthePolishaviationmarket

Graph15:GrowthinLOT’sPAX(incl.subsidiaries)andsalesrevenues

Source:(Civil Aviation Authority of Poland, 2016; Supreme Audit Office, 2009; Puls Biznesu, 2012; Lotnicza Polska, 2008; Polityka, 2012; EMIS Professional , 2016; Polish Market of Airline Transportation, 2011)Between2006and2014LOT’srevenueswererisingmuchmoreslowlythanthegrowth

in carriedpassengers. In thatperiod thenumberofpassengers carriedgrewby65%,

whereassalesrevenuesroseonlyby17%.

3.74.3 4

55.5 5.8

6.35.9 6.1

2,7612,983

2,8802,724

2,9633,157

3,3033,147 3,235

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0

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2

3

4

5

6

7

8

9

10

2006 2007 2008 2009 2010 2011 2012 2013 2014

PAXofLOT(m) Revenues(PLNm)


56

Graph16:GrowthofLOTandthePolishaviationmarket

Source:(Polish Market of Airline Transportation, 2011; Polityka, 2012; EMIS Professional , 2016; Civil

Aviation Authority of Poland, 2016; Marketline, 2015; Supreme Auit Office, 2009; Puls Biznesu, 2012;

Lotnicza Polska, 2008)

LOT'sgrowthinbothrevenuesandPAXiswayslowerthangrowthsofPoland'soverall

airline industrymarketvalueandPAX. In9yearsbetween2006and2014LOT’sPAX

increasedby65%,whereas thePolishmarketgrewby73%.Also,LOT'srevenuesare

stagnant, even though the Polish airline market is growing fast. Poland’s national

carrier’s revenues rose by 17% in the 8-year periodwhereas the value of the Polish

airlineindustrygrewby50%.

Graph20:GrowthofthePolishairlinemarket(scheduledflightsonly)

Source:(Civil Aviation Authority of Poland, 2016)

100%

108%104%

99%

115%

127% 126%

114%117%

100%

116%

108%

135%

149%

157%

170%

159%165%

100%

122%

146%

116%

102%

121%

136%

148% 150%

100%

123%

134%

122%

132%

149%

162%168%

173%

90%

100%

110%

120%

130%

140%

150%

160%

170%

180%

2006 2007 2008 2009 2010 2011 2012 2013 2014RevenuesofLOT(2005=100%) PAXofLOT(2005=100%)ValueofPoland'sairlineindustry(2005=100%) PAXofairlineindustryinPoland(2005=100%)

4.57 5.04 5.52 6.18 5.86 5.78 5.491.08 1.23 1.45 1.50 1.51 1.80 1.960.13 0.17 0.21 0.23 0.46 0.49 0.502.30 2.10 2.42

3.25 2.25 2.61 2.723.13 3.733.84

4.89 6.59 6.53 8.213.49

3.924.08

4.19 4.06 4.505.82

1.521.16

0.91

1.00 1.261.65

2.00

00%

02%

04%

06%

08%

10%

12%

14%

16%

18%

0.00

5.00

10.00

15.00

20.00

25.00

30.00

2009 2010 2011 2012 2013 2014 2015LOT Lufthansa Newcompetitors OtherregularRyanair Wizzair OtherLCCs %ofdomestictrafqic


57

The graph showing the growth of the Polish airline market allows to draw a few

conclusions.

Firstly, Polish airline market does grow fast. In fact, it grew from serving 16.1m

passengersayearin2009to26.7min2015.Thisisthegrowthof66%injust6years,or

theCAGRcoefficientof8.8%.

Secondly,thereisastableshareofdomesticflightsintheentiremarketthatstandsfor

approximately10%.Asamatteroffact,domesticflightswereresponsibleforaslightly

smallerpercentageofthetotalmarketin2015thantheywerein2009.

Thirdly, the growth was generated mainly by low-cost carriers (LCCs). Ryanair is

undoubtedly thebiggestbeneficiaryof theairlinemarketgrowth inPoland.The Irish

airline increased its market share from 21.7% in 2009 to 30.7% in 2015, and was

responsible foralmostahalfof the total aggregatedgrowthbetween2009and2015.

Wizzair andotherLCCsalsoexperiencedhighgrowth rates, yetnot as remarkableas

Ryanair. Overall, LCCs increased theirmarket share by 10% percentage points, from

50%to60%.

Fourthly,onecanobservethatLOTlost itsmarketshare.Althoughin2009theairline

carried 20% more passengers than it did in 2015, its market share was falling

continuouslyinthatperiod–from28,4%in2009to20,6%in2015.

Lastly, as far as the regular carriers are concerned, Lufthansa, which is the biggest

regular carrier in Poland after LOT, managed to almost double the number of

passengers they carried. An interesting tendency can be observed amongst the “new

carriers” which in this paper include Aeroflot, Turkish Airlines, Qatar Airways and

Emirates (the two latterairlinesstarted flying toPoland in late2012andearly2013,

respectively).Althoughthecategorystillaccountsforlessthan2%ofthePolishairline

market,theymanagedtoalmostquadruplethenumberofcarriedpassengers.Asforthe

other regular (i.e. not LOT, Lufthansa or the “new carriers”) airlines, they were the

slowest-growingcategorywiththecombinedgrowthrateofjust18%.


58

Graph22:LOT’strafficonselecteddomesticroutes

Source:owncalculationsbasedon(Central Statistical Office, 2016)RoutesbetweenWarsaw’smainairportandtheairportsinGdanskandWroclawareby

farLOT’sbusiestdomesticroutes.SincePolishtrainsspeededupinDecember2014,the

numberofPAXLOTcarriedbetweentheseairportsfellby24%(ontheroutetoGdansk)

andby10%(ontheroutetoWrocław).

139092112198

126738114799

0

50000

100000

150000

H12014 H12015WarsawChopin-Gdansk WarsawChopin-Wroclaw


59

Part5:Applicationoftheories

Thischapteraimsatapplyinginformation,acquiredbystudyingarticles,numericaldata

andcompanies’histories,inordertocreateadynamicSWOTanalysis.Unliketheclassic,

staticSWOTanalysis, thedynamicSWOTwill lookat thestrategicpositionof the two

examinedcompanieswithinacertainperiodoftime, insteadofapausedpicture.This

analysiswillbethensummarizedtofigureoutthecorereasonsbehindtheAlitaliaand

LOTfall.Also,afewsupportivetheoriesandconceptswillbebrieflyimplementedatthe

endofthispart.

5.1SWOTanalysisofLOT

5.1.1Strengths

LOTwasexposedtoplentyofdifficulties,especiallyafterthe2012crisisthatresultedin

the state aid. However, there are three main factors that, as of mid-2016, can be

consideredstrengthsofthePolishnationalcarrier.

Firstly,LOThasafleetofbrandnew,efficientwide-bodyaircraft.InJune2016LOThad

sevensuchplanes,withonemoretobedeliveredin2017.Theseplanescanbeusedto

develop airline’s long-haul network. For a long time LOT’s long-haul network was

limited to just threedestinations inNorthAmerica–NewYork,ChicagoandToronto.

Since the much-belated delivery of wide-body Boeings 787s in 2013 the airline

launchedthreenewdestinations–Beijing,TokyoandSeoul.OnceLOTpossessesallof

the8orderedwide-bodyaircraft,Poland’snationalcarrierwillbeableexpanditsAsian

networkofdestinations.Thenew787sthatLOTpurchasedareoneofthemostefficient

planesoftheirtype.

Secondly, LOT finally underwent a major restructuring that is thought to have

eradicateditsoperationalmismanagementthatwascausedbytheairline’sdescentasa

state-ownedenterpriseincommunistPoland.


60

Thirdly,LOTmostlikelyhaslowercoststhanitscompetitorsinWesternEurope,dueto

lowerwagesthatstemfromsignificantlylowerGDPperperson(see:graph5inpart4).

This fact, however, remains in the area of speculation. As LOT does not publish any

annualreport,thisstrengthcanbeonlyhypotheticallyconsidered.

5.1.2Weaknesses

The author of this paper has outlined three major weaknesses that are widely

consideredtobeburdens.Oneofthemostworryingfeaturesofalloftheseweaknesses

isthattheyhavebeenpresenteversincetheearly1990s,andtherearefewsignsthat

anyofthemmayovercometheminthenear,orevenmedium-termfuture.

Firstly,LOThasadramaticallysmall,diverseandobsoletefleetofnarrow-bodyaircraft.

TheairlinequicklyreplaceditsSoviet-builtfleetinthelate1980sandearly1990s,but

thechoiceofaircraftdidnotprovetobeawell-thoughtstrategy.Only3outof27ofthe

airline’snarrow-bodyaircraftareBoeings737,whichis,alongwithitschiefcompetitor

Airbus 320, the backbone of virtually every airline in the world (Bloomberg, 2014 ).

Ryanair,whichisthoughttohavebeenthelargestairlineinEuropein2015intermsof

the number of carried passengers, uses exclusivelyBoeings 737s of various versions.

ThisisalsothecaseforWizzair,anotherlargeLCCasitusesonlyAirbus320saircraft

(Wizzair, 2016).LOT’sEmbraerplanestakefewpassengersandaremuchlessefficient

than Boeings 737s, especially in terms of the number passengers that they can take

onboard.

Secondly,undoubtedlyoneofLOT’sgreatestweaknesses is its financialsituation.LOT

has experienced net non-adjusted loss every year since 2008, except for 2013. Its

revenues grew by a mere 2% between 2010 and 2014, compared with over 100%

growth rates forTurkishAirlines andWizzair, and a 36%growth for IAG, the airline

conglomeratewhose2014 levelof revenuewas25 time larger than thatofLOT.This

weaknessisparticularlypainfulgiventhepreviousflaw–lackofsufficientairlinefleet.

WithsuchsluggishfinancialresultsitwillbedifficultforLOTtorebuilditsfleet,which

theairlinebadlyneeds.


61

Thethird,andprobablythemostvitalweaknessofLOTisitsownership.Part4ofthe

analysisprovidedareaderwithan in-depthhistoryofLOT’smanagerialmalfunctions

and missed privatization efforts, which were often carried out in an extremely

unprofessionalmanner.

5.1.3Opportunities

AlthoughthecurrentsituationofLOTisnotexactlyenviable,theanalysisofdatadoes

showsomesolidexternalopportunitiesthatlieahead.Ifembracedproperly,theylay

downthefoundationforthefuturegrowth.Thethreemainpotentialareasforgrowth

are:fast-growingPolishairlinemarket,routestoAsiaandapossibilityofbecominga

hubfortheregion.

ThefirstmajoropportunityreflectsthepotentialofthegrowingPolishairlinemarket.

Graphs3,4and5showthatPolishairlinemarketisstillrelativelysmall,evenwhenASK

andPAXcoefficientsareadjustedtothelevelofaveragerealGDPpercapita.Polandlags

behind countries at similar levels of economic development, such as Malaysia or

Portugal,bothofwhichhaveafewtimeshighernumbersofPAXper1000people,and

ASKpercapita.Graph6alsoindicatesthatPoland’sairlineindustrysizeasa%ofGDPis

verysmall–thesmallestoutof31countriesexaminedinthispaper.Thisinformation

indicatesthatthePolishairlinemarketisbyfarnotsaturatedyet.Graph7,ontheother

hand,provesthatthePolishairlineisdevelopingfast,asistheeconomy.Graphnumber

8 shows that actually between 2010 and 2014 Polish economy grew 2 percentage

points faster than the number of passengers served at the Polish airports.

Unfortunately, asdiagrams showLOT failed to capture thisopportunity and fell from

beingPoland’slargestcarrierin2012tothethirdplacein2015.

Secondly, LOT has an opportunity to embrace the fast growing market of air travel

betweenEuropeandAsiabyusingitshubinWarsaw.Althoughthecarrieroffersonly

two destinations in Asia (with the third – Seoul – scheduled to begin in Winter

2016/17), it can try to become a major player in the growing market of air travel


62

betweenEuropeandAsia,whichgrewbyareasonable2.4%in2014,achievingalmost

9%shareinthetotalextra-EUairpassengertraffic(Eurostat, 2015).

Thirdly, the company can further deepen its penetration of the market in Eastern

Europe. Poland, along with Slovakia and Romania, are the fastest-growing aviation

markets in Europe (Eurostat, 2015). By increasingmarket penetration in the airline’s

naturalgrowthmarket,LOTcanbecomealeadingcarrierintheregion.

5.1.4Threats

Although there are some significant opportunities for LOT, there are also immense

threats.Many of those threats are common formid-size legacy airlines, or airlines in

general,whilesomeareuniquetoLOT.

Firstly, the airline is threatened by the ever-growing clout of the so-called “low-cost

carriers”.Unfortunately forLOT, the liberalizationof theEuropeanair coincidedwith

thetransitionofLOTfromastate-ownedcommunistcompanytoanorganizationthat

competes in the true freemarketplace. Low-cost carriersdidnot skipPoland in their

rapidexpansion.Thegraph18showsthat theirshareof themarketstoodalreadyfor

52% of the total market, and that share increased to 62% in 2015, whereas LOT’s

marketsharefell fromalmost30%toa littlemorethan20%.ThetwolargestLCCsin

PolandareRyanairofIrelandandWizzairofHungary.TheformerairlineoutpacedLOT

bymorethan50%,whereasWizzairjust-managedtooutpaceLOTin2015.Thethings

cangetworse,however,asbothcarriersin2015and2016tookafewboldstepstotake

overthemostprofitablepartsofLOT’sbusiness,suchasmovingtheirmostcompetitive

routs fromModlin, a small airportoutsideofWarsaw, to theWarsawChopinairport,

Polishcapital’smainairportandLOT’smainhub(Warsaw Chopin Airport, 2016).

Secondly, as LOT clearlywants to develop its long-haul network towards Asia, some

emerging airlines from regions such as Middle and Near East or the former Soviet

Union, may force the company to scale back its plans. Only recently the two largest

carriersfromthePersianGulfregions–EmiratesandQatar–startedtoflyfromtheir

hubstoWarsaw.Additionally,graph13showsthatTurkishAirlinesandAeroflotwere


63

by far the two fastest from major airlines between 2010 and 2014 in terms of the

numberofcarriedpassengers.Warsaw’sfavorableposition–betweenWesternEurope

andAsia–maybeanopportunitytocapture.But thismarket isalreadycrowdedand

theairlinesthatoperateconnectingflightsbetweenEuropeandAsiathroughtheirhubs

in Dubai, Doha, Istanbul andMoscow have deep pockets to fight back any emerging

competition.

Thirdly, LOT’s domestic routes may be threatened by the recent improvements of

Poland’s national rail operator – PKP. InDecember 2014 PKP launched a brand new

service – semi-high-speed, frequent and reasonably-priced rail connections between

Warsawand the fourmost important regional cities –Gdansk,Wroclaw,Krakowand

Katowice.Thenewtrainsets,alongwithupgradedrailwaylinesshortenedthetimeof

railtravelbetweenmajorcitiesinPoland.LOT’sCEOsadmittedmanytimesthattheill-

functioning railways were beneficial to the Polish national carrier (Rynek Kolejowy,

2015).Graph22inpart4showsthatthenumberofpassengersonthetwomostpopular

airroutesinPolanddecreasedinthefirst6monthsof2015,comparedwiththesame

period a year ago. At the same time, Polish national railway company increased the

numberof intercitypassengers that they carriedby22% (PKP, 2016). This trend can

impact negatively the already small Polish domestic airline market, that in 2014

accountedforamere10%ofthetotalairlinemarketinPoland,comparedwith39%in

Italy(see:graph9inpart4).ExpectedfurtherupgradesofPolishnationalnetworkmay

hamperLOT’spositiononthePolishdomesticmarketevenmore.

5.2SWOTanalysisofAlitalia

5.2.1Strengths

While studying the fate of Alitalia onemay find out that there are actually quite few

strengths,thatisinternalmeritsthatacompanycouldcapitalizeon,andwhichAlitalia

hadintheresearchedperiod.Beria,Hans-Martin,&Froelichwhileevaluatingthe2006

privatization attempt by the Italian government mentioned that ‘’Alitalia’s only two

attractionswereitsslotsatsomecongestedairportsandthequasi-monopolypositionit

enjoyedduetopoliticalprotection.”Notmuchmoreinformationcanbefoundregarding


64

the first issue, but Alitalia did, according to the paper, in 2007 sell three slots at the

London Heathrow airport for €92m to finance operations. This somehow shows the

miseryofthesituationinwhichItaly’snationalcarrierfounditselfin.

Asfortheprotectionism,thesituationdeservesacloser look.Priortotheearly1990s

AlitaliahadenjoyedthefullmonopolyontheItaliandomesticmarket.Itspositionwas

strengthenedbythebi-polarcharacteroftheItalianeconomy.Onlyin1991didthefirst

domestic competitor turn up and 15 years later, in 2006, Ryanair launched its first

domesticrouteinItaly.Since1990sregulationsoftheairlinemarkethaverequiredfull

freedomofcompetitionfromwithintheEU.Hence,theoretically,theItaliangovernment

couldnot favorAlitaliaover itscompetitors,whether foreignordomestic.ButAlitalia

did enjoy a favorable position for a substantial amount of time. Firstly, it controlled

most of slots at Milan Linate airport, which was the main domestic airport in the

country. Secondly, politicians intervened more subtly, by, for example interfering in

mediations between stakeholders such as unions, air traffic regulators and airport

operators.

5.2.2Weaknesses

WeaknessesintheSWOTanalysisaredefinedasinternalflawsthathampercompanies’

operationsandtheirprospects forthecradleofthefuturegrowth(Ifediora , Idoko , &

Nzekwe , 2014).Alitaliahadplentyofweaknesseswhosenumberwasincreasingasthe

airline was sinking into chaos. Beria, Hans-Martin, & Froelich mention Alitalia’s

weaknessexplicitlywhiledescribingthe2006privatizationattempt.Theysuggestthat

‘’(…)Alitaliawasnotanattractivebuy:itsfleetwasobsoleteanddiverse,itsproductivity

low, itsbrandnamenearlyworthlessanditsfinancesfarfromsound.”Thesevital flaws

weremostlynotdescribedindetail,butthepaperdoesrevealsomeinformationonhow

thesituationmighthavelooked.

TheissueofstrengtheningAlitalia’sfleetbyraisingcapitalwasrepeatedlymentionedin

thetext.Althoughhistoricaldata,whenitcomestoAlitalia’sactualfleetatthetime,,is

hard to come by, the carrier’s fleet was continuously referred to as „obsolete” and


65

„diverse”.IntheconcludingparttheauthorsstressthatAlitalia’sfleetwas„notsuitedto

thenewdynamicsofEuropeanaviation”.

Asforthelowproductivity,theauthorssomehowcontradictthemselves.Theypointout

low productivity when describing the 2006 privatization attempt, but in the next

chaptertheyactuallymeasureproductivityofAlitaliaandsomeofitscompetitorsand

conclude that “The Italian carrier’s productivity in terms of ASK per employee was,

however, comparable or even better than other legacy carriers”. This may come as a

surprise,butdoesnot substantially change thepictureofAlitalia as abadlymanaged

company.

The issueof thebrand imagecanhardlybe talkedabout indetail, as someadditional

researchwouldberequired.Yet,thelastofthementioneddrawbacksofItaly’snational

carriercanbemeasured fairlyprecisely. In fact,Alitalia’s financeswerevery far from

sound in the researchedperiodas the companymanaged tomaintainanegativeEBT

margineverysingleyearbetween2001and2007.

Yetnoneoftheabove-mentionedissuestrulyrevealedAlitalia’ssingle largest internal

weakness. The biggest obstacle for the stable development of Alitaliawas its biggest

shareholder, the Italian state. As themain point of the article, the role of the Italian

governmentinthefailureofAlitaliawasbroadlydescribedinthepaperofBeria,Hans-

Martin, & Froelich. Consecutive governments did not dare to carry out a thorough

restructuring,arewereconstantlybucklingunderpressurefromvariousvestedgroups,

includingthedemandinglaborunions.

5.2.3Opportunities

Beria,Hans-Martin,&Froelichdonot focus toomuch in theirpaperonopportunities

thatAlitaliahadintheanalyzedperiod.Perhapsthesinglelargestmissedopportunityis

the fact that it failed to adjust to the changingmarket conditions. In the early 1990s

Alitaliawas considered to be one of the key players in the expected consolidation of

Europe’s airline industry. 15 year later, it was an outsider, a notoriously insolvent

companythatfailedtomeetthedemandsofthechangingworld.


66

5.2.4Threats

Threats, similarly to opportunities, are vaguelydescribed in the article “Alitalia -The

failureofanationalcarrier”.Onecandeduct,however,thatthemostsignificantoutside

threat to Alitalia were airlines that did manage to adjust to the new regulatory

environment, especially the LCCs, which started taking over Alitalia’s in the 1990s.

Ryanair’slaunchofdomesticflightinItalyin2006wasthenailinthecoffinforAlitalia,

whichhadlongreliedonitsprivilegedpositiononitshomemarket.

5.3DynamicSWOTcomprehensivetable

LOT ALITALIA

STRENGTHS 1. Newwide-bodyaircraft

2. Underwentrestructuring

3. Hypotheticallylower

coststhanWE

competitors

4. Agreeableunions

1.Quasi-monopolisticsituation

2.Slotsatsomecongested

airports

WEAKNESSES 1. Poorshort-haulfleet

2. Unsoundfinances

3. Governmentownership

&involvement

1. Oldandobsoletefleet

2. Lowproductivity

3. Unsoundfinances

4. Governmentownership&

involvement

5. Demandingunions

OPPORTUNITIES 1. GrowingPolishairline

market

2. Becomingaconnecting

airlinebetweenAsiaand

Europe

3. Furtherdevelopmentin

EasternEurope

1. Marketliberalization

(missedopportunity)

2. Largedomesticmarket

THREATS 1. Low-costcarriers 1. CompetitionfromLCCs


67

2. Big,integratedcarriers,

especiallyTurkish

Airlinesandairlines

fromtheGulf

3. SpeedierPolishtrains

andregular,more

competitiveairlines

5.4WhyAlitaliaandLOTfailedandwhatwerethecriticalfactorsbehindtheirfailure

AlthoughneitherAlitalianorLOThadeverdisappearedfromthemarket,bothairlines

canbeconsideredasfailures.Theywere,andstillsomewhatare,notoriouslytroubled

and loss-making. The SWOT analysis clearly showed that both carriers had few

strengths,massiveweaknesses, a pipelineofmissedopportunities andoverwhelming

threats. Yet, the outcome of comprehensive SWOT analyses only partly explains the

miseryofLOTandAlitalia.AbrieflookattheEuropean(andAmerican)airlinemarkets

clearly showshowmuch the entire structure of themarket has changed. Three large

airlineconglomeratesandafewsuccessfullow-costairlinesnowdominateEurope’sair.

ThefirstgrouptookoverabigchunkofEurope’sregularairlinemarket,whilethelatter

providereasonably-pricedjourneyswithinthecontinent.

Bothairlineswentthroughremarkablysimilarcycles.Havingmissedthefirstwaveof

privatization and consolidation, which resulted in the creation of the three large

European airline holding companies, LOT and Alitalia ran into trouble fueled by

structural weaknesses such as overemployment and aircraft malinvestment. That

resulted inever-worsening financial resultsanddeteriorationofbothairlines’market

value.Allthatgavepopulistpoliticiansevenmoreclouttoclaimthatthenationalairline

wouldnotbesoldfor“theclearanceprice”,asSilvioBerlusconi,Italy’sformerPM,putit.

Because the airline industry itself is an extremely competitive and a generally low-

marginindustry,uncompetitivecarriersarehitdisproportionallyhardintimesofcrises

in the industry, such as the aftermath of 9/11 or the 2008-09 financial crisis, that

exposed their structural weaknesses. After several such crises both airlines headed

towardsablindalley.Ontheotherhead, theyweren’tapartofa largeregularairline

holding nor did they have a low-cost profile (which would result in giving up their


68

effortstobecomelong-haulcarriers,andthatwouldbeunacceptabletopoliticians).On

theotherhand,theyweretoosmallandtooweaktobesuccessfullyprivatized,mainly

becauseneitherAlitalianorLOTwereattractivebuysforanystrategicinvestor.Holding

onasanindependent,state-ownedenterprise isnotanattractivechoiceeither,partly

becausethemarkethasshownthatitisnowimpossibletosucceedasaregularairline

without a certain economy of scale, and partly because politicians in both countries

provednottobecompetentowners.

As forpoliticians and theprivatizationprocess themselves - theworld is full ofwell-

knownexamplesoffailedmanagementinprivatecompanies–itisenoughtomention

privatebanksandinsurancecorporationsinEuropeandtheUnitedStatespriortothe

financialcrisisof2008-09orKodak–a textbookexampleofacompany that failed to

adapttothechangingenvironment(Forbes, 2012).Beria,NiemeierandFrölichpointout

thatthat“Privatizationassuchdoesnotnecessarilyincreaseefficiencyunlessitchanges

thenatureofcompetition”.Thereareahandfulofexamplesofstate-ownedcompanies

that are widely considered to be successful. These include Statoil, a Norwegian oil

company or SNCF – a French national railway provider, famous for running its high-

speedTGVunits(The Economist, 2014).Therearealsoplentyofexamplesofsuccessful

state-owned airlines. Turkish Airlines or carriers from the Gulf region emerged from

small,localcompaniesintohugeoneswithaglobalreach(Financial Times, 2013).Their

success was a case study for numerous academic papers and it is not within the

boundariesofthisprojecttoarguehowtheybecamesowildlyprosperous.Theyclearly

enjoyedahugesupportfromtheirgovernments(Financial Times, 2015).Yet,inEurope

this kind of state-led capitalism would be raison d’être. Instead, the consecutive

governments,especiallyinthecaseofAlitalia,weretryingtogivethecarriersdubious

helpby favoring it at their homemarkets and cutting themoff from the competition.

Thosemethods turned out to be counterproductive – theymade the airline less, not

more,competitive.WiththeconsecutiveprivatizationandconsolidationofEurope’sold

national carriers, Alitalia and LOT drifted out from themarket reality – squeezed by

global airline holdings, dirt-cheap low-cost airlines and ever-speedier trains, and

weakenedbypoormanagement,especiallyintermsofthefleet.


69

The purpose of this paper is not to study the privatization process in detail. Yet, the

analysesofcasesofLOTandAlitaliadoshowthatthereasonfortheir failurewasthe

inabilityofgovernmentstocarryoutasuccessfulprivatization.Mostotherproblems–

such as wrong decisions regarding the choice of aircraft, hubs’ strategy or excessive

employment – came as a result. Alitalia and LOT – mismanaged and plagued with

politicalinfluence–missedthechancetogetridoftheirgovernments’grasps.Whatis

interesting is the fact that both carriers did, as some point, have a chance to be

privatizedwithahighdegreeofprobabilityofsuccess.ForAlitalia,seeminglythebest

momentwasin1999and2000whenitcouldmergewithKLMandformanimportant

alliancethatcouldbefurtherdevelopedinthefuture,andthatwouldalreadyprovide

Italy’s national carrier with benefits related to economies of scale and improved

management. As For LOT, pointing out the keymoment is trickier. The fundamental

mistake of LOT’s owners was to purse the strategic partnership with Qualiflyer – a

companywhosemainmemberwasSwissair– anairline thatbankrupteda fewyears

after ithadsignedadealwithLOT.EvenafterSwissair’bankruptcy, theprivatization

processwasevidentlydeliberatelybelatedbythePolishgovernment. IfLOThadbeen

takenoverbyLufthansa in2002, itprobablywouldnothavebecomeaglobal carrier

such as Lufthansa itself – but at least LOT had a chance to transform itself into a

complementary, regional airline with some long-haul presence. In today’s Lufthansa

Group this business strategy is executedbyAustrianAirlines,whichwas acquiredby

theGermannationalcarrierintheaftermathofthefinancialcrisisof2007-09(Deutsche

Welle, 2009). The bottom line is that in both those pivotalmomentsAlitalia and LOT

wouldprobablyhavehadahighchance forahealthy–andprofitable–development

under anewowner,while keeping their brands’ identities andhubs in the countries’

capitals.

5.5Othertheories-arestate-ownedenterprisesdoomedtofailure?

Issuesrelatedtostateownership,roleofgovernmentsandprivatizationemergedtobe

central in examining the fatesofbothAlitalia’s andLOT.The theories thathavebeen

briefly presented in Chapter 3.4 almost univocally state that privatization and

government withdrawal from micromanaging enterprises are good both for those


70

companies,andfortheeconomyasawhole,althoughsomeregulationisalsoneededto

ensurethewell-beingofthesociety.Thelatternotionisespeciallyworthacloserlook.

Schleiferdoessuggestthatprivatecompaniesmayfailtoaddress“socialgoals”ifthey

arenotregulatedproperly,butinthecaseofamodernairlineindustry,itisdifficultto

findanyparticularsocialgoal–perhapsotherthanemployingpoliticalcronies.Airline

industryistodayextremelycompetitive,newroutesareannouncedalmostweeklyand

airlinesdesperatelywanttoattractpotentialpassengerswithever-lowerprices.Infact,

the airline industry is almost unarguablymore competitive today than it was in the

1990swhenMichaelPorteralreadypointedoutthefierce,zero-sumcompetitionwithin

the airline industry. This observation almost completely undermines politicians’

opinions, both in Italy and inPoland, that airlines are special interest companies and

justify maintaining national carriers at all costs. Air travel has become a commodity

much likebeer, cinemasor intercitybusses.These industrieshavenot seen state-run

playersforalongtime,andfewthinkthatweareevergoingtoexperienceshortagesof

moviesincinemasorbeerinsupermarkets.

Alreadyin1994,“TheEconomist”foundoutthatstate-ownedairlineswerelessefficient

thanprivateonesmainlyduetoexcessiveemployment.Thisturnedouttobetruealso

forLOTandAlitalia, evendecades after the researchwas conducted.OneofAlitalia’s

mainproblems thatBeria,Niemeier andFrölichdescribe is that the airline couldnot

decideonitshubstructure.ItmoveditsoperationsfromRometoMilan’snewairport,

but did not close its base in Italy’s capital due to the pressure not to dismiss its

employees there, many of whom were even unwilling to move to Milan. LOT’s

employmenthalvedaftertherestructuringprogramimplementedafter2012state-aid

crisis,withoutanysignificantdecrease in thenumberof carriedpassengers, although

this could also be related to outsourcing some services by selling out daughter

companies.

An interesting comparison emerges if one looks atGillanders&Billon and Shleifer&

Vishny studieswhichprove that an increase in stateownershipdecreasespropensity

for corruption but, on the contrary, enjoymore favorable regulation frompoliticians.

TheauthordidnotfindanyevidenceofsuchcasewhenitcomestoLOT.However,as

Beria,NiemeierandFrölichnote,Alitalia,apart fromtheone-shotstateaid,enjoyeda


71

whole range of regulations imposed by the politicians that aimed at keeping Italy’s

nationalcarrierafloat.

Lastly,althoughprivatizationitselfisnotthecoreissueofthisthesis,thebriefanalysis

in Part 4 of this paper provides a reader with a view on how privatized and non-

privatized airlines behave on the market. The big three airline conglomerates –

Lufthansagroup,AirFrance-KLMand IAG (whichcomprisesof, amongothers,British

AirwaysandIberia)werefairlyquicklyprivatizedinthe1990sandearly2000s.They

managedtointegrate,restructureandgaintheeconomicsofscale,althoughevennow

theyarealsochallengedwithlowmarginsandstaffstrikes.Thewidelysuccessful–and

profitable-low-costcarriershavebeenprivatefromtheverybeginning,sotheydidnot

havetogothroughthealways-troublesomeprocessofprivatization.Pereira&Caetano

arecertainlyrightthatprivatizationalonedoesnotsolvealltheproblems,butexamples

of airlines in Europe expressly prove that without it - success is next to impossible.

KaufmannandSiegelbaum,intheir1990sstudyofCEE’sprivatizationefforts,citeone

EastEuropeanpoliticianwhosays“Ifprivatizationiscorrupt,trywithoutit”(Kaufman &

Siegelbaum, 1996). This sentence epitomizes the vital issue related to airline

privatizationinEurope.Noonecanguaranteesuccessonceprivatizationiscarriedout.

But there is little evidence suggesting that running a successful airline by the state,

especiallyincountriesthatarepronetocorruptionandcronyism,isevenpossible.


72

Part6:Conclusion

This part will bring in the answer to the research question and present a short

discussiononthetopicofthispaper.Lastly,somerecommendations,aswellasfieldsfor

furtherresearcheswillbepresented

6.1Finalremarks&discussion

Theresearchquestionofthisthesisis:Whatarethecriticalfactorsbehindthefailureof

Europe’sstate-ownedairlines?ThecaseofLOTandAlitalia.

The analysis has shown that the answer to the RQ is fairly clear-cut: while various

factorscancontributedirectlytoaneventualfailureofastate-ownedairline,themain

reason behind it is the very structure of the ownership of these firms, namely –

governmentsthatfailedbothtoprivatizetheresearchedairlines,andalsotorunthem

effectively themselves. Alitalia and LOT gave in to the fundamental changes on the

market. Both airlines found themselves in the same boat -missed the opportunities,

became overexposed to threats, had too few strengths that were no match to the

monstrousweaknesses. Perhaps as amatter of coincidence, the direct causes behind

both failureswere extraordinarily similar to each other. Spectacularlywrong choices

regarding fleets’ structures left LOT and Alitalia uncompetitive for decades. Both

airlinesmaintainedanexcessivenumberemployeesuntil their financialsituationwas

so bad that they had to call for state aid, which caused frictions with the European

Commissionthat inbothcasesonlyconditionallyagreedforaone-timefinancialhelp.

Oneof the fewmajordifferences in theprocessof failureare the laborunions. LOT’s

unionswere fairly agreeable over the past two decades, while Alitalia’s unionswere

extremely ruthlessly demanding ever-better deals and, in some cases, contributed to

fiascosofimportantofimportanttalks,e.g.regardingprivatization.

Virtually every airline in Europe is now facing challenges from issues such as

aggressive, ever-increasing competition, fluctuatingoilpricesorunionizedworkforce,

among other things. It is possible that the relative success of airlines that were


73

restructured,privatizedandeventuallyconsolidated inthe1980sand1990s ishardly

repeatable. Legacy carriers that did not join the process in time have now reached a

dead-end. They are too small and lack the economics of scale to survive in the

demandingairline industry.Mismanagementbroughtbythestateownershipdoesnot

helpeither.Ontheotherhand,theyareperceivedbythepoliticiansastoo“precious”to

besoldfor,asMr.Berlusconisaid,“abargainprice”,whichisprobablytheonlypricethe

governmentscanpossiblyaskforasneitherofthetwoexaminedairlinesisnow,orwas

in the past few years, an attractive buy. Politicians are acutely aware that they have

virtually threeoptions.The first is tocompletelyprivatizeLOTandAlitaliabyanIPO.

But the risk is that the small carriers with obsolete fleets would soon go bankrupt

withoutaconstantstreamof indirecthelp fromthestate.Thesecondoption is tosell

theairlinetoamajorEuropeanairlineconglomerate,shouldithappenthatanybodyis

interestedinpurchasingthem.Thisoption,however,woulddoomLOTorAlitaliatobe

juniorpartnersinthelargeairlineholdingswhichwouldirrevocablyforcethemtoscale

downtheirchimericalambitionstobecomemajorplayersontheirown.Thethird,and

inthesecasesprobablymostlikely,optionisthatthesituationwilleventuallystayasit

is right now. The airlineswill probably still live frompaycheck to paycheck as semi-

bankruptenterprisesthatareconstantlyindirectlysupportedbythestateandthatkeep

losingtheirmarketshare–whethertolow-costcarriers,airlinesfromtheMiddleEast,

ortrains.Theironyisthatifbothairlineshadbeenrestructuredandprivatizedintime,

theywould have had a chance to come away relatively unscratched from themarket

turmoilthatwascausedbythechangingregulationsandpoliticalsituationinthe1990s.

Thepaper,inaway,showsthatevenintheeraoffastchangesandquarterlyearnings

bad decisions can have decades-long consequences. This refers not only to the

misfortune of missing the right time to privatize the airlines, but also to the fleet

management. Although the issues with fleets were not exactly the same in LOT and

Alitalia,thebottomlineisthatatsomepointtheairlinesfoundthemselveswithhaving

small, diverse and obsolete fleets while the industry was being driven by low-cost

carrierswhosefleetswerestandardized,modernandefficient.Thefleetproblemisone

ofthechiefexamplesofincompetencethatresultedfromthestateownership.


74

Onecanpointoutthatthispaperskippedissuesrelatedtoculture.NeitherPolandnor

Italyisfamousforqualitygovernance.Althoughthistopicwouldbeworth-examiningas

aseparateresearch,therearemanycasesthatprovethatculturemaynotplayapivotal

roleinrunningstate-ownedairlines.Attheendoftheday,SAS,anairlinethatoriginates

from famously honest and well-run Scandinavia, is in permanent crisis and even

managedtobeasmallercompany,intermsofthenumberofpassengers,in2014thanit

wasin2010.

Ifsomeoneaskedthequestion“CouldLOTandAlitaliahavebeenmoresuccessfulthan

theyeventuallyturnedouttobe”,theanswerwouldprobablynotbethesameinboth

cases.ThisisdirectlyrelatedtotherelativemarketsituationinwhichAlitaliaandLOT

found themselves when the European aviation market was liberalized in the 1990s.

Alitaliawasalreadythenarelativelysizablecompanywithanestablishedpositionon

theEuropeanmarket. Italy’snationalcarrierwasexpectedtobeoneof themostvital

partsoftheupcomingconsolidationonthemarket.LOT,ontheotherhand,wasinthe

1990s a small, impoverishedairline thatneeded to copewith two forces at once: the

transformationfromastate-runentityoperatinginaclosed,oddcommunistrealityin

the1980s,andthemarketliberalizationjustafewyearlater.

Hence, if the author was to point out which of the two carriers was relatively less

successful, the answer would probably lean towards Italy’s national carrier. Italy’s

national carrierentered the liberalizedmarket in the1990sasa relativelybigairline

witharecognizablebrand.Yet,Alitaliaturnedouttobeperenniallyresistanttoreform.

Consecutive Italian governments were sweeping the problem of Alitalia under the

carpet,until theproblembecame toobig to ignore. Inotherwords, it canbe said the

past20yearsbroughtarelativedeclineforAlitalia,anddidnotbringsufficientgrowth

for LOT – who failed to capture the opportunities coming from the growing Polish

airlinemarket.

Asforthemethodology,thedynamicSWOTanalysis,althoughveryusefulincomparing

two different business situations, turned out to be slightly too narrow to explain the

reasonsbehindtheairlines’relativefailure.Althoughitisausefulandeasytooltouse,

themainproblemwith themodel is that it doesnotweigh the strength,weaknesses,


75

opportunities and threats. Seemingly most important direct factors behind failures

were wrong choices regarding fleet structures (for both carriers) and, for Alitalia, a

messcausedbytheill-preparedswitchbetweenhubs.Yet,whenonetakesacloserlook

attheseweaknesses,itcanbeobservedthatsomeweaknessesstemfromothers.Inthe

caseofthispaper–itisthestateownershipthatwaslargelyresponsibleforproblems

such as excessive employments. Without the ability to weigh constituencies of the

model properly, it can be difficult to deal with more complex cases than the one

describedinthispaper.

6.2Recommendations

Although this isnotapurelyconsultingresearch, therearesome issues thatcouldbe

recommendedtoLOTshouldit(oranyotherairlineinasimilarsituation)wanttoavoid

themistakesthatAlitaliamadeinthepast.

TheshortlistofstrategicrecommendationsforLOTinclude:

-Havingaconsistent,long-termhubandfleetstrategy.

-Standardizeitsfleet,e.g.bypurchasingorleasingBoeings737s

-Focusonthekeygrowthmarkets,suchasEasternEuropeandAsia

-Becomeprivatized,preferablythroughacquisitionbyalargeairlineconglomerate,

suchasIAG

These four issues are not unique to LOT or to Alitalia. They can serve as a rough

guideline for any European legacy carrier that wants to adjust to the market – and

surviveonit.


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6.3Furtherresearch

Theauthorofthispaperisawarethatthispaperbarelytouchestheissueofthefailed

airlines.

Firstly,amorein-depthanalysisofbothLOTandAlitaliawouldbepossibleifonecould

digintotheairlines’books.Yet,neithercompanyispublic,whichlimitedtheacquisition

of data about these companies. Alitalia in this process was evaluated almost solely

basedonaresearchpaperdonebyotheracademics.Evenifthescopeoftheresearchon

Alitaliareachedfurther,nottoomuchnewinformationwouldprobablybefound,asthe

companydoes not publish anywide, comprehensiveperiodical reports. The situation

withLOTisevenworse-theevaluationofthecompanywascreatedexclusivelyonthe

author’sresearch.Thedataeventuallycamemainlyfromresearchagencies(bothopen-

-access and reached through CBS databases) and credible media sources. These two

sources, however, did notmake it possible to conduct even a basic cost comparison

analysis.Inotherwords,hadothersourcesofdatabeenavailable,theanalysiscouldbe

less qualitative - based on the evaluation of the strategy - and lean towards amore

quantitative, finance-based evaluation. One of themanypossible titles of suchpaper

wouldbe“Towhatextenthighcostsinfluencethefailureofstate-ownedairlines.Thecase

ofLOTandAlitalia”.

Furthermore, the same topic and cases could be evaluated using a different

methodology.ThemeritsandflawsoftheSWOTanalysiswerealreadydiscussedinthe

methodology section. Yet ,it is by farnot theonly tool that canbeused to assess the

reasonswhyparticular companiesbehave ina certainway.PESTLEanalysis couldbe

used to compare the political, environmental, social, technological, legal and

environmental background of the airline industries in Poland an in Italy, but not

necessarily to compare the two airlines to each other. Thus, it would be a nice

supplementto theactualanalysisof theairlines–otherwise, thepaperbasedonlyon

PESTLE would at most be able to compare two markets – not companies. The Five

Forcescouldverywellbeadded to theSWOTanalysis thatwouldallow toperforma

morein-depthinvestigationofthemarketenvironmentthatAlitaliaandLOToperated

in.


77

Perhaps one of the most interesting topics for a further research could involve the

broadlymeantconceptofchangemanagement.Thenatureofcompetitionhaschanged

dramatically forbothAlitaliaandLOTsince1990s.Especially the latterairlinehad to

adapt fromoperating in a closedeconomydominatedby stateownership to ahyper-

competitivemarketafewyearslater.Theevidenceindicatethatasubstantialnumber

ofchangemanagementeffortsinbothcompanieswasinonewayoranotherinfluenced

bypoliticiansandothervestedgroups. If thetopicof thispaperwasmorefocusedon

theissueofchangemanagementitcouldbe“Howdidthechoiceandexecutionofchange

management strategies influence the failure state-owned airlines? The case of LOT and

Alitalia”.

Oneofthemostbasicrequirementsforagoodresearchisrepeatability.Thus,afurther

research for this particular paper could comprise studying the cases of some other

airlinesthatarethoughtnottobeparticularlysuccessful.Therearesomecarriersthat

meet this definition – the national airline of Denmark, Norway and Sweden, SAS, or

MALEV–abankruptHungariannationalcarrierwhosestorywasbrieflymentionedin

the introduction of this paper. This hypothetical analysis would strengthen the

credibilityof theresearchmade in thispaper,providedthat thesamemethodology is

implemented.Inthiscaseonlythesubtitleofthepaperwouldbechangedto“Thecase

ofSASandMALEV”.

Theresearchthatwasperformedinthispapercouldalsobetakentothenextlevel.Due

tolimitedspaceandarelativelybigscopeofthisproject,manyissueswereessentially

onlyflippedthrough.Onecouldverywellfocusontheimpactofthechoiceofshort-haul

fleets–oneofthemostvitalweaknessesofbothAlitaliaandLOT.Thepossibletitlethat

would involve this concern would be “How does the choice of short-haul aircraft

influencethecompetitivepositionofa legacyairline?ThecaseofLOTandAlitalia”.The

same pattern could be used should amore policy-based approachwas implemented.

The influence of politicians and other vested groups was clearly a key issue in the

process of decline of both companies. Was the topic narrowed-down towards this

aspect,theprojectcouldbetitled“Whatwastheroleofvestedgroupsinthefailureofa

state-ownedairline?ThecaseofLOTandAlitalia”.


78

Thispaperhas,tosomeextent,provedthattoomuchofpoliticalinterferencecanhavea

catastrophicimpactonenterprises,especiallythosewhooperateinhighlycompetitive

industriessuchasairlines.Butthiscaseisbyfarnotuniqueandlimitedtotheairline

industry.Therearestillmany industries inwhichstateownershipplaysan important

role, even in liberal democracies in the West. After all, politicians, whether in

democratic or in authoritarian regimes, tend to twist state-owned companies’ arms

when they have an opportunity to do so. Vulnerable industries involve areas such as

energy,oil, railwaysorpostalservices.Andalthoughthenatureofallaforementioned

industries is arguably less competitive than that of airlines, state-owned energy or

transportcompaniescanalsooperatewithvariousdegreesofsuccess.Manyconcerns

raisedinthisverypaperwouldverylikelybevalidfortheseindustriestoo.


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