Major Czech Airlines Seek Protection From Creditors

Smartwings and Czech Airlines have applied for court protection from their creditors. The government has so far refused to intervene directly, partly because it is unsure whether government money should be used to support the national airline. Also in the spotlight is the relationship between the Prime Minister and key investors in the companies. Photo credit: Smartwings archive.

Czech Rep., Aug 31 (BD) – Both Smartwings and CSA (Czech Airlines), members of the Smartwings group, have filed for protection from creditors under the special Lex Covid introduced as part of the government measures to mitigate the effects of the coronavirus on businesses. Airlines all over the world have suffered as a result of the restrictions on international travel. In the Smartwing Group’s case they saw a 95 percent drop in flight performance in the Apr-Jun period compared to last year, and more than 80 percent in July and August.

The response to the need to support airlines has varied from country to country. Sometimes as in Germany, the government helps directly. Indeed , back in May the government was considering ways of supporting the Smartwings group. Minister of Transport and Industry and Trade Karel Havlíček told Czech Television that the government was considering buying up to 100% of the group, but it was more likely there would be some sort of support for loans. 

The government is grappling with the significance of the group to the Czech holiday and transport sectors and the economy in general. According to Havlíček, the collapse of the company “would mean that immediately all airports would stop receiving any money. I’ve included losses for all social services. There would be a loss of 1.2 billion for the Czech Republic.” According to him, Smartwings has paid around CZK 3 billion in contributions to the state in the last five years. Smartwings operates flights from Prague to 25 destinations from Prague, nine from Brno and two from Ostrava. Czech Airlines operates flights to 12 destinations and plans to resume flights to Barcelona, Madrid, Budapest, Gothenburg, Bucharest, Brussels, Warsaw and Milan from September. From a passenger point of view, these routes if profitable would be picked up by other operators. But Havlíček’s view is that to rely on companies such as Ryanair “would be suicide”.

Most analysts agree that if Smartwings and CSA were to collapse, there would be wider economic repercussions. Photo Credit: ZM / Brno Daily.

The ownership of the group also complicates the discussion. The Unimex Group, which is owned by entrepreneurs Jiří Šimáně and Jaromír Šmejkal control Smartwings. In addition, the chinese investment company Citic Europe holds just under 50% of the shares in the carrier. Prime Minister Andrej Babiš has connections to Jiří Šimáně, who was a guest at the former’s wedding. As a result of this in May, the Prime Minister tried to distance himself from decisions relating to the company in an interview with Blesk. He said he would leave decisions concerning state aid for Smartwings to Havliček and Finance Minister Alena Schillerová . However, it was subsequently revealed that the Prime Minister had already been lobbying on behalf of the company in January before the shutdown due to coronavirus. CNN Prima reported that he had sent a letter to Boeing relating to the grounding of the 737 Max aircraft asking them to mitigate the resultant losses suffered by Smartwings. Opposition politicians then seized upon the paragraph that states that “it suffered a loss of more than $80 million by the end of 2019. This fact put the company’s management under enormous pressure. It was difficult to keep the company afloat with minimal financial reserves; management has had to rely on bank loans, but banks no longer want to extend loans because of the risk.” Indeed if the airline was in a financially parlous state before March 2020, it would be ineligible for support related to the coronavirus crisis. The airline has always denied this is the case and Smartwings recorded an after-tax profit of CZK 133.4 million last year, up more than 50 million year-on-year. Sister company CSA also made a profit.

Most analysts agree that if the airlines were to collapse completely, there would be a wider economic effect. Many tour companies rely on Smartwings and much of their business would be replaced by foreign owned companies and also migrate to foreign airports. However, given the unpredictable nature of the virus and the huge losses being racked up during the current crisis, the government has backed off from direct investment and the companies have had to file for protection while they apply for help under the COVID plus programme. Šimáně stated “We are discussing all available funding options to ensure the operation of both companies and will work closely with our funding institutions and other stakeholders throughout the process. In this context, we have also newly engaged an international advisor, EY, who has extensive experience in restructuring and securing financing as well as the necessary specialization in aviation.”

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