Globe Merchant Travel Blog

A little history on the Olympic Airlines/European Commission conflict

ATHENS, Jan 14 (IPS) – The European Commission (EC) announced a formal investigation Dec. 20 into complaints that the Greek state is illegally subsidising its national air carrier.

This is the third time that the EC is taking up this case.

The national carrier comprises two separate legal entities – the Olympic Airlines (OA) and Olympic Airways Services (OAS). The two companies emerged from a split in Olympic Airways in 2003 in a move to part privatise the company.

OA took over the flying part and OAS the handling and technical services. It also picked up Olympic Airways shares in other companies which provided services like catering and information technology assistance.

This division followed the first investigation by EC, which found that the government had given subsidies worth 160 million euros.

The commission argued then that between 1994 and 2000 the Greek state was allowed to reform Olympic Airlines under the “one time, last time” principle. That makes it lawful for a state to support restoration of a public company once.

A Greek court held that the new entities did not bear the financial responsibilities of the older one. But the Commission considered the two new companies successors of the older one, and said they, rather than the state, should be responsible for their debts.

A second investigation in March 2004 found that Olympic Airlines had received another 450 million euros in illegal financial assistance.

Subsidies came by way of not collecting taxes and social security contributions from the company. It was also found that the state had supported lease of aircraft on behalf of the company, and since 2005 has protected it with a special law on private creditors.

The commission also says the Greek state over-compensated the airline when it sued the government over past obligations.

The third investigation now follows further moves by the Greek government to evade collection of debt owed by the airline. The inquiry is expected to lead to an EC request to reclaim more illegal financial support from the funds it gives to Greece.

“No selective treatment against Olympic is applied, we just want that the state implements the Commission’s decisions and recovers illegal financial support,” EC spokesperson Michele Cercone told IPS.

Airline officials strongly oppose the EC moves. “The Commission is picking on issues with the airline that are pending also for every other company in Greece, like delayed social security contributions and taxes,” Emmanuel Patestos, president of the Union of Airways Workers told IPS.

“It also ignores that the relation between the company and the state is not based exclusively on market criteria. During the construction of the new Athens International Airport, 100 billion drachmas (pre-euro Greek currency) went from the accounts of the company to developing services infrastructure at the airport, thus serving state interests.”

The public character of Olympic means it is not just profit oriented. The company maintains various daily flights to non-profitable destinations like the islands during the winter.

It is widely accepted that liquidation of the company would lead to a sharp increase in air fares and huge unemployment. A decline in safety standards is also feared if private companies take over.

Permanent staff has been reduced more than 50 percent since 1998. The airline currently employs about 4,000. Another 4,000 are on seasonal contracts. The airline maintains 100 domestic and international flights daily, and carries 6.5 million passengers a year.

OA is also considered one of the safest companies worldwide, with a highly qualified maintenance crew. It receives many requests for technical support to fleets of major European companies. But bad management and lack of personnel have meant that such services have done little to erase debts.

EC commissioner for transportation Jaque Barro has recommended reduction of the company’s services in line with the pattern followed for the Belgian airline Sabena. “Respecting the law is the only way to secure a healthy future of the air transport market in Greece, based on fair competition and providing for the interests of Greek consumers and taxpayers.”

But despite its problems the company enjoys the support of the public and the Greek diaspora. “The consequences of liquidation will be enormous,” Patestos said. “We speak of a company which has for decades contributed the most in Greece’s economic development, supported the periphery, and maintained bonds with another 10 million Greeks abroad.”

The market has not failed the company, he said. “It is the Commission’s political decision to dissolve smaller national air carriers and support private companies that dictates what happens in this case.” The commissioner’s spokesperson declined to comment on this statement.

By Apostolis Fotiadis

By Joe Brancatelli

International affairs will be incredibly important to business travel this year because the concept of “open skies” will liberalize many of the aviation treaties that limit which airlines can fly to which international destinations, and when they can. The biggest open-skies arrangement kicks in on March 28, when the United States and the European Community will allow airlines more freedom to choose routes without bureaucratic interference.

The result? A headlong rush of carriers flying into London’s overburdened Heathrow Airport, the world’s most important international gateway. The four big U.S. airlines currently barred by treaty from Heathrow- Delta, Continental, Northwest, and U.S. Airways-have already announced plans to fly there the moment that open skies begins. The Heathrow incumbent, British Airways, will retaliate by creating an entirely new airline that will fly nonstop between the United States and continental Europe. B.A.’s plans will be officially announced tomorrow and flights should start by mid-spring. The current speculation is that B.A. will actually call the new carrier “Open Skies” and that it will initially link New York with cities such as Paris and Brussels.

B.A. won’t be alone. London-based Virgin Atlantic is expected to create its own new airline to fly between the United States and Europe without a Heathrow stopover. And Lufthansa is furiously reworking its strategy. The formidable German carrier has already announced that its all-business-class flights between Germany and secondary U.S. gateways like Chicago will be replaced with traditional three-class flights; the business-class jets are likely to be part of Lufthansa’s own new approach to trans-Atlantic flight.

There’ll be changes across the Pacific too. Australia and the United States will begin negotiating about open skies next month. The result is likely to be more flights and lower fares to the land Down Under and the U.S. debut of Virgin Blue, a domestic Australian carrier.

Greece’s transport minister has warned that national carrier Olympic Airlines faces a dim future as speculation increases that the airline will be closed within a few months.

In a series of carefully worded statements late Friday and over the weekend, Costis Hadzidakis reaffirmed the government’s commitment to keep the airline aloft.

But he also stressed that the government would protect the interests of Olympic employees and the Greek public if the carrier is shut down, which the Greek media has widely interpreted as a sign of its imminent closure.

Hadzidakis’ statement came after a Friday meeting in Brussels with EU Transport Commissioner Jacques Barrot and followed a recent legal complaint by Ireland’s low-cost carrier Ryanair Holdings PLC (nasdaq: RYAAY – news – people ) against the European Commission concerning Olympic.

The complaint, filed late last month, charges that the commission has failed to recover hundreds of millions of euros worth of illegal state-aid to Olympic.

“After the lawsuit by Ryanair against the commission, the situation for Olympic has become even more difficult,” Hadzidakis said.

The commission has taken Greece to court twice demanding the return of more than 700 million euros ($1.02 billion) in illegal state subsidies to the carrier – a sum Greece says makes it impossible to find investors for the hoped-for privatization of the airline.

Late last year, a Greek court awarded Olympic 563.9 million euros ($825.47 million) in compensation from the Greek state for violating an existing contract relating to its facilities at Athens’ old international airport.

Since being appointed Transport Minister in September, Hadzidakis has been trying to negotiate with the EU to see if the Greek court award could potentially offset a large part of the commission’s demands.

In his statement Saturday, Hadzidakis said that none of the estimated 8,500 workers at Olympic will lose their jobs and that none of the Greek islands would lose their air links to the mainland.

He also pledged that the government would ensure that Olympic is not replaced by another monopoly carrier on domestic routes. Recently-listed Aegean Airlines is widely seen as benefiting from a potential closure of Olympic.

Since first taking office in March 2004, the center-right New Democracy government has been critical of past mismanagement at Olympic, highlighting that the carrier costs Greek taxpayers some 300,000 euros ($442,830) a day.

PARIS: When British Airways experimented a decade ago with removing the Union Jack from the tail fins of its planes, few of the company’s executives seemed to have anticipated the public outcry that would ensue.

Scale models bearing examples of the new “ethnic” designs were displayed at a Conservative Party conference in 1997. The former prime minister, Margaret Thatcher, whose government had privatized the airline a decade earlier, took one look and deemed them ghastly.

“We fly the British flag abroad, not these awful things,” Thatcher snapped. Then, in full view of the television cameras, she pulled a handkerchief from her handbag, draped it over one of the model planes and stormed off.

“It was an extraordinary moment,” said Simon Bennett, a sociologist at the University of Leicester in Britain and author of “After Hubris, Nemesis: Why Flag Carriers Fail.” “Here was a former prime minister telling off the executives of a company that she privatized for diluting its British identity,” Bennett said. “It shows what powerful national symbols airlines are.”

British Airways has since reverted to a version of the flag on most of its fleet. But the episode remains a stark example of how politicians with even the most bona fide free-market credentials can still harbor a weakness for the glamour and gloss of airlines.

“Airlines occupy a unique place in the public consciousness,” said Gehan Talwatte, managing director of Ascend, an aviation consultancy in London.

Last Friday, Alitalia’s board unanimously named Air France-KLM as its preferred bidder, spurning an offer from Air One, a much smaller Italian airline.

The center-left government of Romano Prodi is studying the proposals and – after three postponements already – is now due to make its decision in mid-January.

Prodi has come under intense pressure from local politicians to keep Alitalia in Italian hands, although the prime minister insists that its final choice will be based on the strength of the business plan, not on the bidder’s nationality.

A flag carrier is in many ways the embodiment of national ambitions, a political instrument as much as an airline. Even the flying public sometimes has viewed them almost as an arm of the state, maintaining national prestige and projecting influence abroad – filling a role that was held before the jet age by ocean liners and gunboats.

“That perceived need to show the flag around the world is still there,” Bennett, the sociologist, said.

Yet in an era when private airlines seem to be cropping up regularly across Europe and beyond, much of the economic rationale for the traditional state carrier has disappeared, analysts said.

“As new models for running airlines have evolved, you can’t argue for the nationalized model in the same way as you could 10 or 15 years ago,” Talwatte, of Ascend, said. “The political and economic justification for it is becoming less and less certain.”

Alitalia reported on Monday that its group debt as of Nov. 30 had risen to €1.19 billion, or $1.71 billion. The airline is losing about €1 million a day.

In addition to its financial troubles, it is saddled with a fleet of aging, fuel-guzzling aircraft and a bloated, strike-prone work force of 20,000. It also faces stiff competition from low-cost rivals, including domestic carriers like Air One and Volare as well as foreign ones like EasyJet and Ryanair.

“Alitalia grew up in a time when if you wanted to fly between two countries you basically had a choice of two airlines,” Talwatte said. “Today, if you look at almost any city pair, there is likely to be a range of options depending on your price point.”

The plight of national airlines has been worsened, analysts say, by years of state support that have enabled them to cling to outdated, unprofitable business models, despite competition from nimble newcomers operating from a far lower cost base.

When the likes of British Airways and Air France were privatized, in the 1980s and 1990s, Europe’s aviation market was still highly regulated. Private start-ups like Ryanair were still flying just a handful of planes to a few destinations.

Oil prices were relatively stable and European Union limits on government budget deficits – not to mention restrictions on state aid to companies – had yet to take effect.

All that has since changed.

“The Alitalias and the Olympics of the world who haven’t adapted to the new environment are facing the cult of the dinosaur,” he said. “There are no obvious solutions that don’t involve a lot of pain.”

Those national airlines that have successfully made the transition to private enterprises have tended to emerge from the process as smaller carriers that cater either to a particular region or class of travelers.

Aer Lingus, which Ireland privatized in 2006, has cut its operating costs sharply and now focuses on long-haul travel, catering particularly to business customers and flying to major hubs like Frankfurt International Airport and Kennedy Airport in New York.

Brussels Airlines, forged last year from the remains of Belgium’s bankrupt flag carrier, Sabena, and the low-cost carrier Virgin Express, has reinvented itself as a largely regional operator, offering frequent connections to about 50 European cities while serving a limited number of long-haul destinations, especially in Africa.

Elsewhere, Royal Jordanian Airlines was privatized in 2001, after nearly collapsing in the late 1990s trying to compete against the big Gulf carriers Emirates and Etihad on long-haul routes to Asia and North America. Over the past six years, Royal Jordanian has reduced its work force, spun off ancillary services like flight catering and concentrated on the Middle East market, increasing frequencies to destinations in North Africa and cities like Beirut, Cairo and Damascus. The airline listed 49 percent of its shares on the stock exchange of Amman, Jordan, this month.

With its one-third share of the Italian domestic market, Alitalia, analysts said, could find a successful niche as a regional airline, providing feeder service to other European hubs or offering more frequent connections to Mediterranean or North African destinations.

“If someone could get it right, then there is a real opportunity there because it has been so wrong for so long,” said Peter Morris, chief economist at Ascend.

In Greece, the government has vowed to privatize its debt-ridden flag carrier, Olympic Airlines, as early as next year. Athens has said it hoped to attract investors for at least a 51 percent stake, though any buyer would have to overcome staunch opposition from labor unions and repay hundreds of millions of euros in past state aid that the European Union has deemed illegal. Nationalist politicians have also insisted that the carrier’s Greek identity – complete with Olympic rings logo – be maintained.

TAP Portugal said last week that it expected to begin talks in the first half of 2008 about a sale of some of the government’s shares in the airline, which was nationalized in 1975. Previous attempts in the 1990s to privatize the occasionally profitable carrier fizzled in the face of union protests.

Meanwhile, the Spanish carrier Iberia, which was privatized in 2001, was soliciting takeover proposals as it struggled to compete in an increasingly crowded European market. But while several potential bidders have considered making offers this year – among them Lufthansa of Germany, Air France-KLM, and the U.S. private equity group TPG – the country’s politicians and the airline’s unions are strongly backing a bid from an all-Spanish consortium. The Spanish state retains a 5 percent stake in Iberia.

For governments, abandoning control of their flag carriers can be seen as a blow to the national ego, almost as bad as letting it fail.

“It’s better to let it atrophy than admit to the public that you are powerless in the face of global competition,” Bennett said. “Otherwise, what you are implicitly saying is that we Italians – or we Greeks – are not capable of running an airline.”

But even in their privatized incarnations, as the example of British Airways has shown, one enduring feature of former state-owned carriers is their resilience as national icons.

“Flag carriers are absolutely here to stay, even if it is just in symbolism rather than fact,” Bennett said.

Olympic Airlines, the loss-making Greek carrier, faces a fresh blow Wednesday when the European Commission opens new investigations into whether it is receiving illegal state aid.

The Commission, which has accused Athens of funnelling about €600m ($865m) to the airline from 1994 to 2005, will now examine payments after that date. It suspects that the government has waived debt interest, social security payments for staff and some fees at Athens airport.

The Commission is also to probe a domestic court deal under which the state was ordered to give Olympic €564m to pay for services rendered.

“The sums seem to add up too neatly. We are going to launch two investigations,” said a Commission official, on condition of anonymity. “We are also concerned that some of the money may have been paid to Olympic already.”

Jacques Barrot, the transport commissioner, is aiming to crank up the pressure on Athens to decide the airline’s future.

People close to Olympic said that the move could complicate matters. “This poses a problem for the Greek government. Opening a new procedure means the financial risks for the airline are not known. This discourages investors,” said one.

The European court has already ruled that Athens has failed to comply with an order from Brussels to repay state aid.

The new Commission cases concern a domestic court ruling this year that said the state owed Olympic €563.9m for costs incurred in moving to the new Athens international airport in 2001 and for transport services provided free of charge to successive governments under a contract first signed with Aristotle Onassis, the late Greek shipping tycoon.

“Under this deal signed in 1956, Olympic has been carrying ministers around and handling Greek government business for free,” said someone close to the airline.

Olympic Airlines was relaunched in 2004 after the old Olympic Airways was split into a ground services and separate flying division. The Commission has been pursuing all three entities.

Costis Hatzakis, Greek transport minister, has said that if Olympic shuts down, it would be replaced by a new Greek carrier and that EU-approved subsidies would be available to keep open loss-making routes to remote Aegean islands.

The new airline would be restricted to European and domestic routes, in competition with Aegean Airlines, a profitable private carrier controlled by local entrepreneurs. Olympic’s policy of maintaining prestigious long-haul routesis one reason why the carrier has racked up annual losses exceeding €100m since its relaunch, say analysts.

Mr Barrot has said that island routes could be subsidised as long as there was an open tender for the services.

Dec 11, 2007, 9:56 GMT

Athens – All flights are expected be grounded, ships to be docked and urban transport and public services are expected to grind to a halt across Greece when labour unions Wednesday stage a 24-hour-strike to protest proposed pension reforms.

No flights would be leaving or arriving at Athens International Airport as air-traffic controllers decided to join the action Tuesday.

State-operated Olympic Airlines joined the strike after the government said it was unlikely that it could rescue the airline from bankruptcy.

Meanwhile, ferries and boats will remain docked at ports across the country, paralysing transport to and from hundreds of Greek islands as port authorities will join the strike.

Urban transport, including bus, trolley and suburban railway services will be suspended while work stoppages have been called at the Athens Metro and Athens-Piraeus electric railway, two of the city’s vital public transport systems.

Banks are expected to be closed as will most public services, including tax and municipal offices.

Courts will not be operating as lawyers and court staff decided to call a 48-hour strike on Tuesday. Hospitals and ambulance services will be operating with skeleton staff while no lessons will be given at public schools and universities as teachers join the action.

Archaeologists operating the country’s main tourist attraction, the Acropolis, and other ancient sites across the city said they would probably shut it down for the day.

The powerful journalists’ union said that it will also launch a 24-hour nationwide strike on Tuesday, resulting in a nationwide news blackout.

The journalists’ strike will disrupt newspaper production, public television news broadcasts and internet sites.

The country’s two largest unions, GSEE and public sector union ADEDY, which jointly represent more than 2.5 million workers, will also hold a rally in central Athens at noon.

Unions are protesting pension reform plans which they say will raise retirement ages while cutting benefits to millions of future retirees.

The strikes follow the presentation and upcoming vote of the 2008 budget to parliament, which foresees controlled public spending, a further lowering of the deficit and higher taxes.

The conservative government, under the leadership of Costas Karamanlis, is under pressure to press forward with reforms, mainly involving the country’s ailing pension system which runs the risk of going bankrupt in 20 years because of an ageing population and low birth rate.

Saturday December 8, 2007-Transport Minister Costis Hatzidakis said yesterday that state-owned Olympic Airlines cannot be saved in its present form and should be replaced with a new company, as efforts for debt settlement with the European Union looked set for failure.

«We want to transfer (OA’s) name, logo and air slots to a new entity,» the minister told Parliament.

«Saving the company as it is today does not appear to have much chance of success,» he said.

Greece has spent years negotiating with the European Commission, the EU’s executive arm, on how to deal with OA’s long-running debts, estimated at 2.4 billion euros amid annual losses of 245 million euros.

But efforts to settle the debt and kickstart the company’s privatization have stumbled on the Commission’s refusal to accept Greece’s arguments for excusing hundreds of millions of euros in illegal Greek state aid to OA.

Under pressure from labor unions and a public that wants to see the airline founded by shipping tycoon Aristotle Onassis keep flying, consecutive governments have tried and failed over the years to find a buyer for the loss-making carrier.

«Our first aim is to rescue the airline exactly as it is but this is not the most likely scenario,» added the minister.

Meanwhile, police scuffled yesterday with unionists attempting to force their way into the transport minister’s office to demand that the government rescue OA.

There were no reports of arrests.