SPECULATION RAMPANT AS OLYMPIC AIRLINES GOES ON THE

UNCLAS SECTION 01 OF 02 ATHENS 000656

SIPDIS

STATE ALSO FOR EB/TRA, OES/SAT, EUR/ERA AND
EUR/SE

FAA FOR DANIEL AND MOORE

MONTREAL FOR USICAO

BRUSSELS FOR FAA/KURT EDWARDS

E.O. 12958: N/A
TAGS: EAIR ECON GR OLYAIR
SUBJECT: SPECULATION RAMPANT AS OLYMPIC AIRLINES GOES ON THE
AUCTION BLOCK ONCE AGAIN


SENSITIVE BUT UNCLASSIFIED -- HANDLE ACCORDINGLY

SUMMARY
--------------

1. (SBU) After four previously failed efforts to sell
Olympic Airlines (and its predecessor Olympic Airways),the
Greek Government is making a new and probably final effort
to sell the ailing national flag carrier. Rival Aegean
Airlines is considered by some to be the front runner as
final bids are due by the end of March, although Aegean
owners themselves have indicated a certain ambivalence on
the subject. Visions of Olympic Airlines' future after a
sale vary according to the interlocutor, but most seem to
agree that its staff will have to be slashed and its routes
significantly restricted in order to keep it alive.
Whatever its fate, Greek ministers and officials have
stressed repeatedly that this tender is the real deal, and
that Olympic's privatization must be accomplished by April
to avoid EU injunctions as well as to show the government's
willingness to proceed with other privatizations waiting in
the wings. END SUMMARY.

BACKGROUND
--------------

2. (SBU) After several efforts to first rescue and then to
privatize ailing Olympic Airlines, the government is making
a final attempt to sell flight operations, ground handling
and technical services of the Greek flag carrier. This is
the second attempt to sell Olympic Airlines after its
restructuring and separation from Olympic Airways in 2003,
and the fifth attempt to sell the airline overall. The new
Olympic Airlines continues to operate at a loss however,
losing 23 million euros in 2003 and reportedly an amount
equal to a third of its total revenue in 2004.


3. (SBU) On February 25, a short list of five bidders was
approved by the Inter-ministerial Committee of Privatization
(which includes the Ministers of Economy, Transportation and
Employment). The five bidders will be asked to submit
binding offers by the end of March. According to our
information, this list includes Aegean Airlines (a Greek
private sector carrier),German budget carrier DBA,
Britannia Aviation International Services, Greek-American
Chrysler Aviation and another Greek-American investor
consortium. Olympic Airlines employs about 1,850 people and
has a fleet of 36 airplanes of which 14 are Boeing 737-300s
and -400s. The book value of the company is 115 million
euros, but this is considered an optimistic price by
industry analysts.

AEGEAN IN THE PICTURE
--------------

4. (SBU) Ambassador has had discussions on separate
occasions with two of the primary owners of Aegean Airlines
about the Olympic tender. The bottom line for Aegean is not
whether it wins the tender, but rather that Olympic Airlines
lose its privileged state-supported position. Aegean
believes that with a one-third reduction of staff and the
trimming of unprofitable routes Olympic could operate
successfully. However, the real issue for Aegean is that it
is competing with a company that has been given millions of
euros in subsidies, benefited from a corporate split that
sent most its debt to its sister company, and is exempt from
paying into the very expensive state-operated pension system
(IKA). Aegean also aspires to serve non-EU routes, the
bilateral rights for which at present are all allocated to
Olympic.

OTHERS SPECULATE
--------------

5. (SBU) Akrivos Tsolakis, currently Chairman of the Air
Accident Investigation and Aviation Safety Board and former
Olympic pilot, told us Aegean's bid is the most serious. He
thought that Aegean would use Olympic's fleet and flight
schedules to cover European destinations, but would cut
transatlantic routes. On the other hand, Stephanos
Costopoulos, AmCham President and former Director of Delta
Airline's Athens office, told ECON Counselor that if Aegean
won the bid it would keep Olympic's access to Europe and the
U.S., and slash domestic routes.


6. (SBU) A Greek official at the Ministry of Transportation
stressed that the Olympic problem has to be resolved before
April because of a European Court of Justice (ECJ) action
pending against the Greek airline for receiving illegal
government aid of about 200 million euros a few years ago.
In his opinion, international investment company Lazard's
selection as lead sale advisor for the tender was
encouraging due to Lazard's experience and familiarity with
the market.

COMMENT
--------------

7. (U) According to reports from Brussels, the Commission
continues to follow Olympic's privatization closely. In
January the EU Advocate General recommended that the GoG be
ordered to reclaim from Olympic Airways some 200 million
euros in illegal subsidies given during the late 1990s.
This action is complicated by the Olympic Airways/Airlines
split, although neither company has liquid assets to cover
the repayment. Greece claims the funding amounted to only
46 million dollars.


8. (SBU) Greek Minister of Transportation Liapis told us
that he has an agreement with the EU Transport Commissioner
that, if Olympic is privatized by April, the EU will not
take action on the subsidies that would jeopardize the
company's future. Whether this is true or not remains to be
seen. The fact that this is a serious political issue for
the current government cannot be disputed. The New
Democracy government, now celebrating its first year in
power, is under increasing pressure to show its commitment
to privatization. The Olympic Airlines sale has highlighted
the problems faced by a Greek government that seeks to trim
unprofitable state-owned enterprises, while coping with
social unrest from a labor force long accustomed to lifetime
employment, early retirements, and generous pensions. Other
sectors in line for privatization are telecommunication,
energy, and maritime ports, and all eyes are on the Olympic
sale as an indication of how the government intends to see
privatization through. Although New Democracy inherited the
Olympic problem, how it chooses to resolve it might be the
government's economic legacy. END COMMENT.

Ries