Identifier
Created
Classification
Origin
05PRAGUE1139
2005-08-02 14:41:00
UNCLASSIFIED
Embassy Prague
Cable title:  

CZECH REPUBLIC: PRIVITAZATION OF AERO VODOCHODY

Tags:  ETRD EINV PREL PGOV EZ 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 PRAGUE 001139 

SIPDIS

E.O. 12958: N/A
TAGS: ETRD EINV PREL PGOV EZ
SUBJECT: CZECH REPUBLIC: PRIVITAZATION OF AERO VODOCHODY
PLANNED BEFORE GENERAL ELECTIONS IN JUNE 2006


UNCLAS SECTION 01 OF 02 PRAGUE 001139

SIPDIS

E.O. 12958: N/A
TAGS: ETRD EINV PREL PGOV EZ
SUBJECT: CZECH REPUBLIC: PRIVITAZATION OF AERO VODOCHODY
PLANNED BEFORE GENERAL ELECTIONS IN JUNE 2006



1. (U) Summary. At its cabinet meeting on July 20, the
Czech government approved a privatization plan for Aero
Vodochody (Aero),the aircraft company formerly partnered
with Boeing until their 2003 split. Following the
recommendations made by Deloitte & Touche, the government
will sell Aero as a whole after a two-phase bidding process:
the first round will judge the business proposals of buyers,
and the second round will focus on the price offered. The
privatization should be complete by the end of April 2006.
To date, the Czech government has paid half of the almost
CZK 11 billion (approximately $440 million US) required to
clear Aero's outstanding debt, and the other half will be
paid off by the time the tender proper starts in November.
Due to the current market situation, the state is unlikely
to regain the money is has paid out to stabilize the
company. End summary.

Money first - reward later?
- - - - - - - - - - - - - - - - - -


2. (U) The privatization is to start this fall after the
state pays for Aero's income tax arrears (250 million CZK
or $10 million US),which dates back to 1997. The tender is
scheduled for the beginning of November at the earliest,
when the government will pay off the remaining debt of 5.4
billion CZK ($216 million US). This is the nominal value of
bonds issued by Aero combined with the last annual interest
coupon. By the end of June, the state had already paid 5.5
billion CZK ($220 million) of this debt.


3. (U) Stabilization of Aero will ultimately cost the Czech
tax payers CZK 11 billion ($440 million) before
privatization. Although the Minister of Industry and Trade,
Milan Urban, hopes to find a strategic partner for Aero
(such as another big player in the aircraft industry),it is
unlikely that any potential owner would pay anything close
to the amount already paid out of state coffers.

Ministry of Defense vs. other ministries
- - - - - - - - - - - - - - - - - - - - - - - - - - - -


4. (U) The decision to privatize Aero involved an
intergovernmental struggle. While representatives of the
Ministries of Industry and Trade, of Finance, of
Transportation and of Labor and Social Affairs supported the

Deloitte recommendation, the Ministry of Defense was worried
that the new owner might not ensure proper servicing and
repairs of the 72 L159 aircraft that the Czech military now
owns (a model for which the company has found no other
buyers). The MOD produced an alternative plan to separate
the repair division from the rest of the company and either
fold it into the military or tack it on to a state owned
company (probably to Letecke opravny Malesice, which
currently repairs engines and helicopters) to ensure that
the military's L159s are properly serviced. Privatization
would then only affect the remainder of the company assets.


5. (U) An internal report of the Ministry of Industry
leaked to the press revealed that it rejected the proposal
of the Ministry of Defense on the grounds that:
- separation of a part of Aero would be technically
demanding;
- the tender would be delayed by months;
- the risk would be higher that the European Commission
might not approve of such a division (it could be qualified
as unjustified advantage for the producer);
- the state would collect less money, while the military
would to some degree still remain dependent on Aero as the
L159 producer.

EC hopefully avoided in the process
- - - - - - - - - - - - - - - - - - - - - - - - -


6. (U) Another positive feature of Deloitte's proposal for
a two-round privatization, apart from rapidity, is that the
process should be relatively smooth from the point of view
of the EU, as the EC would not have to be notified nor its
approval sought. The only risk under the current proposal
would be if conditions for the "entrepreneurial intent" in
the first round were considered too restrictive in nature,
and the EC were to judge it as further government support.
Last year, Brussels permitted government aid of over CZK 10
billion to the bankrupt Aero but made it clear that no more
similar bailouts would be appreciated.

Aero: the Phoenix rising again?
- - - - - - - - - - - - - - - - - - - - -


7. (U) After parting ways with Boeing, Aero went through a
year of radical changes. It significantly lowered both the
number of employees and production costs. According to its
annual report, it started earning profits on the Sikorski
helicopter cooperative production. The company's profit in
2004 was CZK 300 million ($12 million).


8. (U) Some bidders may be interested in Aero because it
owns a private airfield which could be turned into a
satellite international airport for smaller, low-cost
companies. While there is no such project yet proposed, the
spokesperson at the Ministry of Transportation has already
made clear that it supports dynamic development of civil
aviation and airport infrastructure, and the Aero
spokesperson estimates that such an airport could start
operating within two years if the new owner decides to go
ahead with the plan.

Who wants Aero
- - - - - - - - - - - -

9. (U) Several foreign companies are said to be interested
in purchasing Aero; British Aerospace and Israeli Elbit
among them. Rumors have it that Russian arms companies would
also be interested. At a recent lunch with Lenka
Zlamalova, senior commentator for the business daily
"Hospodarske Noviny," she speculated that BAE, EasyJet and
McDonnell Douglas could all be interested in the sale
because of the draw of establishing a satellite airport.


10. (U) Comment: The government will be careful not to
repeat the unfortunate Boeing blunder and the choice of the
buyer is sure to be carefully scrutinized to avoid any more
costly disappointments. The latest figures showing an Aero
profit are an encouraging sign, and if the sale to a strong
company is carried out and a good business plan conceived,
(including the establishment of a satellite airport serving
budget airlines),Aero could live to see better days. A
successful privatization would also gain CSSD some much-
needed political points in the pre-election year and justify
the government's reluctance to let Aero, with over 1,600
skilled employees, go bankrupt.

Cabaniss