OLYMPIC AIRLINES PRIVATIZATION ENTERS NEW PHASE

C O N F I D E N T I A L SECTION 01 OF 02 ATHENS 000372

SIPDIS

E.O. 12958: DECL: 02/06/2016
TAGS: ECON EAIR GR OLYAIR
SUBJECT: OLYMPIC AIRLINES PRIVATIZATION ENTERS NEW PHASE
(AGAIN)

REF: A. 2005 ATHENS 1372

B. 2005 ATHENS 2114

C. 2005 ATHENS 2470

D. 2005 ATHENS 2628

Classified By: Ambassador Charles Ries for reasons 1.4 (B) and (D)


1. (SBU) Summary: On February 2nd, Ambassador met with Deputy
Minister of Finance Peter Doukas to discuss the latest GoG
plans for privatizing the ailing national air carrier,
Olympic Airlines (OA). Doukas stated clearly that he saw no
way forward for last year's plan to sell the company to U.S.
based Olympic Investors LLC in the face of EC Transport
Commissioner Barrot's opposition to allowing OA to be sold
without repaying improperly received state subsidies. As a
result the GoG intends to seek investors to capitalize a new
Greek-flagged airline by March, which will compete in an open
auction this fall on the assets of OA and Olympic Airways
Group. The proceeds of the liquidation will be offset
against subsidy repayments due to the Greek government.
Ambassador was assured that Olympic Investors would be
invited to participate in the new start-up company. End
Summary.


2. (U) On February 2nd, Ambassador met with Deputy Minister
of Finance Peter Doukas to discuss the latest GoG plans for
privatizing the ailing national air carrier, Olympic Airlines
(OA). In August 2005, the U.S.-based investment consortium of
Olympic Investors LLC and York Capital, signed an MOU with
the GoG to purchase OA (reftel b). In October, however, the
GoG announced that the sale terms established in the MOU were
"unworkable" in light of EC opposition (the MOU and the
tender offer anticipated the sale would be contingent on
European Commission approval.) Subsequently the government
began planning a new privatization plan.

Out with the Old
--------------

3. (U) When asked about the reasons for terminating the MOU
with Olympic Investors, Doukas was straightforward; in
September the EC had ruled that OA and Olympic Airways (the
ground handling/catering group split off in 2002) were
jointly and severally liable for the repayment of up to 650
million euro in illegal state subsidies granted between 2001
and 2003 (reftel c). According to Doukas, EC Transport
Commissioner Barrot had been clear that this penalty would be
enforced against both OA and Olympic Airways, and that the EC
would under no circumstances approve the sale of OA as a
non-inheritor of that debt until the state aid had been
repaid to the GoG treasury.


4. (SBU) Doukas said that Barrot told Greek Minister of
Transportation Liapis that the only way to avoid EC fines
would be to totally liquidate OA, as well as associated
companies in the Olympic Airways Group, in an open and
transparent auction. The assets from the sale would be set
against the repayment obligations, and any remaining
obligations written-off with the dissolution of OA and
Olympic Airways Group. Doukas noted that Barrot had focused
in particular on the fact that the EC would not allow OA, the
major revenue-earning part of Olympic Airways Group, to be
sold without any portion of the subsidy repayment obligation
being attached. Since the MOU with Olympic Investors was
valued under the assumption that OA would not inherit any
repayment debt, Barrot's position "doomed" the deal.

In With the New
--------------

5. (SBU) Doukas described the GoG's new plan as an attempt
to satisfy Barrot and the EU while retaining a Greek-flagged
national air carrier. In the new plan, the GoG is seeking to
establish a start-up company with 150 to 200 million euro in
equity. The opportunity to participate in the new airline
would be by private offer only, involving select venture
capitalists, existing foreign air carriers (note: Doukas
mentioned the Emirates Airlines by name),and Greek ship
owners. Doukas confirmed that Olympic Investors and York
Capital would be given a chance to participate in this new
venture. Doukas also confirmed that the GoG was anticipating
buying between 30 and 50 million euro of shares in the
company, but would settle for less if enough outside capital
could be found (Note: Minister of Finance Alogoskoufis
separately told Ambassador the GoG would be happy not to hold
any equity if it all can be sold to private investors. End
note.) Doukas noted that the less the GoG held of this new
company, the more satisfied the EC would be, but that in any
case the GoG had no intention of assuming any management
responsibilities.


6. (SBU) Doukas observed that OA was in dire straits, and
would be lucky to have enough money to continue operations
through the summer. His timetable is to have the new company
established by March or April, therefore, and the liquidation
of OA completed by the fall. When prodded by Ambassador, he
confessed that not all the details were yet worked out. In
particular he was not sure what would happen with OA's
routes, or how OA competitor Aegean Airlines would be
compensated with additional EU routes in order to be "less
unhappy" with the creation of another Greek-flagged
competitor airline.

7. (SBU) Ambassador also inquired how the GoG intended to
handle the politically sensitive issue of Olympic Airways
Group's 7700 state employees. Doukas acknowledged that it
was going to be expensive, but that the State was obliged to
either offer buy-outs or place the employees in other
state-owned companies. He said that the price tag for this
process was being negotiated with the EC so he couldn't
discuss it, but that it would be "monstrous."


8. (C) Comment: It was clear that Doukas was prepared for
this meeting, and unlike previous meetings (reftel d) with
GoG officials, was prepared to explain the GoG motivations
for canceling the MOU with Olympic Investors. It isn't clear
that there exists 200 million euro in capital dying to invest
in a start-up air carrier in Greece, but the GoG is working
with Lazard and SABRE to create a business plan and find
interested parties. If, as Doukas suggests, the new company
will be buying OA assets (including valuable Heathrow slots)
in a fair and transparent auction process in which anyone
interested can participate, it would go a long way towards
solving the GoG's problems with Brussels over the
subsidization of OA. Brussels will have achieved the
liquidation of Olympic Airways Group, and as long as the GoG
isn't providing improper state aid, if investors want to try
and make a go of a Greek-flagged airline, it will be a
further step towards competition in European civil aviation.


9. (C) For its part, U.S. based Olympic Investors continues
to maintain that the GoG has failed to honor the terms of the
MOU, and that despite indications to the contrary, Brussels
really would be ready to approve the deal as struck between
the investors and the GoG last summer if only Greece would
promote it effectively. We would welcome USEU's assessment
on this point. End Comment.
RIES