ZAGREB AIRPORT DIRECTOR DESCRIBES GRIM FINANCIAL

UNCLAS ZAGREB 000110 SENSITIVE SIPDIS DEPT FOR EEB/TRA, EUR/SCE, TREASURY FOR INTERNATIONAL AFFAIRS LARRY NORTON, COMMERCE FOR ITA/MAC KRISTIN NAJDI E.O. 12958: N/A TAGS: ECON ETRD ETA EINV HR SUBJECT: ZAGREB AIRPORT DIRECTOR DESCRIBES GRIM FINANCIAL SITUATION AT CROATIA AIRLINES ¶1. (SBU) Summary. Zagreb Airport Director Tonci Peovic sat down with Ambassador and Econoff on February 12 to discuss the current state of air transport, the performance of the national airline, and problems within the Transport Ministry. According to Peovic, Croatia Airlines is in a dire financial situation and is suffering losses of up to $50 million. He said the company would not be able to survive a strike or other disruption to its operations for more than a few days. The state-owned company is in major need of restructuring, but the Minister of Transport is in a politically weak position and may be unwilling to make sweeping changes. The case illustrates the dysfunctional role of the State in key economic sectors in Croatia. End summary. ¶2. (SBU) Six months into his mandate as Zagreb Airport Director, Tonci Peovic sat down with Ambassador and econoff to describe a growing financial crisis within civil aviation. Croatia's state-owned airline, Croatia Airlines, is the central pillar of Croatia's aviation industry, accounting for 64% of traffic through Zagreb Airport, and over 70% of the airport's revenues. In the last 7-8 months, Peovic reported, Croatia Airlines has amassed roughly $10 million in arrears to the airport, and the sum is growing. He told us the company itself faces over $50 million in losses, as well as a possible pilots and flight attendants strike. If negotiations with the union break down and a strike occurs, it is Peovic's opinion that the company could not survive financially for more than a few days. There have even been rumors in the press that Lufthansa might be interested in a takeover. ¶3. (SBU) According to Peovic, the central problem is political. Croatia Airlines is overstaffed, the product of years of jobs being used as patronage. This has reportedly resulted in a high employee to passenger seat ratio of 1 to 1.3 (for comparison, Peovic told us that EasyJet has an employee/seat ratio of 1 to 5). This includes a huge ground staff at Zagreb Airport with numerous inefficiencies and redundancies. The Ambassador asked Peovic if the Minister of Transport was aware of these problems and if he was prepared to take action to address them. Peovic indicated the Minister appears risk averse because of his current political weakness. (Note: Although Transport Minister Bozidar Kalmeta is one of the most powerful leaders in the ruling HDZ party, his influence has weakened lately due to numerous scandals and mismanagement allegations surrounding his ministry, including allegations of corruption in roads contracting and several rail accidents). ¶4. (SBU) Peovic's long term task will be to oversee the construction of a much-needed new terminal for Zagreb. Zagreb Airport has seen no significant expansion since 1974 and the small size and inadequate facilities conflict with Croatia's vision for itself as a regional hub. Unfortunately, Peovic said the plans developed by his predecessor are unrealistic and unaffordable, requiring at least 300 million euros. Peovic believes that, rather than constructing a "monument", the government should undertake a more modest project in cooperation with one or more strategic partners along the "BOT", Build, Operate Transfer, model. But this will also require a decision from the Ministry of Transport, which Peovic feels is unlikely to happen soon for the reasons outlined above. ¶5. (SBU) Comment: Peovic's description suggests the government is unprepared for the potential collapse of its flagship carrier and the resulting economic damage such an event would cause. Croatia cannot afford the negative spectacle of a high-profile business failure in a year when it must convince EU member states, increasingly wary since the Greek debt crisis, that Croatia's economy is sound. While Croatia Airlines may still be able to muddle through, the case is indicative of the State's dysfunctional role in the economy and its inability to respond effectively to the challenges posed by the continuing economic crisis. FOLEY