It was a tremendous saga of a Slovakia-based business. Some writers romantically described the company’s story as one of a magical airline company which made the skies accessible to thousands of Slovaks for the first time. Nevertheless, it is a business story that lacks a fairytale ending, as after eight years of flying Slovakia’s SkyEurope Airlines, which had never made an annual profit, went bankrupt and landed for its final time.
Two Belgians, Christian Mandl and Alain Skowronek, started talks on launching the first low-cost airline company in central and eastern Europe at the turn of the millennium. Their preparations to launch the company lasted nearly two years.
At that time, investment companies in Slovakia had very little idle capital and could not manage to help start a serious airline company and observers found it somewhat surprising that Mandl and Skowronek managed to attract western European banks and venture capital funds to invest in a new airline registered in Slovakia.
The founders had grand plans and in the first three years of its existence $20 million was to be injected into SkyEurope. The company’s economic activity was to at least break even in three years and the price of flight tickets was to be 30 percent cheaper compared to the operating traditional airlines. It was a novel idea and never before seen approach in those times when flights were very expensive in Slovakia.
Since Slovakia was not part of the EU at that time, there were several economic barriers in the areas of taxes and import duties. When SkyEurope wanted to import an aircraft worth $35 million in 2001 it had to pay duties worth $7.5 million. But the company managed to negotiate legislative changes with the Slovak government which allowed SkyEurope to plan aircraft purchases and its expansion. However, it was also at that time when the first scandal emerged. SkyEurope proposed a “Memorandum of Understanding” to the government under which SkyEurope would be eligible to gain exclusive rights on domestic flights in Slovakia and on selected international flights operating from Slovakia. The proposed document also granted the company a 10-year tax holiday. The tabloid media referred to the document as “constructive treason” and it was withdrawn under pressure and it is not clear even now whether it had ever been signed.
Nearly 50,000 passengers in 2002
The first aircraft SkyEurope flew was a 30-seat Embraer imported from the Netherlands with the corporate logo of British Airways. SkyEurope then introduced its first ever aircraft design, which was to later change several times. In 2002, the operating company had a combined Slovak-Austrian-Spanish ownership background, involving two shareholders: the Bratislava-based SkyEurope joint stock company with Mandl and Skowronek as shareholders and the Spanish airline carrier SwiftAir.
In early 2002 Slovak authorities granted a license to SkyEurope and it held its inaugural flight on February 13 from Bratislava to Košice, which launched SkyEurope’s first regular route to eastern Slovakia. On March 18, 2002, it added a route to Zurich, Switzerland.
Its fares were significantly lower than those offered by Slovak Airlines, Slovakia’s sole regular carrier at that time. Slovak Airlines flew from Bratislava to Košice for a fare of almost Sk7,000 while the price for a SkyEurope flight was Sk990.
SkyEurope carried 773 passengers in the first eight days of its operation and in eight weeks the number swelled to 6,000 passengers: the Košice route had almost 4,800 passengers and the route to Zurich carried 725. In nine months of 2002 SkyEurope carried 46,046 passengers with sales up to Sk140 million. In the first year, SkyEurope gained market share exceeding 50 percent in regular domestic routes. In the same year the carrier opened new routes to Prague, Milan, Split, Zadar, Venice, Poprad, Munich and Berlin. The cost of flight tickets was between Sk2,000 and Sk3,000.
In July 2002 SkyEurope flew from Zurich to Bratislava with a special passenger on board: the airline carried Ivan Lexa, former chief of the Slovak Intelligence Service, who had been arrested in South Africa and was being extradited to Slovakia.
Significant growth and new shareholders
In 2003, the company maintained its strong growth and attracted the attention of three private investments funds: the Slovak Post-Privatisation Fund, Euroventures Danube and East Fund Management. They became shareholders along with some additional Slovak investors. The main investors in these funds were the European Bank for Reconstruction and Development (EBRD), the European Union and Dutch bank ABN AMRO. This consortium injected €5 million into the company.
“We like the concept of SkyEurope,” said Alexander Auboeck, former chief of the EBRD branch in Slovakia. “It allows people and business makers to travel cheaply and comfortably, which will enhance the progress of business activities in Slovakia.”
Christian Mandl said that the company intended to use the money to purchase two new aircraft and to expand and open new routes, the Pravda daily newspaper reported. The investors had bought 50.1 percent ownership in the company.
In 2003, SkyEurope added a Boeing 737-500 aircraft, able to carry 133 passengers, to its fleet of four Embraer aircrafts. The 737-500 was used for routes to London and Paris. At the end of 2003, the airline expanded to Hungary by launching a subsidiary SkyEurope Hungary.
In September 2003, SkyEurope flew Pope John Paul II on his official visit to Slovakia. SkyEurope fulfilled one of the Pope’s special wishes: he wanted to see the Slovak Tatras from the skies.
This was also the year that brought rumours that SkyEurope had held talks with Niki Lauda, the former Formula 1 driver, who founded the airline company Lauda Air which later merged with Austrian Airlines. Lauda confirmed to the Sme daily in 2009 that the talks had been held in 2003.
“I was in talks with the founders of SkyEurope to see if I could buy myself into the company,” Lauda said. “But they only wanted me as a marketing tool to attract Austrian passengers to Bratislava, for them to fly SkyEurope. I did not want to be a marketing tool so I decided to launch my own airline.”
In 2004, SkyEurope recorded strong revenue growth as well as a skyrocketing increase in the number of passengers, both of which exceeded expectations. Total revenues in 2004 reached €63 million compared to only €13.1 million in 2003. The company carried over 8 times more passengers than the previous year, a total of 171,000 people.
SkyEurope benefited from its expansion in the central European region, especially in Poland where it opened its fifth hub in Krakow. The company also had hubs at that point in Bratislava, Košice, Budapest and Warsaw. SkyEurope flew 19 routes weekly from Krakow with destinations to London, Paris, Amsterdam, Milano and Rome. It had one Boeing 737 in Krakow and three aircraft in Warsaw. The Budapest hub was also doing well: in one year, SkyEurope carried 210,000 passengers to 10 European cities with a load factor up to 78 percent, using three aircraft from Budapest, two Boeings and one Embraer.
In 2004, SkyEurope completed talks on €10 million in new investments. This was part of a total planned liquidity enhancement of €50 million which the company planned to use to finance its further expansion in central Europe. The finances were supplied by institutional investors from Great Britain and continental Europe.
Rising fuel prices, new AIRCRAFT and new passenger rights
The company planned to invest over €30 million in 2005 to cover the growth of its network, to enhance liquidity and to make deposit leases on new aircraft. At the end of 2004 rising fuel prices began to exert pressure on the company’s budget and the airline’s management reacted by raising prices of all flight tickets by €3. But at the beginning of 2005 the company was also forced to add special fuel surcharges.
Then the European Union issued a new directive regarding passenger rights in the airline industry which had a negative impact on SkyEurope. The directive required that passengers were entitled to compensation in the event of delayed or cancelled flights along with meals and the right to make two free phone calls or send an e-mail. Furthermore, if a carrier cancelled a flight, it was required to fully refund the ticket and the passengers were eligible for further compensations. This rule influenced many low-cost carriers, including SkyEurope.
In that year SkyEurope ordered 32 new Boeing 737-700 Next Generation aircraft able to carry 149 passengers. The first part of the contract involved 16 aircraft to be supplied in 2006 and 2007 worth a total of €880 million. The second part involved purchase rights on aircraft to be supplied in 2008 and 2009. The whole contract was worth nearly $2 billion. It was the biggest order for aircraft in central Europe at that time. But future circumstances prevented SkyEurope from fulfilling the whole contract. The first part of the contract for the 16 Boeing 737-700 NGs was covered completely through the GECAS leasing company.
SkyEurope planned to make a profit in 2007
In September 2005, SkyEurope was listed on the Vienna and Warsaw stock exchange through its parent company, SkyEurope Holding AG, which had become the 100 percent shareholder of SkyEurope Airlines. The holding company had its headquarters in Vienna and continued in operation until September 2009.
The company planned to invest the €60 million it hoped to raise on investments into its four existing hubs in Bratislava, Budapest, Warsaw and Krakow. The price per share was set at €6 and the shares in Vienna immediately went up to €6.5. In Warsaw, SkyEurope’s shares strengthened by 8.5 percent. The company offered 11.8 million shares; 10 million were new shares and the remaining 1.8 million were offered for sale by existing shareholders. As the demand for SkyEurope shares was thought to be high, the existing shareholders offered an option purchase for another 1.18 million existing shares and thus the overall number of shares offered reached nearly 13 million. This brought the book value of the company to €120 million.
The entire transaction was monitored by the investment division of Bank Austria Creditanstalt as well as by the German Sal. Oppenheim bank. Analysts of the German banks lowered their valued price of SkyEurope shares from €10.40 to €8.70 in late 2005. This was based on a predicted loss of €0.88 per share. The analysts thought that SkyEurope could achieve a balanced economic result in 2006 and 2007. SkyEurope itself expected the turnaround to come in 2007 when it expected to generate its first profit.
Besides the company’s issuance of stock in 2005, it became clear in that year that SkyEurope was experiencing significant financial losses from operations. Due to terminating the use of its smaller Embraer aircraft the company posted a loss of €26.8 million in 2005. In the previous year the loss had been €10.1 million even though the turnover of the airlines had doubled from €52.6 million to €112.7 million. The number of passengers had also grown rapidly, more than doubling. In the 2004-2005 fiscal year the number of passengers was 1.7 million while in the previous year it was only 0.7 million.
The newly issued shares of stock did not perform well in 2005 and even though the share price was falling company management did not consider the situation to be dramatic.
“The price of the stocks may move up or down, but I don’t think that there are any rational elements present that would lower the prices in the long-term,” Christian Mandl told the SITA newswire. At that time he served as the CEO of the company and he also expressed his belief that it was a good step for SkyEurope to be listed on the Vienna and Warsaw stock markets.
Despite losses, Vienna hub is launched
In 2006, five years after its founding, media began to report regularly on the losses of SkyEurope. Economic commentators analysing the situation were asking whether the rapid growth of the company and the planned purchases of so many larger aircraft were good moves. SkyEurope posted a loss of €55.2 million for the 2005-2006 fiscal year compared to its loss the year before of €33.6 million.
“The economic results were influenced by investments into new routes, the launch of a new hub in Prague and purchases of five new Boeing 737-700 Next Generation aircraft,” the company said in its official statement.
SkyEurope’s management then decided to open a new hub in Vienna which was launched at Schwechat Airport on March 25, 2007 with routes to 16 destinations, some of which were identical as from Bratislava. Niki Lauda, the founder of the competing airline flyNIKI at that time predicted huge losses for SkyEurope. CEO Mandl, apparently aware also of the serious situation, decided to slow the growth of the airline.
“It is time to slow down the growth from 100 percent to 30 percent yearly and to focus on making profits,” he told the Hospodárske Noviny daily in 2007.
Investors began to fear potential liquidity problems for SkyEurope in 2006 and started selling their shares. The price of SkyEurope shares fell from more than €6 to €1.42 at the end of July 2006, a drop of more than 75 percent. The company needed new capital and the shareholders’ meeting on July 20, 2006 authorised SkyEurope’s management to issue new shares. The company increased its capital by another €56.3 million. Nearly 9 million shares were purchased by the York Global Finance II fund which focuses on investments in the aviation market. York purchased a 23 percent share of the company at that time and still holds its major share in the bankrupt airline today.
SkyEurope then made the first profit in its history. For the fourth quarter of its 2006/2007 fiscal year, SkyEurope posted a profit of €14.3 million before taxes with a net profit of €9.6 million for the quarter, according to the EBITDAR standards. The company lowered its financial losses from €57 million to €24 million. In 2007 investors still showed some interest in SkyEurope shares, which increased to an average level of €4.64.
In 2007, the company ordered five more Boeing 737-700 NGs bringing its total order to 26 aircraft. At that time the company was operating 10 of these aircraft, the only aircraft in its fleet.
Major changes came to the management of SkyEurope in 2007. One of the company’s founders, Christian Mandl, left the company in September 2007 but remained as a member of the board. Shortly before this management change, the company had announced the closing of its hubs in Krakow and Budapest because of what it said were disadvantageous conditions, high taxes and a decrease in demand for its services. The company’s focus moved to Slovakia, the Czech Republic and Austria and it started to expand its new hub in Vienna, moving some flights from Bratislava to Vienna.
Jason Bitter became the new CEO of SkyEurope Holding for central and eastern Europe in December 2007. The chief for business operations was Steven Greenway, who had come to SkyEurope from Virgin Blue Airlines in Australia. Christian Mandl stepped down from the board of directors.
“We have finished the handover of the company to the new management,” Mandl told Hospodárske Noviny. “The financial goals of 2007 were met, and the airline is in good condition with a brand new fleet and a high quality product.”
The airline finished its 2008 fiscal year with a loss totalling €59.412 million, more than double the loss generated in the previous year of €24 million.
The major shareholder, York Global Finance II, tried to buy the airline for a symbolic price of €1. The company desperately needed new investment but there was a dispute between York and a minority shareholder, Focus Capital Investments B.V., which also wanted to buy the whole airline and invest additional funds into it. SkyEurope tried to strengthen its route position on the European market through cooperation with Italian carrier myAir and both companies said they were planning a merger, but it never happened.
At the end of 2008, further news about liquidity problems emerged. SkyEurope was unable to pay full salaries to its employees and paid them only partially. The company also owed money for social insurance payments for its employees and was unable to pay refunds to passengers for several terminated flights. There were also several fines issued to SkyEurope by the Slovak Trade Inspection which SkyEurope had not paid.
As 2009 arrived it became the most critical year in the history of SkyEurope, and in fact, its last. On January 9 the GECASE aircraft leasing company terminated SkyEurope’s lease of six Boeing 737-700 NG aircraft which SkyEurope had to hand over immediately. SkyEurope’s share prices reached their bottom and were trading at just a couple of cents.
The company’s problems culminated in the summer of 2009 when a Czech advertising agency, Beyond Interactive, published an advertisement in Sme daily with an appeal to all creditors of SkyEurope to start the process of recovering their outstanding debts. The advertising company was a creditor of SkyEurope and it had failed to reach an agreement with the airline company to recover its debts.
On June 22, the Bratislava District Court granted SkyEurope protection from its creditors. The same day, Paris Orly Airport seized one of SkyEurope’s Boeing 737 aircraft which SkyEurope operated even though it did not belong to SkyEurope Airlines but was owned by its subsidiary SkyEurope Asset Management which had no debts to Orly Airport. Orly demanded the recovery of all debts owed by SkyEurope. A French first instance court ruled in favour of SkyEurope, while a second instance court favoured Orly airport. Interestingly, the aircraft is still in the hand of Orly even after the company ceased operations.
In July, CEO and chairman of the board Jason Bitter resigned and left SkyEurope. He was then replaced by CEO Nick Manoudakis. The Bratislava District Court ruled on July 17 that the company could undergo a restructuring and Jozef Griščík was appointed as the reorganisation trustee.
At the end of July, SkyEurope announced that it had a new investor represented by the Dutch company Focus Equity, a sister company under the same ownership as one of the SkyEurope’s current shareholders, Alon Shklarek. SkyEurope also announced that it had arranged a €5 million short-term loan from Chainbox Technology, a British firm, to enhance its cash-flow.
At the beginning of August 2009, Vienna Airport stopped servicing SkyEurope aircraft because the company had failed to pay for previous services. SkyEurope left its Vienna hub and moved all its Vienna flights to Bratislava. Passengers were transported to Bratislava by bus.
On the morning of August 31, 2009 the airline’s fuel supplier terminated refuelling aircraft because of debts and the company’s flights were delayed. In that afternoon Prague’s Ruzyně Airport demanded new deposits for its services even though SkyEurope did not have any new debts to the airport and had paid for its post-reorganisation services on regular basis. Ruzyně Airport insisted on the deposits and said otherwise it would stop servicing SkyEurope flights the next day. The threats had no impact on the future of the company though; it was too late for an alternative plan for SkyEurope as the potential investor refused to send any additional funds to the company.
Several hours later, SkyEurope’s reorganisation trustee officially declared the company bankrupt. Its history lasted for seven years, eleven months and 26 days.
More information about Slovak business environment you can find in our Investment Advisory Guide.
7. Dec 2009 at 0:00 | By Adam Valček and Juraj Koiš