East European Airlines Find Western Partners

UNTIL recently, flying an East European airline could be an unsettling experience. Flight attendants were invariably surly, the food forgettable, and the Russian-built Ilyushin and Tupolev aircraft uncomfortable, with some models demonstrating a nasty tendency to come apart at the seams in-flight.

Much of that has changed. Some airlines, particularly the national carriers in Poland, the Czech Republic, and Hungary, have made great strides to improve service, safety, and management. Poland's LOT, CSA Czechoslovak Airlines, and Hungary's Malev have formed partnerships with Western carriers and are making major investments to replace the fleets of aging Soviet aircraft with modern Western planes.

``A flight to or from Western Europe on LOT, Malev, or CSA can now be as good or better than that of a West European carrier,'' says Robert Toth, managing director of Budapest-based Tradesco Tours. ``There's a lot of competition between the three carriers for who will emerge as Eastern Europe's leader.''

Fleet replacement has been one major step. Russian-built Tupolev and Ilyushin models are maintenance-intensive and consume 40 percent to 50 percent more fuel than comparable Western designs. Their excessive noise and weight often result in higher landing fees at Western airports. Industry analysts say the carriers recently have encountered difficulties in trying to obtain spare parts from Russian manufacturers, resulting in lengthy groundings.

But by 1996, all three carriers say they will have replaced these aircraft with Boeing, Fokker, and Airbus designs. Malev announced in September that it would acquire four new Fokker 70-seat propeller turbo prop airplane jetliners and six Boeing 737s by next spring to complete its $400 million fleet modernization campaign. LOT and CSA are also phasing out their older models.

The airlines' partnerships with Western carriers are an effort to increase capital, improve services, and gain vital access to modern computerized reservation and fare-management systems. Alitalia of Italy purchased a 30 percent share of Malev in 1992, while 39 percent of CSA was sold to Air France. (The latter deal has since soured; Air France says it overpaid for its share of the troubled Czech airline.) LOT has formed a ``strategic partnership'' with Delta Airlines centered on route and passenger sharing, but thus far has avoided foreign equity involvement. ``Forming links with other carriers is vital for us,'' says Sophie Gonda-Fischer, Malev communications manager. ``The market is so competitive that even bigger carriers are finding they can't stay alone.''

But change hasn't been easy. The three airlines suffer from years of financial mismanagement and the sudden collapse of their traditional markets in Eastern Europe. Before the demise of Comecon (Council for Mutual Economic Assistance), the former Soviet trading bloc, fares were 10 percent to 25 percent of those set by the International Air Transport Association. Soviet fuel imports were often subsidized, and there was little pressure from state authorities to reduce costs. But now the airlines are trying to restructure during a time of crisis in the regional economy and the world airline industry as a whole.

Like most European carriers, the three airlines are bracing themselves for Eastern Europe's eventual entry into the European Union, which is set to deregulate the airline industry in 1997, enabling any EU airline to fly between and within member countries. Given free reign in the region, stronger, northern European carriers such as Lufthansa, Swissair, and British Airways could drive their tiny competitors out of business.

``With deregulation, it's going to be difficult to justify the long-term existence of so many small-flag carriers in the region,'' says Paul Betts, aerospace correspondent at London's Financial Times. ``The question is going to be which cities will emerge as regional hubs and which airlines can take advantage of that and squeeze out their competitors.''

It's difficult to say who is winning the race for dominance. Warsaw Okecie and Budapest Ferihegy airports each have new terminals, and plans are under way to build a new airport in Prague. By most accounts, Malev has the edge in service, but LOT benefits from a domestic market four times larger than Hungary's or the Czech Republic's.

Malev is currently benefiting from the closing of the Belgrade airport, which has forced thousands of Yugoslav-bound passengers to fly in and out of Budapest. Mr. Toth says these passengers represent 25 percent to 30 percent of the volume on certain routes to Budapest. ``I'm sorry to say that we are making good business as a result of the war,'' Ms. Gonda-Fischer of Malev says.

In the long term, industry analysts say, the three carriers' best chance for survival may be to form closer alliances with each other. Some point to SAS Scandinavian Airlines - the joint flag carrier of Denmark, Norway, and Sweden - as a possible model. ``I don't think the market can sustain three separate airlines when outside carriers with bigger advantages start making inroads,'' Mr. Betts says. ``They may need to work together to meet the challenges deregulation will bring.''

British Airways, for instance, flies nearly 50 million passengers annually. Compare that with Alitalia (19 million), Malev or LOT (about 1.2 million), and CSA (900,000). Frankfurt, London, and Amsterdam are European hubs, giving Lufthansa, British Airways, and Dutch LKM a decisive advantage over other competitors.