Lamenting LOT subsidies miss the point—because internationally state subsidies are the point

By Preston Smith

During a recent meeting with key private equity professionals, LOT Polish Airlines President Sebastian Mikosz lamented in impressive—and quite technical terms—the difficulties of running effectively a private airline against state-subsidized competitors.

As the meeting was not open to the press, I will forgo the details, but lest the above statement shock you (as LOT Polish Airlines is certainly state-owned)—there is real logic to this statement when the real world of business is applied. Moreover, Mikosz’s battles are a symptom of something greater that is changing the international world of business in a fashion off the radar of the quick-fix press.

First, a quick word to the naysayers—i.e. the work-their-beat business press. On the day I am writing this, articles appeared in several Polish media thrashing the airline. Perhaps the airline deserves a thrashing, but titles such as “LOT exists only thanks to state subsidies,” or “You can’t find a more expensive ticket to Brussels” both simplify the airline’s problems and miss the point.

Which is: practically no major airline exists without the benefit of state subsidies.

With the second, much larger point being: the airlines that are trying desperately to wean themselves off of state subsidies in order to adhere to liberal principals are basically getting pummeled—by foreign airlines that are no less than an extension of the state.

Don’t believe me—then without making this a fifty-page report, allow me to cite a quite respected journalist on this issue.

“All over Europe governments are giving hidden subsidies to their state-owned airlines, in the hope of giving the national carrier an advantage for when the real battle begins. A recent summary by the European Commission of the main state aid to airlines – based on the incomplete information given by governments – ran to 60 typewritten pages,” according to Tim Jackson, writing for the UK’s Independent.

Put simply, there are hidden (and possibly illegal) small-airport subsidies for the low costs. Then there are overt, “exception” such as restructuring injections for Iberia and Air Italia. Then there are state-owned airlines like LOT Airlines, which are small monopolies trying to break free of the “bad old days” in a world where the layman is interested in low ticket prices first and superb service second.

The problem, most would say, is that the first and the second do not go hand in hand. Low-costs have put such pressure on traditional carriers that service goes out the window.

To this I say: Yes, that is a problem, but it’s not the problem that counts.

What is actually tough on the airlines is the simple competitive fact plaguing a number of key international sectors, ranging from oil and gas exploration and delivery to industrial metals mining to all levels of manufacturing: the competition is not playing by the same rules.

Perhaps the evidence is anecdotal, but it is foolish to ignore. State-owned airlines outside of Europe and North America do not fight the same anti-subsidy battles faced by those dealing with pro-business (and democratic) rules. Such airlines—and to avoid a lawsuit, I will not drop names—do benefit from favorable fuel arrangements, airport docking deals, route arrangements, airport financing and the like. They are, in fact, flexible because such decisions need little approval beyond a state-appointed president and his cronies.

The oil industry has recently faced a similar wake-up call. Not so very long ago the rules were different. A US company could enter a foreign country with unmatched skills and technology, and thus force an exploration/exploitation deal. Now they are often kept out of such deals simply because enough technology is there, and there are enough mercenaries from various countries willing to work anywhere for a price.

Finally, while they must fight for loans and stick within anti-bribery/FCPA rules, other regimes (let’s go ahead and mention the Chinese) do not.

Thus, Western companies—in part for adhering to higher, far more sound principals—simply cannot compete.

This is more nefarious than you might expect. Or perhaps not nefarious, but worrying all the same. For there is credible evidence to suggest that even a sector as innocuous as the airline industry can be used and is being used as part of national economic strategy by non-EU countries. Or let’s put it this way.

Put simply, if Turkish airlines or the Emirates can bankroll new airports, new docking deals and new routes without the hindrance of their Western competitors, they are fairly or unfairly promoting their countries’ international business and advancement to the detriment of an airline such as LOT Polish Airlines, which must struggle with simply re-adapting its fleet.

Unfortunately, there are no simple answers here, only the obvious conclusions: The West is having a very difficult time living up to its own supposed business morality. The Rest is making huge, internationally and economically game-changing inroads by ignoring such morality altogether.

Is the answer protectionism? To some extent this may be the only card left on the table, and in today’s world that would be a terribly difficult card to play. That said, it is extremely difficult to win the game of business when no one else is playing by the rules. And if you don’t believe me, simply pick your favorite EU airline and dig a little deeper—but don’t expect to hit gold.