Two years ago I warned former President Ivo Josipović that without a change in strategy we risked having Croatia Airlines becoming a flying shipyard – a bottomless pit for state subsidies with little hope of recovery.
For those not from these parts, Croatia ˝invested˝ $8 billion USD into its shipyards, without restructuring them – and most died. To put this in perspective, Croatia could have used that money to buy General Motors for $5.8 billion USD in 2008 (today worth $60 billion), or Lufthansa today ($6.8 billion).
The aerospace industry is specific in that people who work in it are very passionate about what they do. Despite the bankruptcies, the crashes and the current discomforts caused by heightened security there is a romance to flying which cannot be found in most industries. To those involved it is almost an addiction.
I know this because I suffered from this addiction for a long time. In my career I have negotiated over $2 billion USD in various aircraft sale, finance and corporate finance transactions in the industry. I managed an American-German aircraft manufacturer through Chapter 11 reorganization and liquidation. In the process – 4,500 people lost their dreams and jobs, I fired myself, I lost about $200,000 in investments that I had made in company stock (as did many others), and the aircraft we spent almost $1 billion USD developing was mothballed. Our bankruptcy was due to the attacks of September 11, 2001, but also due to some extensive mismanagement.
The bankruptcy was a brutal management experience, but not unusual in aerospace, where bankruptcies seem to occur about every 5-10 years. At least that is the case everywhere else but Croatia.
1. Civil Air Force
To understand Croatia Airlines you need to understand the history of the airline industry. Airlines in almost all countries were seen as very strategic national entities, just below air forces. That is how the concept of flag carriers was introduced. The national carriers like Lufthansa, Air France, British Airways and JAT provided air transportation, pride and generally losses. But nobody really cared about those losses, just as they didn’t care that their air force was losing them money. Thus the airline industry was governed mostly by politics and law – while economics took a back seat.
The industry didn’t change until 1978 with the passage of the Airline Deregulation Act in the United States which started the process of removing government-imposed restrictions on prices, routes and barriers to entry. These changes in regulation happened because governments realized that air transport was a service like any other and needed to be regulated as such. These changes increased competition, reduced prices and encouraged privatization of national carriers.
2. Take Off
Croatia Airlines as we know it started operating on July 23, 1990. This was a tumultuous time for Croatia and Croatians were rightfully proud to have their own national carrier, even before the country was recognized. As Croatia would soon be attacked there wasn’t much thought given to how the airline should be organized and owned.
This made sense – it is difficult to contemplate new economic models and deregulation when the bombs are flying in. So, Croatia Airlines became a state-owned carrier – because there wasn’t much choice, because that was how airlines used to be organized, and because Croatians were comfortable with a system ruled by politics and regulations – and not economics. This is how we run most industries, even today.
3. Political Management
Throughout its first 20 years Croatia Airlines kind of flew under the radar. It had relatively stable senior management which survived various changes in government. In those years the airline reported earnings in a very odd way. I would fly in and read in the papers that Croatia Airlines had had another very good year – with operating profits, which excluded debt and lease payments. There would be little mention of net profits or losses.
This is a bizarre and false way of reporting corporate performance. It would be as if I reported that I had a profitable year, excluding my bills and mortgage payment. That would be a very good way to live, if it were possible.
In Croatia it was possible and everybody seemed to enjoy it. The management liked running the company, and the union members liked working there – they did what they loved, they earned salaries way above the national average and they worked far less than airline staff in more competitive environments. The only loser in this arrangement was the Croatian taxpayer.
4. Croatia Airlines Friends & Family
In 1998 I was offered a job to join Airbus’ legal department. I flew in for the interview and was impressed with the head of the department. She took me around and introduced me to people who would be my co-workers. Finally we came to a man in his early 30s like I was who didn’t seem that friendly. When she left he said to me – ˝Oh, you are another one of those Croatians˝. I was shocked and asked him what he meant. He explained to me rather rudely that he was sick and tired of unqualified but well-connected Croatians coming in for jobs ever since Croatia Airlines signed the deal to buy the Airbus A319/320 aircraft.
I was livid – at him (as Airbus had called me for the job not the other way around), but more at Croatia Airlines’ management and the government for having used the deal to try to push their unqualified friends and family on the company. I didn’t take the job because I liked the deal side better than legal and because I didn’t like the atmosphere Croatia Airlines helped create.
5. Didn’t Need the Lowest Cost Aircraft
Just over 10 years ago I was running an aerospace consulting company in the United States. There were 9 of us on the team and I was the youngest and the CEO. The other eight partners were extremely experienced in the industry. As an example, our oldest member had been Vice President of Flight Operations for United Airlines, then the largest airline in the world, where he managed 12,000 people. In total, our team had negotiated over $20 billion in aircraft sale and lease transactions.
At the time, Croatia Airlines was just getting ready to negotiate the purchase of regional aircraft. I offered Croatia Airlines’ management that we negotiate the aircraft deal for them as we could get a far better deal than they could on their own. In return, we would just take 10% of the savings between the first price offered and the last price we negotiate. They graciously declined our offer.
6. The Reality Wall
Like many of our inefficient companies, Croatia Airlines hobbled along until the recession hit in 2008. Up to that point, government support and relatively good economic times allowed the airline to continue operating in much the same way it had operated the previous two decades, and much the same way most airlines had operated from the 1920s to the 1980s, but they were by then in a new century, and we weren’t.
In a final anecdote, in early spring of 2011 I was called to interview for the position of Chief Financial Officer of the airline. It was explained to me that the company was in trouble and that it needed new energy and new direction. When the then charming head of HR explained their situation to me I thought of the flying shipyard analogy – and told her so.
Sometime later I was informed by an intermediary well connected to the company and the government that they were worried that I couldn’t restrain myself from making changes until after the election scheduled for December that year. They read me well.
The then government signed new collective agreements with the unions in May 2011, which reflected the fact of the upcoming elections much more than the reality of the company’s financial position.
It might as well have been 1961!
This article originally appeared in Index.hr in an amended form and in Croatian.