US embassy cable - 05PRAGUE1139

UNCLAS SECTION 01 OF 02 PRAGUE 001139 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD, EINV, PREL, PGOV, EZ, Privitazation 
SUBJECT: CZECH REPUBLIC: PRIVITAZATION OF AERO VODOCHODY 
PLANNED BEFORE GENERAL ELECTIONS IN JUNE 2006 
 
 
1.  (U) Summary.  At its cabinet meeting on July 20, the 
Czech government approved a privatization plan for Aero 
Vodochody (Aero), the aircraft company formerly partnered 
with Boeing until their 2003 split.  Following the 
recommendations made by Deloitte & Touche, the government 
will sell Aero as a whole after a two-phase bidding process: 
the first round will judge the business proposals of buyers, 
and the second round will focus on the price offered.  The 
privatization should be complete by the end of April 2006. 
To date, the Czech government has paid half of the almost 
CZK 11 billion (approximately $440 million US) required to 
clear Aero's outstanding debt, and the other half will be 
paid off by the time the tender proper starts in November. 
Due to the current market situation, the state is unlikely 
to regain the money is has paid out to stabilize the 
company.  End summary. 
 
Money first - reward later? 
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2.  (U)  The privatization is to start this fall after the 
state pays for Aero's income tax  arrears (250 million CZK 
or $10 million US), which dates back to 1997. The tender is 
scheduled for the beginning of November at the earliest, 
when the government will pay off the remaining debt of 5.4 
billion CZK ($216 million US).  This is the nominal value of 
bonds issued by Aero combined with the last annual interest 
coupon.  By the end of June, the state had already paid 5.5 
billion CZK ($220 million) of this debt. 
 
3.  (U) Stabilization of Aero will ultimately cost the Czech 
tax payers CZK 11 billion ($440 million) before 
privatization.  Although the Minister of Industry and Trade, 
Milan Urban, hopes to find a strategic partner for Aero 
(such as another big player in the aircraft industry), it is 
unlikely that any potential owner would pay anything close 
to the amount already paid out of state coffers. 
 
Ministry of Defense vs. other ministries 
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4.  (U) The decision to privatize Aero involved an 
intergovernmental struggle.  While representatives of the 
Ministries of Industry and Trade, of Finance, of 
Transportation and of Labor and Social Affairs supported the 
Deloitte recommendation, the Ministry of Defense was worried 
that the new owner might not ensure proper servicing and 
repairs of the 72 L159 aircraft that the Czech military now 
owns (a model for which the company has found no other 
buyers).  The MOD produced an alternative plan to separate 
the repair division from the rest of the company and either 
fold it into the military or tack it on to a state owned 
company (probably to Letecke opravny Malesice, which 
currently repairs engines and helicopters) to ensure that 
the military's L159s are properly serviced.  Privatization 
would then only affect the remainder of the company assets. 
 
5.  (U) An internal report of the Ministry of Industry 
leaked to the press revealed that it rejected the proposal 
of the Ministry of Defense on the grounds that: 
-  separation of a part of Aero would be technically 
demanding; 
-  the tender would be delayed by months; 
-  the risk would be higher that the European Commission 
might not approve of such a division (it could be qualified 
as unjustified advantage for the producer); 
- the state would collect less money, while the military 
would to some degree still remain dependent on Aero as the 
L159 producer. 
 
EC hopefully avoided in the process 
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6.  (U) Another positive feature of Deloitte's proposal for 
a two-round privatization, apart from rapidity, is that the 
process should be relatively smooth from the point of view 
of the EU, as the EC would not have to be notified nor its 
approval sought.  The only risk under the current proposal 
would be if conditions for the "entrepreneurial intent" in 
the first round were considered too restrictive in nature, 
and the EC were to judge it as further government support. 
Last year, Brussels permitted government aid of over CZK 10 
billion to the bankrupt Aero but made it clear that no more 
similar bailouts would be appreciated. 
 
Aero: the Phoenix rising again? 
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7.  (U) After parting ways with Boeing, Aero went through a 
year of radical changes.  It significantly lowered both the 
number of employees and production costs. According to its 
annual report, it started earning profits on the Sikorski 
helicopter cooperative production. The company's profit in 
2004 was CZK 300 million ($12 million). 
 
8.  (U) Some bidders may be interested in Aero because it 
owns a private airfield which could be turned into a 
satellite international airport for smaller, low-cost 
companies. While there is no such project yet proposed, the 
spokesperson at the Ministry of Transportation has already 
made clear that it supports dynamic development of civil 
aviation and airport infrastructure, and the Aero 
spokesperson estimates that such an airport could start 
operating within two years if the new owner decides to go 
ahead with the plan. 
 
Who wants Aero 
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9.  (U) Several foreign companies are said to be interested 
in purchasing Aero; British Aerospace and Israeli Elbit 
among them. Rumors have it that Russian arms companies would 
also be interested.   At a recent lunch with Lenka 
Zlamalova, senior commentator for the business daily 
"Hospodarske Noviny," she speculated that BAE, EasyJet and 
McDonnell Douglas could all be interested in the sale 
because of the draw of establishing a satellite airport. 
 
10.  (U) Comment: The government will be careful not to 
repeat the unfortunate Boeing blunder and the choice of the 
buyer is sure to be carefully scrutinized to avoid any more 
costly disappointments.  The latest figures showing an Aero 
profit are an encouraging sign, and if the sale to a strong 
company is carried out and a good business plan conceived, 
(including the establishment of a satellite airport serving 
budget airlines), Aero could live to see better days.   A 
successful privatization would also gain CSSD some much- 
needed political points in the pre-election year and justify 
the government's reluctance to let Aero, with over 1,600 
skilled employees, go bankrupt. 
 
Cabaniss