POLAND: New domestic carrier OLT Express goes bankrupt13.08.2012, 19:42
Polish budget airline OLT Express, which had taken the domestic market by a storm in the spring of 2012 carrying 320,000 passengers over the April-June period, has gone bankrupt. The carrier threw in the financial towel and declared itself bust on July 27, a few days after it had suspended all domestic flights at short notice. The bankruptcy declaration also led to the cancellation of foreign charter flights, leaving some holidaymakers struggling to get home.
Although the media lamented the "unexpected" collapse, to us at news2biz, this was no surprise. Thanks to our earlier research into the business (see no 470 page 13), we felt here had been something fishy about OLT from the start.
The airline flooded Poland with a very aggressive (and clearly very expensive) advertising campaign a few months ago and in April it started flying on a number of domestic routes for as little as PLN 99 (EUR 25). Although only some 50% of all tickets were being sold for that amount, the price seemed unrealistically low anyway. OLT's competitor LOT argues that tickets have to cost PLN 200 on the average for domestic flights to remain feasible.
OLT sponsored one of this year's largest advertising
campaigns in Poland. Its visually assaulting banners
could be seen virtually everywhere in Polish cities.
OLT executives had said upon launching the business that their investors were ready to subsidize the business for some 2-3 years. And this is probably the most problematic aspect of OLT's operation. The airline's sugar daddy was Amber Gold, an investment company which offers strangely attractive savings deposits (with 16% annual interest compared to 6-7% being granted by the most generous banks), despite warnings from the financial watchdog KNF.
Since Amber Gold does not hold any license for banking or investment operations, the service it officially provides is "gold bar storage". Taking advantage of all sorts of loopholes, the business (which is currently falling apart) attracted some 50,000 of gullible and greedy investors. The founder of Amber Gold had been earlier sentenced for financial crimes and as the media storm around his business thickened, the source of cash that kept OLT Express alive, had run dry.
Mistakes were made
It has to be said that OLT picked the right moment for entering Poland's domestic air travel market – at the peak of railway track renovations and shortly before the UEFA Euro 2012 tournament. However, instead of properly researching demand for each route, its managers preferred to pump money into advertising, which resulted in many connections being shut down and numerous flights being cancelled.
The use of Airbus airplanes on some routes also proved a big mistake as achieving the necessary 75-80% occupancy in such large machines was a major challenge. Overall, according to OLT Express, some PLN 66m was invested into the business, which generated PLN 47m worth of revenues (including PLN 21m from charter flights). Unable to cover airport fees and pay its fuel bills, the airline folded and its operating license was revoked with immediate effect.
The reason we devote so much space to their business is that during its short period of operation, OLT had unearthed the potential of Poland's domestic market. Until very recently, no-one, including the national carried LOT, had been taking this segment seriously. In fact, before OLT flying between Polish cities had been a luxury for the rich. Despite its obvious shortcomings and dubious sources of financing, OLT made domestic flights an option for travelers.
A couple of weeks ago the author of this text needed to get from Warsaw to Wroclaw and after a quick research he figured that taking the train would cost me PLN 131 one-way (and 5.5 hours) whereas going by car would add up to a very similar result both cost- and time-wise. The best option proved to be OLT Express, which promised to take one from Warsaw to Wroclaw for PLN 99 in less than an hour. Luckily, the trip was cancelled, but we mention this story just to illustrate the kind of logic that drove almost half a million Poles to book flights with OLT. Some 130,000 of them are now hoping to get at least some of their money back.
This is what people mean when they say OLT had revolutionized air travel in Poland. Suddenly, thousands of Poles, many of whom had never even considered travelling by air on domestic routes, discovered the convenience of flying. Perhaps a more experienced operator with a solid business plan and reliable financing, could make affordable domestic flights a reality in Poland. With the railways still being largely in disarray, now seems to be the perfect time.
The first to jump into OLT's place was Eurolot, part of the LOT group, which has announced that it would fill some of the routes left free by the bankrupt carrier, and offer cheap tickets between major Polish cities. The airline said that from August 20 it will operate a service between Poznan and Krakow, with tickets going for as little as PLN 99. In a statement the company said it was opening the new service "in response to passenger needs, and because of the continual development of Eurolot."