The Supervisory Board of Czech Airlines has approved the company’s 2007 business plan, which anticipates a profit for the year of 42 million Czech crowns. Compared to the current year, in which the company anticipates a loss of 493 million Czech crowns, it marks a positive difference of more than half a billion crowns. The 2007 financial results could, however, be negatively affected by increased personnel costs associated with the introduction of a new Czech Labor Code, which could push up personnel costs by as much as CZK 180 million. The business plan for the new year anticipates retaining the current size of the company, which includes roughly 50 aircraft and 5,000 employees. However, the company expects to divest itself of its Cargo Terminal and Catering Services. The company’s supervisory board took the initial steps today in this area by approving the detachment of both divisions from ?SA and the turning of them into separate standalone subsidiaries.
The key driving force behind the improvement of the airline’s financial situation will be the growth in revenues from regular air service operations. Thanks to the changes the company is applying in its Sales Division, revenues are projected to increase by CZK 1.4 billion. The increased passenger capacity of the airline in 2007 - as a result of the introduction of larger aircraft to the airline’s fleet and the expected improvements in seat occupancy factors - is expected to boost revenues by CZK 600 million. Another CZK 800 million increase in revenues is expected to come through improvements in marketing across all areas of the company.
Management anticipates continuing to maintain its emphasis on cost reduction. This year, the company was able to save CZK 200 million by centralizing its purchasing activities and by re-tendering for a number of outsourced services. Management has identified additional areas in which the airline may be able to save an additional CZK 600 million. 25 percent of this amount would come from newly signed contracts. Such additional savings would be the result of changes such as the selection of a new insurance broker, which alone could represent a saving to the company of up to 80 million crowns per year, along with the replacement of the contractors currently providing handling services for ?SA at foreign airports.
On the negative side, the company has been unable to reach an agreement with the unions regarding limitations on salary increases in 2007. These increases are locked into the existing collective bargaining agreements. Due to the salary increases stipulated to in the collective bargaining agreements, the company’s personnel costs will move up in 2007 by CZK 300 million. The new version of the Czech Labor Code may also have a negative impact on the company’s expenses. These could be as much as CZK 180 million. Another major cost for the airline will be the acquisition of additional new Airbus 320/319 aircraft for CZK 300 million.
The business plan also anticipates the obtaining of additional financing through the sale of certain assets. Early next year, the company plans to do a sale-leaseback of five of its Boeing 737-500 aircraft. Such a move is a standard financing tool used in the airline industry. Management expects that the sale of the company’s Cargo Terminal and Catering Services divisions will boost the airline’s cash flow and significantly improve its financial results.
The new business plan projects a 5.6 percent increase in passenger volumes to more than 5.7 million passengers.
?SA’s management will continue to exert downward pressure on the company’s costs in 2007. However, it will focus primarily on increasing revenues. The company will be introducing standard management tools such as a sales rep motivation program and an incentive system for sales agencies as part of its marketing strategies for the new year.