Reverse Invasion: LOT Polish Takes Over Condor

Talk about an odd-coupling. LOT Polish has been looking for a growth strategy for years. Meanwhile, Condor has been looking for a new owner since its last one failed. If you put those two together, you might think the announcement that LOT’s parent would buy Condor makes sense. I’m not sure I’d agree.

There’s a LOT Going On

LOT falls into the category of “small unaligned state-owned European flag carrier,” and that’s a dangerous place to be. Oh sure, LOT has a long history, and it is part of Star Alliance. But like SAS, Tarom, Czech, and others, it isn’t part of one of the big three joint ventures, and it feels squeezed from all sides.

After a restructuring a few years ago, LOT has been able to eek out a profit some of the time, and it has been working hard to actually find a growth strategy. You can see some of its exploits by looking at this map of routes that don’t touch Poland at all.

When Hungary’s “small unaligned state-owned European flag carrier” Malev failed, LOT saw an opportunity and moved into Budapest with both short- and long-haul flying. Some of that didn’t work (Chicago), but much of it continues flying, and LOT seems pleased with it. But that’s not all.

You can also see some oddities in the north of Europe. Those are a result of LOT taking a stake in Estonian-carrier Nordica. Nordica has slowly but surely backed away from its own flying and LOT now uses Nordica’s regional jets to fly a couple routes from the Baltics under the LOT brand. Got that?

LOT’s management deserves credit for trying to be nimble and create opportunity, but it’s not clear how well this is all going to work out in the long run without a larger partnering. It doesn’t help that LOT has been facing aircraft issues (not of its own doing) which make growth difficult.

LOT primarily operates a 737 and 787 fleet. The 737 MAX grounding as well as ongoing 787 engine issues has meant LOT has struggled to maintain capacity. It has had to lease in aircraft from third parties while it tries to work through all of this. That is, shall we say, inconvenient.

The Condor Needs Parents

Meanwhile, Condor has become an orphan thanks to the failure of Thomas Cook. Thomas Cook bought the airline several years ago, but now that Thomas Cook is gone, Condor needs a new owner. The German government has kept it alive with a bridge loan so it didn’t have to shut down. But that was always meant to be a “bridge” to finding a new owner.

Condor, like LOT, has a long and successful history but it remains based on that dated charter model which has sent many airlines (including Thomas Cook and Monarch) to their graves. It also flies aging 767s as its long-haul fleet and will need a fleet renewal soon. This isn’t to say that Condor hasn’t tried to evolve. It has. But without the power and volume of Thomas Cook travelers behind it, it faces a less certain future. Still, with a large German slot portfolio, it’s no surprise that other companies were sniffing around at the opportunity.

In the end, it sounds like the decision came down to LOT or some private equity groups. LOT won. It decided to buy Condor (via LOT’s parent, PGL) and keep it separate. Is that a good thing?

Better Together…?

Condor’s new focus is summed up in this bullet point from the press release:

Condor will become the centre of PGL’s leisure strategy with a focus on growth in Germany as well as adjacent markets, building one of the leading European leisure airlines

Condor will keep its own management team and will be run separately from LOT. The airline will be tasked with growing not only from Germany but also from other countries. It will keep its leisure focus which means it will be squarely competing with low-cost carriers around the continent.

LOT already faces a squeeze in Poland. This summer, LOT will have just shy of 40 percent of departures in Poland. Ryanair will have just over 20 percent with Wizz at 17 percent. It is feeling the heat, and Condor is not going to solve that problem.

Will Condor now begin picking off leisure-heavy routes from Poland? Maybe, but it is far from clear how Condor is significantly better-equipped to compete with Ryanair than LOT. Condor’s model may provide new route opportunities, but it is still at a disadvantage compared to the newer-generation carriers.

Condor may have more luck on the long-haul where there isn’t low-cost competition… yet. Its hybrid model has done well in many US cities as well as other places around the world, and its ability to connect travelers on the same ticket to Lufthansa is something many others lack. But that long-haul network needs a lot of expensive new airplanes right now, and it’s not clear how the economics will look once that happens. Further, the Condor and LOT long-haul strategies aren’t really complementary.

I’m assuming the idea here is that LOT thinks that pure heft will enable it to better compete, but it’s not really trying to integrate here. It wants LOT to be the full service operator while Condor is the leisure airline. That kind of heft doesn’t really help… unless the strategy changes.

I don’t know that bringing these two airlines together does any harm, but I’m just not convinced that it adds much value either. That is the problem. Or maybe it’s not. I suppose we’ll find out once LOT unveils its ultimate plans for the two carriers.