The privatisation of Bulgaria's national carrier, Balkan Airlines, has been a turbulent saga which has seen it plummet into controversy and insolvency. In a decade, a company which had 55 regular flights, 78 international route agreements, and 46 trade representatives, has shrunk to 14 routes and five representative offices. As the court case over its rehabilitation drags on, Balkan could be headed for a new future - or oblivion.

How did the downward plunge of one of the most powerful operating airlines in Europe start?

Balkan (Bulgarian) Airlines has been the national air carrier for 55 years. The services of the company used to cover regular international and domestic flights, passenger and cargo charters. Balkan Airlines also operates a licensed training centre for education and training of its own aviation staff. The company's maintenance facilities serve other airlines like Hemus Air and Air Via.

But after 1993, the company was set on a downward spiral as it attempted to service debts from unfortunate deals.

The problem began with the lease of two Boeing 767s for $670,000 a month, twice as much as the Sultan of Brunei was paying for the same aircraft.

The other two leased airplanes were A320 Airbus types for $280,000 and three Boeing 737s for $220,000.

Zeevi's involvement

In 1999 Balkan Airlines was sold to Israeli investor Gad Zeevi, who took 75 per cent of the company.

According to company spokesman, Viktor Melamed, Zeevi Holding is a diversified company, operating in the energy sector, construction, information technologies, logistics and trade.

Zeevi owns a TV channel and a radio station in Israel. Zeevi Holding pledged to invest $100 million in Balkan Airlines over five years but did not provide a bank guarantee against a default on that promised investment at the privatisation of the company on June 30, 1999.

The Israeli consortium paid a mere $150,000 for the airline because of the amount of liabilities for which the new owners would be taking responsibility. Zeevi were taking on $30 million worth of Balkan Airlines debt from the state. At the time the deal was signed, the representatives of Zeevi and Arkia, an Israeli domestic flight company, which later withdrew from the deal, refused to announce their investment programme nor did they submit a business plan for the company's future development.

The slippery slope

Mismanaged and heavily indebted, since the beginning of 2001 the company has been in insolvency proceedings and has been facing constant ups and downs, including continuous financial problems and staff losses.

"Neither has the company covered the airline's debts from before it was privatised nor its fleet has been modernised as promised," said Petar Zhotev, former deputy prime minister and minister of economy.

The Privatisation Agency's examination showed that Balkan Airlines' majority stakeholder had defaulted on six clauses of the privatisation contract. Meanwhile, the company ZBIA, registered in Bulgaria, became the owner of 26 per cent of the capital of Balkan Airlines.

ZBIA is majority owned by ZBI, which had advised Zeevi during the privatisation procedure for Balkan Airlines. Hristo Chakurov, Balkan Airlines chief executive and a minority shareholder in ZBI, explained that 26 per cent of the company had been transferred to the Bulgarian company because it makes 51 per cent of the Balkan Airlines' shares held by Bulgarian nationals - a requirement set by airports in a number of countries, in order to recognise Balkan as a national carrier. The other shareholders in Balkan Airlines remained Dutch Balkan Airlines Holding BV (49 per cent), the state and the company employees.

Last May, a sanction of $3.8 million was imposed on Balkan Airlines for failure to fulfill the privatisation agreement. Meanwhile Zeevi launched a $230 million lawsuit against the state for what they felt to be a failure on the part of the state to execute the privatisation contract just before the court estimated the insolvency case. The claim was filed with the International Arbitration on Trade and International Law office of the United Nations.

Former Bulgarian Prime Minister Ivan Kostov said that this move by Zeevi was a prelude to declaring Balkan insolvent and that it was unclear whether the privatisation contract was to be annulled or a declaration of insolvency would to take place. Zeevi Holding alleged the Bulgarian Government had covered up millions of dollars worth of the airline's debts. The company approached the Bulgarian Government with a request for immediate transfer of the due funds to cover the assets that were discovered to be missing after the purchase.

"This is an attempt to attack the Bulgarian Government in an aggressive manner," said the then-executive director of the PA, Levon Hampartsoumian. He added that in his view the claim by Zeevi was not backed up by facts.

Sofia City Court launched insolvency proceedings against Balkan on March 12, 2001, after local insurer Bulstrad, controlled by Dutch-based TBI Holding, filed a claim requesting such proceedings because of outstanding dues of $11 million which had accumulated since 1993.

The international airline body IATA, Sofia Airport and a local firm renting ticket offices to Balkan, also filed insolvency claims. March last year was one of the most critical months for the company's fate. First the carrier had its aviation operator certificate terminated, then the court set the insolvency case against the company in motion and, finally, the owner, Zeevi Holding, submitted a recovery programme for the company to the court. Antoni Slavinski, Minister of Transport and Communications, issued an order terminating Balkan's flying licence. The minister based his decision on the Law of Civil Aviation, according to which a licence can be terminated if the owner loses technical or operating capabilities. The company had to wait six months to reapply for a licence and in the meantime it remained with no revenues and continued to generate debt.

On the same day that Balkan's licence was terminated, Zeevi submitted a recovery programme for the airline to the City Court. According to this plan, Balkan was able to start generating profit by late this year. The key point in the plan was that Cabinet would inject $15 million into the carrier. In addition, Zeevi requested a freeze of all of the airline's debts until it could reach operating profitability. Ralitsa Topchieva and Vladimir Petkov were the two court appointed Trustees who took the reins.

"I am perplexed by the actions of Zeevi Group," said Emanuel Zisman, ambassador of Israel to Sofia during a meeting with the leaders of the union of the pilots on February 17...

You can read the whole Big Story in Issue 11 of The Sofia Echo.