British Airways turned down an option to buy 20 per cent of Olympic Airways, the loss-making Greek state carrier that has been managed for the past 11 months by Speedwing, its management consultancy arm.
BA said on Friday that Speedwing's contract would be terminated early but under a timetable to be agreed with the Greek government. BA's option to acquire an equity stake in Olympic was included in the management deal.
BA's decision, made public four weeks before the option was due to expire, marks a significant setback for Greece's privatisation programme. It also casts doubt on Olympic's chances of survival, given its record of heavy losses and prolonged labour disputes.
BA itself is seeking to shed rather than to add loss-making operations, as it struggles to improve its financial performance after falling into loss (before exceptional items) in the year to March for the first time since privatisation 13 years ago.
Last month it sold its 86 per cent stake in Air Liberté after running up continuous losses ever since it entered the French domestic market in 1993.
It is also focusing on the wider opportunities in Europe offered by expected consolidation moves arising from the recent break-up of the KLM/Alitalia alliance. Rod Eddington, the group's new chief executive, has refused to disclose whether BA is considering a bid for KLM, but said recently that BA must be "a leading player in the consolidation of the European aviation industry."
Leo van Wijk, KLM chairman, said the Dutch airline needed a European merger and was willing to be the minority partner.
BA's withdrawal could make it difficult for the Greek government to find another leading airline as strategic partner.
Yannos Papantoniou, Greece's finance minister, said after a meeting with Roger Maynard, BA's director for alliances, that the government would launch an international tender to find a strategic investor that would also take over management.
A Greek management team would take over day-to-day running of the airline, while the tender process was underway. A financial adviser would be appointed later this month, with a view to completing a deal by the end of this year.
"We would offer at least 20 per cent, perhaps rising to 49 per cent at a later stage. A flotation would be possible as soon as the airline returns to profit," a government official said.
A Speedwing management team took over at Olympic last July with a commitment to making the airline profitable within 30 months and preparing it for membership of an international airline alliance.
But losses are projected to increase this year to about $60m, while Speedwing's business plan indicated it could not become profitable before 2002. Olympic's airline faces increasing competition on domestic and regional routes from small Greek private carriers, while all its international routes have been operating at a loss.
The team, headed by Rod Lynch, a former BA executive, faced strong opposition to its plans to modernise the airline's management from members of Olympic's board of directors and from its powerful unions.