SkyEurope founder: Hedge funds to blame for collapse of airline


Christian Mandl, co-founder of SkyEurope Airlines which went bust this month, has launched a stinging attack on the hedge fund that took control of the airline after he sold his stake in 2007.

Christian Mandl is co-founder of SkyEurope Airlines and managing director of Danube Consulting.

He was speaking to Gary Finnegan. 

To read a shortened version of this interview, please click here.

What made you want to be an entrepreneur? 

After my studies, I sent many applications that were not considered by HR departments because my profile and experience did not match their pre-shaped categories. Then, when I finally got to work as an employee, I left after six months because each time I proposed something creative, I was told that I had joined the company too recently to be making such ambitious proposals. I realised that the jobs market held nothing for me and started, at the age of 25, to write a business plan for an airline start-up. 

Money in itself cannot be the main motivation to become an entrepreneur. While it can be a measure of success, the real driver is the entrepreneurial idea and the personal satisfaction of transforming a vision into reality. 

When you were starting your career as an entrepreneur, what were the most important factors in your early success? 

One of the advantages of starting early is that you are at a stage of your life when you have nothing to lose and where your illusions are intact. Not yet having a mortgage or children meant that a possible failure would not affect others. At a later age, the decision to abandon the comfort of a regular income for an entrepreneurial adventure requires a certain degree of courage. 

Besides that, a quality that is certainly required from an entrepreneur is perseverance, as there will always be obstacles. That is why a well-defined vision is so important, because different paths can bring you to the same final goal, even if you meet with closed doors on your way. 

What obstacles did you have to overcome? 

I often compare entrepreneurial projects to Hollywood movies: you first need a script (the business plan), then the right casting (the management team), then a producer (the investors) and finally success at the box office (the exit strategy). Very often, entrepreneurs are a bit like artists, they can propose a script with great actors, but do not know how to get their movie financed. 

The European movie industry is successful because strong public financing schemes are in place. But for a young entrepreneur with no access to professional advisors, fundraising is extremely difficult and time-consuming. Even for well-structured projects, fundraising and reporting require such a significant share of management attention that it can be at the expense of day-to-day operations. In any entrepreneurial project, most obstacles can be removed if sufficient financing is in place from the beginning, but this is rarely the case. 

The European Union is currently trying to promote innovation and entrepreneurship. Do you have any comment on their efforts? Are they doing enough to encourage entrepreneurship? 

In my experience, providing loans or guarantees through commercial banks does not work, because these schemes remain within the banks’ headquarters and are not made available to the entrepreneur that consults his local branch. 

On top of that, banks operate on a model (requesting asset collateral and financial covenants) which is not compatible with innovative companies that have no other asset than their intellectual property. In my view, investments through venture capital vehicles are much more effective. 

However, technical assistance funds should be provided in addition, to contribute to the costs of professional advisors (lawyers, accountants, patents and trademark registration, recruiting, etc.) that are required to properly establish a company. 

The capital markets should be encouraged to come back to their primary function, which consists of financing enterprises. The Alternative Investment Market (AIM) of the London Stock Exchange is an example to follow. Finally, investments by Business Angels should be made fiscally attractive and promoted, as they are particularly suitable to small start-ups. 

Do you think role models and primary school education are important in developing an entrepreneurial culture, or is it simply that some people are born risk-takers? 

At school, I participated in several activities such as the school newspaper, the pupils’ committee and a model European Parliament. I believe that these experiences can help develop some skills that can be helpful when starting a business. 

What are the biggest challenges facing young entrepreneurs during this economic crisis? 

An enterprise is always a bet on the future, and in times of crisis it is more difficult than ever to convince investors to put money into a start-up, as economic actors lack optimism and confidence. 

Also, with lower valuations of established companies and good return opportunities on corporate bonds, the competition for scarce investment resources increases. Besides financing, the crisis also affects demand levels, making it particularly difficult to plan ahead. 

Do you think Europeans take fewer risks than businesspeople in the US and elsewhere? 

The US environment offers less social protection than in Europe, and entrepreneurship is therefore often driven by necessity. US businesspeople have nothing to lose and do not need to fear for their reputation in case of failure, which is still better accepted than in Europe. In contrast, the European welfare state offers a relatively strong social safety net for workers combined with union representation. 

European universities have excellent research and development centres that could foster innovation, but most European students will still prefer a stable job in the private or public sectors rather than an entrepreneurial adventure. 

The EU has to do more to put workers and entrepreneurs on an equal footing, so that the social net also applies to the entrepreneur. Both success and failure have to be accepted in order to promote reasonable risk-taking. 

In your experience working all over Europe, do you see any differences between Eastern and Western Europe in terms of people’s attitudes to entrepreneurship? 

There is clearly a generational difference. In most Eastern European countries, young people had the opportunity to take responsibility in business and politics, because part of the older generation was compromised with the former regime. 

Eastern European have been so much exposed to economic reform in the course of the last two decades that they are much better prepared to accept change than Western Europeans. 

In the West, the older generation is not ready to give up power and there is far more opposition to change. The problem is that while there might be enthusiasm and an entrepreneurial attitude in the East, the availability of venture capital is still very much concentrated in the West. 

If you could change one European policy, what would it be? 

I think that the experience of European mobility is essential, including for the development of entrepreneurship. It is often much easier to be inspired by some interesting businesses in another country and to bring an idea back home than to try to invent a new revolutionary concept. 

Also, as explained before, entrepreneurs should not be excluded from the social net protecting employees, as this reduces willingness to take risks. In many European countries, unemployment benefits are only available to those who lose their jobs, and not to those that would want to voluntarily become self-employed or entrepreneurs. 

The would-be entrepreneur needs reassurance that he can reintegrate into the system in case of failure. Creating an enterprise is almost like giving birth to a child, so “entrepreneurial leave” could be modelled on the “maternity leave” concept. 

You co-founded SkyEurope in 2001 as the first low-cost airline in Central and Eastern Europe. Were you disappointed that the company suspended all flights earlier this month and went bust? 

I was its CEO until 2007 when I sold my shares and left the management team. Although I was no longer a significant shareholder, I remained emotionally connected to the brand I created. I am therefore saddened by the negative developments over the last two years that in my view led to the failure of the company in 2009. 

In terms of performance, we had achieved a very positive trend in 2007 with a huge improvement over the previous year. My strategy at that time was to reach critical mass in terms of fleet size and passenger volumes, which allowed us to run a profitable operation in summer 2007 when we had 16 aircraft and 3.6 million yearly passengers. 

So what went wrong? 

In my opinion, the hedge fund that took control of SkyEurope and the loyal but incompetent management they appointed decided to implement the exact opposite strategy to the one I had been pursuing: they offered the Hungarian and Polish markets to our competitor Wizz Air, although our Krakow base was our best performer, and started a significant downsizing of the fleet. 

During the last two years, nothing new was built, but everything that had existed was destroyed, the only exception being the strong company culture that lasted till the very end. Our attempts to find an honourable exit for our financial shareholder – which lacked aviation experience – failed, as they could not agree on a price with Air Berlin and Lauda’s FlyNiki joint venture in Austria, which had expressed serious interest. 

What have you learned from this experience? 

The first mover is not always the most successful. SkyEurope performed pioneering work in Central and Eastern Europe, contributing to the democratisation of air transport and allowing close to 15 million people to fly during the eight years it operated across what used to be the Iron Curtain. Even if it failed, it paved the way for others in the region such as EasyJet, Ryanair and Wizz Air. 

So you still see a future for other low-cost carriers in Eastern Europe? 

In my view, low-cost carriers provide affordable transportation that contributes to European mobility and intercultural exchange in a form that is as important to European integration as the successful Erasmus programme. 

The indirect economic impact cannot be neglected: SkyEurope’s accounts may have been negative, but Slovakia and the region greatly benefited, although the airline never received any state aid: contrary to the €500 million awarded to Austrian Airlines. 

What has it taught you about leadership? 

Leadership and strategy are key to success. While entrepreneurs may not always be the best managers, they usually have a passion for their business that is contagious to the rest of the workforce. Managers have different qualities, but can generally not reproduce this atmosphere. 

Strong leaders have a vision which they like to communicate to all stakeholders: employees, suppliers and investors alike. Without a clear strategy, a company loses its ability to attract external funding or to maintain the trust of its partners, in our case airports and aircraft leasing companies. 

Constant changes of strategy end up costing a lot of money, as it basically means writing-off previous investment before their fruits can be harvested. Implementing a long-term strategy requires a certain patience that is not always available to a publicly-listed company forced to report on a quarterly basis. 

What is your view of hedge funds as a source of investment capital? 

Hedge funds are not always the best partners. Some hedge funds have been highly successful in delivering good returns to their investors, and usually attract smart people with a strong educational background. These young graduates often have no operational experience but can still do an excellent job trading securities hidden behind their Bloomberg terminals. 

However, a private equity investment with a controlling stake requires different skills and attitude. It simply reflects the difference between the financial casino, where each player believes that he is smarter than his neighbour, and the real economy, where the customer experience needs to be consistent, employees need to get paid, and important decisions cannot be postponed. 

People actually expect the main shareholder to speak up. Holding all meetings through conference calls without ever visiting the company and the staff, or attending a general meeting but refusing to speak to other shareholders, is not very helpful. All this could be forgiven if the main shareholder would at least do the only thing that really matters: conduct a careful and professional selection of the top management. 

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