Infrastructure Report September 2016 NETWORK OF HIGHWAYS AND EXPRESSWAYS

Highways

S6

S5

Szczecin

S3

1553.2 km

Gdańsk Olsztyn S7

A1

Bydgoszcz

Toruń

S11

Expressways

S8 Białystok

Poznań

A2

Warsaw

S11 S3

S5

S8

A1

Radom S19

S7 Katowice S1

existing

Lublin

2016 2017 2018 2019

Kraków

under construction

BUDGET FOR ROADS (PLN)

A2

S17

Łódź

Wrocław

A4

1495.7 km

2020

A4

19.0 bln 26.1 bln 27.1 bln 25.3 bln 21.6 bln

Rzeszów

S7

planned

MAIN TRUNK RAIL LINES

160 km/h or faster

1420 km

Gdańsk Szczecin E59

C-E65

E75

Poznań E20

C-E59

Wrocław

C-E59

under construction planned

E20

C-E65

Radom

E65

NR8

3420 km 80–120 km/h

5770 km BUDGET FOR RAIL LINES (PLN) 2016

Katowice

existing

Warsaw

Białystok

Łódź

E59

E30

120–160 km/h

E65

Bydgoszcz

E30 Kraków

Rzeszów

2017 2018 2019 2020

7.1 bln 6.2 bln 9.6 bln 14.3 bln 18.4 bln

The last quarter in infastructure

STATUS OF KEY INVESTMENT PROJECTS:

A4 motorway: In July the last, a 41-km section from Rzeszów to Jarosław has opened, which completed the motorway – it now smoothly connects the Polish-German border in Jędrzychowice with the Polish-Ukrainian one in Korczowa. A4 is Poland’s first motorway to have been completed in its entirety. The Rzeszów-Jarosław section will be paid for all cars weighting more than 3.5 tonnes. Central Airport: A team has been created in MinInfra tasked to analyse the purposefulness of construction of a new airport. Soon an intra-ministerial team should also be created. According to EY’s analysis, the construction of the airport would last a dozen years and cost at least PLN 3-5 billion, not counting the auxiliary infrastructure (such as railways). LOT CEO assesses that such an investment could be executed in less than 10 years and it could be part-funded by the EU. So far, it remains unknown where the airport could be located.

Warszawa

Katowice Kraków

E30 railway line Kraków-Katowice: PKP PLK concluded a tender for 4.8-km section between Kraków Mydlniki and Kraków’s main freight station. The contract for the relatively short section is worth PLN 304.3 mln, which results from the project’s complexity and modernisation needs (the line cuts across the city). Tenders for two key sections from Krzeszowice to Trzebinia and from Trzebinia to Jaworzno Szczakowa have stuck at the final stage. Railway line 4 (Central Railway Line): PKP PLK called tenders for the reconstruction of the line’s only two stations - Opoczno Południe and Włoszczowa. If the company will select the cheapest bid, it will pay over PLN 110 mln in total. The investment is to allow to boost the speed limit and allow the trains to cross the stations at 200 kph. However, this will not happen sooner than in December 2017.

22.06 2016

NIK deems privatisation of PKP Energetyka legal. In its report, however, the Supreme Audit Office emphasised that the sale involved a risk, as the company’s new owner, investment fund CVC, will not invest in PKP Energetyka’s long-term development and will want to sell it again in a few years, with the state treasury having no control over the future transaction. At the same time, NIK pointed out that these risks are limited by the duties imposed on PKP Energetyka by Polish law. Despite the Office’s positive opinion, PKP filed a lawsuit in September to cancel the sale of PKP Energetyka.

27.06 2016

PKP Cargo will not buy Orlen companies. Over half a year since signing a preliminary agreement on acquiring Orlen KolTrans and Euronaft Trzebinia, the railway company has withdrawn from the transaction. PKP Cargo was to pay around PLN 250 million for both companies, which would reduce the significance of coal transportation for the company. In a statement, the carrier attributed its withdrawal to the resistance by Orlen staff and the unstable situation on the market. Maciej Libiszewski, PKP Cargo’s CEO since January, is banking on organic development, rather than takeovers.

01.07 2016

A1 motorway around Łódź opens early. The 40-km stretch from Stryków to Tuszyn, forming the eastern ring road around Łódź, has opened over a month earlier than stated in the investment schedule. Work sped up in anticipation of the World Youth Days. The new stretch will link the Baltic coast with Kraków bypassing Łódź; it also connects southern Poland to the A2 motorway. It will remain free until at least November 2018.

07.07 2016

PKP PLK director for investment dismissed. Grzegorz Muszyński, who was also a member of the railway company’s management board, had been responsible for investments there as of the spring. His main task was

Polityka Insight – Infrastructure Report September 2016

transforming the tender model of PKP PLK and launching major investments financed from EU funds for 20142020, but the rail track company still has not completed a single key tender. It is already clear that the implementation of the biggest projects will be delayed significantly; rather than the planned PLN 7.1 billion, PKP PLK will spend just under 4 billion this year.

07.07 2016

The government will create a team for the central airport. MinInfra Andrzej Adamczyk filed a request to PM Beata Szydło asking for the creation of an intraministerial team that would work for the central airport. It will most likely consist of representatives of MinTrea, MinInfra and MinDev. Their main task will be to decide whether Poland needs a new central airport and if yes, where could it be located and who should finance it. The team’s work will rely on the new aviation strategy which is currently being considered by the MinInfra. Our industry and governmental sources criticise the process and argue that the strategy should be ready before any decisions about the central airport are taken. LOT and State Airports CEOs support the new airport, while other airlines and Modlin airport’s board are against.

14.07 2016

Airbus and Boeing sign huge contracts. At the Farnborough airshow, the two largest producers of passenger planes have signed agreements and letters of intent to sell a total of 461 planes. The total value based on catalogue prices hits around USD 62 billion, but most carriers received significant discounts. According to our sources, LOT CEO Rafał Milczarski attended the airshow, speaking to producers and leasing companies about new Boeing 737 jets for the Polish airline.

2

20.07 2016

A4 motorway from Germany to Ukraine completed. After over four years’ delay, the final, 41-kilometre stretch between Rzeszów and Jarosław was finished yesterday. It is now possible to drive from Poland’s border with Germany to Ukraine without exiting the motorway. The A4 is the first of the three main road axes across Poland, alongside the A1 and A2 motorways, to be completed. The link will significantly improve freight transport to and from Ukraine. Road tolls for trucks will be charged from October 2016. z trzech głównych osi drogowych kraju (obok autostrad A1 i A2), którą ukończono w całości.

31.08 2016

Ryanair wants to continue developing in Poland. The Irish airline is to launch a third domestic connection next year (from Warsaw to Szczecin), open one or two new bases in Poland and provide at least three new planes for connections to Poland. This mainly results from Brexit and the reduction of Ryanair’s presence in Britain; none of the 50 new Boeing planes that the airline will collect in 2017 will be based there. Modlin, outside Warsaw, will remain Ryanair’s main airport in Poland; the airline is not launching international flights from Warsaw’s Chopin Airport for now.

29.07 2016

Airlines fear Brexit aftermath. Ryanair has announced that, given the uncertain consequences of Britain leaving the EU, it would reduce the number of flights from London Standsted and develop connections on the continent instead. EasyJet, which is registered in Britain, confirmed that it has prepared a plan for obtaining a licence in other EU countries, which would avoid problems with connections, if Britain and the EU scrapped their open sky agreement. While this seems unlikely, PI has learned that EurCom is considering this solution as well.

05.09 2016

New road tenders in September. Deputy MinInfra Jerzy Szmit announced that the General Directorate of National Roads and Motorways (GDDKiA) will call for 15 major tenders worth a total of over PLN 4 billion, with construction to be completed in 2019-2020. They include the construction of the A2 motorway east of Warsaw and stretches of the S7 (Warsaw-Kraków) and S17 road (Warsaw-Lublin). They will be the first major tenders since the reshuffle at GDDKiA in December 2015.

09.08 2016

PKP PLK announces that tenders will be sped up. Before the end of the year, the company wants to announce proceedings for PLN 7.7 billion investment projects. This will be possible thanks to the amendment to the law on public procurement. If these targets are met, it will amount to considerable acceleration in tenders; the value of those announced since January amounts to just PLN 1.5 billion. Delays in spending EU funds, from the 2014-2020 budget, mean that the PLN 65.7 billion investment plan may prove impossible to implement.

13.09 2016

LOT to rent out medium-sized Boeings. Next year the airline will sign a five-year lease for six brand new Boeings. The carrier’s new planes fleet will grow in coming years; there are to be 30 in 2025. This is a part of LOT’s new development strategy. All the leases will be arranged under operating lease scheme, a cheaper form of financing in the short term (the costs rise in the long term). In July 2017 LOT will receive the last two Boeing 787 Dreamliners it ordered pre.

14.09 2016

LOT will seek EU funds for the new airport. Poland is not taking advantage of all the allocated funds for rail investment. This could be a good starting point for a discussion about transferring the money to the construction of the Central Airport, CEO of LOT Rafał Milczarski has said. According to him, the new airport could be constructed in less than eight years. The EurCom does not plan to support new airports from the 2014- 2020 budget, but Milczarski believes that the government could renegotiate this principle.

20.07 2016

LOT to rent out medium-sized Boeings. Next year the airline will sign a five-year lease for six brand new Boeings. The carrier’s new planes fleet will grow in coming years; there are to be 30 in 2025. This is a part of LOT’s new development strategy. All the leases will be arranged under operating lease scheme, a cheaper form of financing in the short term (the costs rise in the long term). In July 2017 LOT will receive the last two Boeing 787 Dreamliners it ordered pre.

PROMOTIONS AND RESIGNATIONS:

Jarosław Kołodziejczyk has been dismissed from the PKP board

Piotr Halupczok has become the CEO of Grupa Arriva in Poland

Małgorzata Kuczewska-Łaska has been dismissed from the PKP Polskie Linie Kolejowe board

Polityka Insight – Infrastructure Report September 2016

Piotr Stomma has resigned from the post of undersecretary of state at the MinInfra

Andrzej Bittel has appointed to the post of undersecretary of state at the MinInfra

Justyna Skrzydło has been appointed to the post of undersecretary of state at the MinInfra

3

AVIATION

LOT dreams of doubling in size LOT presented a new strategy in Krynica. The airline’s main objective is to ensure sustainable profitability.

Dominik Sipiński, Business Analyst Twice as many passengers. In 2015 LOT carried 4.3 mln passengers*, which gave it a 19.4 per cent share in the Polish market. By 2020, it wants to increase the number of travellers to 10.4 mln, which should equal a 25-per cent market share. The Polish airline assumes that it will grow much faster than the overall market – the Civil Aviation Authority estimates that the number of passengers in Poland will grow by a rate of 5 per cent a year. Such dynamic growth requires large investments in promotion and new routes, but it is a feasible target. After the lifting of EurCom’s restrictions on the number of connections, LOT has grown by 20 per cent in the current year. More long-distance routes. This year flights to Seoul will be launched, and from spring 2017, flights to Newark will be reinstated. There are plans for other routes to Asia (Chengdu and Shenzhen) and to the US (including Los Angeles and Boston). LOT’s network of destinations is to be based on transit flights through Warsaw and the connections between East and West. Poland is well placed to pursue such strategy - LOT can shift passengers from regions such as the Caucasus, the Balkans or Central Asia. However, Finnair has similar plans, and in countries such as Iran and Kazakhstan, competition grows with other airlines. That is why LOT has to look for market niches (such as Cluj-Napoca and Kosice), which comes with the risk of low demand. Airline is to compete on price-quality ratio. LOT plans to draw in customers with attractive offer, and CEO Rafał Milczarski has promised to maintain a high quality of service. According to our information, the carrier will bring back free meals on board some of the flights. At the same time the carrier will increase the pool of cheap tickets and introduce promotions for specific groups of passengers. This strategy corresponds to the trends in the market - even low-cost airlines are investing in improvements in service quality. The challenge for LOT is to change its image as an airline which is expensive and unreliable. In addition, the carrier will have to cut costs in order to lower ticket prices.

Need for new aircraft. The airline wants to enlarge its current fleet of 45 aircraft to 70 in 2020 and 88 in 2025. By the end of the decade, it will buy eight new Boeing 787 Dreamliners – it now has six of them and is awaiting the delivery of two more. The most urgent need is a larger fleet of medium-sized aircraft - LOT needs to acquire six such planes in 2017. However, the carrier has no cash to buy planes or arrange leasing finance, so it opts for the cheapest operating leases. They are waiting for negotiations with the owners of the aircraft, which will have to be convinced that the deal will be permanently profitable. Plans to hire staff, but in a new way. The airline has announced that from 2020 it will employ 400 new pilots and 1,000 cabin crew members. They will work, according to LOT, subject to the market „mechanisms of remuneration”. In practice, this means hiring under civil contracts through three subsidiaries: LOT Crew, Cabin Crew LOT and LOT Team. The salaries of crew and pilots will depend on the number of hours, a mechanism which the airline in now introducing in contracts of employment. Thanks to lower costs, LOT will compete effectively in a market dominated by similar contracts – used, among others, by Ryanair and Wizz Air.

WHAT’S NEXT Rafał Milczarski was to make the plans of his predecessors, Sebastian Mikosz (from June 2015) and Marcin Celejewski (from December 2015), a reality. The new document is more balanced but does not refer to financial issues. It is not known how much LOT wants to earn in the coming years and whether it will have a budget to finance the development. In addition, the airline is in an unstable situation. The key will be the next few months - if the carrier can generate a profit this year, this will provide the liquidity for the acquisition of the first of several new planes, and then things will be easier. However, LOT cannot afford mistakes in choosing routes or additions to its fleet in the next two or three years. * The figures do not match CAA statistics because LOT counts domestic passengers once, and the CAA twice (at the airport for take-off and for landing).

Polityka Insight – Infrastructure Report September 2016

4

RAIL

Rail sector troubles hit infrastructure minister Andrzej Adamczyk, who is being criticised for the way he appoints executives, is not eager to spend EU funds.

Dominik Sipiński, Business Analyst Adamczyk’s position getting weaker. MinInfra is one of the most criticised cabinet members. Criticism is even voiced by PiS politicians. Representatives of the infrastructure sector stress that when Adamczyk was an MP, he was content-oriented and had a rare skill to find faults with the former cabinet, but as a minister, he is unable to manage a large and challenging ministry. Adamczyk has been included in a group of ministers who might lose their positions in a possible cabinet reshuffle. His dismissal might come as a result of problems with rail investments. Last week, a letter sent by Leszek Kraskowski, a PR employee who cooperates with MinInfra, deepened the feeling that things are getting out of hand. In his letter Kraskowski criticised actions taken by the ministry. Deputy ministers issue. Piotr Stomma, who was responsible for the rail sector, submitted his resignation at the end of July. According to right-wing media, he sent a letter to Jarosław Kaczyński and Beata Szydło, in which he described chaos at the ministry. Stomma clashed with Adamczyk over appointments in Groupa PKP. He also fell out with deputy minister for roads Jerzy Szmit. It was difficult to find candidates to take over his office – potential runner-ups do not want to start working for the ministry before the expected resignation of the minister. Eventually, the post was taken up by Andrzej Bittel, an inexperienced politician who has the backing of Mariusz Kaminski, minister-coordinator for the services. Our sources indicate that an imminent resignation of a recently appointed deputy minister for European affairs Justyna Skrzydło, is also possible. Poor appointments. Shortly after the election, the minister appointed Bogusław Kowalski as CEO of PKP S.A. Two days later, Kowalski resigned as a result of accusations that he had cooperated with the communist secret service. PKP PLK had no CEO from December 2015 until March 2016, which hampered investment. The office of deputy CEO for investment saw yet another string of new appointments. According to our sources, Adamczyk’s ratings plunged because he failed to quickly dismiss the managers of XCity Investments (Grupa PKP’s development company), who did not want to transfer land plots for the Home+ programme.

Polityka Insight – Infrastructure Report September 2016

A lull in rail investment. PKP PLK, overseen by MinInfra, has been unable to decide a single large tender for EU-subsidised rail investment this year. The largest tenders that are currently underway (including one for the installation of the ERTMS system for PLN 3.4 bln and modernisation of the Warsaw-Lublin railway line for PLN 3.5 bln) were opened by the company’s former management. They were, however, badly prepared and got stuck in the first stage of the proceedings. Adamczyk announced a review of the national rail programme and promised to put investment on a fast track, but consultations on the amended investment plan finished only on September 2, and no construction work has yet been launched. According to our sources, EurCom and the Centre for EU Transport Projects (CEUTP), which oversees the way European funds are spent on domestic infrastructure, believe that the situation in PKP PLK is dire. This year, the company will likely sign contracts for less than half of the planned amount of PLN 7.1 bln Adamczyk goes on the offensive. Contrary to expectations, after the PiS political council in mid-September a government reshuffle has not happened. Adamczyk was criticised, but retained his position. To strengthen his standing, he hurried his politically most important tasks. Acting on his recommendation, PKP SA board filed a lawsuit to cancel PKP Energetyka privatisation. Adamczyk also dismissed Jarosław Kołodziejczyk, PKP board member responsible for property management. Appointing Bittel to the ministry can also be deemed political. However, in the key areas of responsibility, particularly in investment, progress is still very slow.

WHAT’S NEXT During the reshuffle Mateusz Morawiecki could consolidate his grip over the economy and assume informal control over deputy ministers in MinInfra. MP Jerzy Polaczek could likely replace Adamczyk, a move that could, in turn, trigger the appointment of Czesław Warsewicz as CEO of PKP. It is also possible that Adamczyk would head the sized-down ministry of construction, where he would be responsible for the Home+ programme.

5

AVIATION

Air travel in Poland grows fastest in Europe New routes opened by LOT, Wizz Air and Ryanair in 2016 will increase the number of passengers at Polish airports by 12.5 per cent.

Dominik Sipiński, Business Analyst Two-digit increase in the number of passengers. In 2015, Polish airports handled a record 30.4 mln passengers, 12.3 per cent more than in the previous year. This year they will likely register a larger increase – airlines that operate to and from Poland will offer 38.9 mln seats, 12.5 per cent more than in the previous year. Apart from extended offers, the largest foreign players present in Poland, Ryanair and Wizz Air, want to improve the number of occupied seats on their flights. As a result, the increase could amount to 14-15 per cent on an annual basis, and the number of passengers could amount to as many as 35 mln. LOT set to carry 20 per cent more passengers. In 2015, the airline carried 5.5 mln passengers*, and this year it is set to top that figure by 20 per cent. EurCom restrictions imposed as a result of public aid received by LOT were lifted at the beginning of 2016. LOT also opened or re-opened flights to 17 destinations and increased the number of existing flights, which would push the available number of seats on an annual basis by 19 per cent to 9.4 mln. A majority of LOT passengers on domestic routes travel to Kraków, Gdańsk, Wrocław, Rzeszów, Poznań and Szczecin, on European routes – to London-Heathrow and Frankfurt and on long-range ones – to Chicago and New York. Low-cost airlines are not falling behind. Ryanair will remain market leader – in 2015, the airline carried 8.2 mln passengers to and from Poland. This year, the Ryanair’s offer will increase by 11 per cent and amount to 10.5 mln seats. This will translate into 9.2-9.5 mln passengers. Ryanair will carry the largest number of passengers between London-Stansted and Modlin and Kraków. The number of Wizz Air passengers is growing at an even faster pace. In 2015, the airline carried 5.8 mln people, becoming second largest market player in Poland. The airline has increased its offer by 14.6 per cent to nearly 8 mln seats. As a result of purchasing larger Airbus A321s, it will be able to carry 6.7-6.9 mln passengers. EasyJet will also register a 20 per cent growth.

Polityka Insight – Infrastructure Report September 2016

Lublin grows the fastest, Kraków is lunging ahead. Apart from new airports in Radom and Szczytno, Lublin will register the largest increase in the number of passengers. It will handle around 360,000 passengers, a third more than in the previous year – the result of a larger number of flights offered by Wizz Air, including to London-Luton, Doncaster and Glasgow. A twodigit increase will also be registered by the Warsaw Chopin Airport (12.8-13 mln passengers) and Kraków, which would strengthen its position as Poland’s second largest airport. In 2016, only Łódź will register a decrease – after Czech Airlines closed down the connections to Prague and Edinburgh, the airport will handle nearly 10 per cent fewer passengers, namely 260,000. The market is driven by flights to the UK. One in five passengers that uses Polish airports flies to or from the UK. In 2016, the number of people choosing this destination will increase by 14-15 per cent from 6.2 to 7 mln people. This increase is largely due to Wizz Air, which will carry 25 per cent more passengers between Poland and the United Kingdom as compared to 2015. Flights to and from Germany and domestic routes will grow, on average, by 8 per cent. The fastest growth is registered by airlines operating routes to and from Sweden, mainly due to new connection to Stockholm Skavsta. Among key destinations only Norway will register a decrease. This is the result of a new airline tax introduced by Oslo and reductions in Ryanair’s offer. WHAT’S NEXT In 2016, Poland will remain Europe’s fastest growing airline market. On the one hand, it is the result of increased mobility directly connected with labour migration to the UK, Ireland, Germany and the Nordic countries, on the other hand – airlines’ extended offers. The forecast for the Polish airline market looks good, although it is still unclear how it would be affected by Brexit – shutting down of the British labour market or restrictions on flights to that destination will greatly affect smaller Polish airports, which generate most of their profits from flights to the United Kingdom.  *Domestic flight passengers are counted twice: before takeoff and at landing. 6

AVIATION

Air China enters the Polish market

THE NUMBER OF INBOUND/ OUTBOUND PASSENGERS IN POLAND (MLN) 10

Chinese national carrier has opened a connection to Warsaw and considers making major investments in LOT.

2014

9

2015

2016

8 7 6 5 4 3 2 1 0

Dominik Sipiński, Business Analyst National carrier, but not the biggest airline in China. Air China was founded in 1988, following the division of a state agency dealing with air transport. The new lines were divided geographically, and Air China became the national carrier, based in Beijing. Since 2004 it has been listed on the Hong Kong stock exchange, where 26.4 per cent of the shares are traded. As a result of the consolidation of the other airlines, Air China has lost its title as the biggest carrier - in 2015 it carried 89.8 million passengers, it was also overtaken by the state-owned China Southern Airlines and China Eastern Airlines. Nevertheless, Air China still carries the most important people in the country and has the strongest brand. For many years mostly a domestic carrier. In 2015, 74.4 million (83 per cent) Air China passengers flew on domestic routes, while 4.4 million travelled to Macau, Hong Kong and Taiwan. The share of international routes is growing, but slowly - in 2016 more than 77 percent of the destinations offered by the company are still inside the country. The carrier’s base is Beijing (28.5 per cent of destinations offered); the other hubs include Chengdu, Hangzhou, Shanghai, Chongqing and Guangzhou (Canton). In Europe, the airline’s long-standing destinations include London, Paris, Frankfurt and Munich, and in central and eastern Europe - Budapest, Vienna and Minsk. The airline has obtained the consent of the Chinese Civil Aviation Authority to fly to Warsaw. Consistently a profitable company. The last time Air China was in the red was during the crisis of 2008 and, since then, every year has been profitable. In 2015, the firm generated more than CNY 110 billion in revenues (PLN 64 billion, an annual increase of 4 per cent) and made CNY 7.5 billion in net profit (PLN 4.4 billion, a 73 per cent). The airline increased its profits mainly due to lower fuel prices – over the year, expenditure on fuel was reduced by over 30 per cent, although during the period the airline increased its network by 10 per cent. In 2015, the unit revenue per Air China passenger was CNY 0.56 (PLN 0.32) - a third less than Lufthansa and half of the figure for the world’s largest operator, American Airlines.

Polityka Insight – Infrastructure Report September 2016

Ryanair

Wizz Air

OT

Lufthansa & Eurowings

Purchases from Airbus and Boeing. Air China’s fleet consists of 370 aircraft, and almost 600 counting its subsidiaries (American Airlines have 950). The airline relies on the narrow-bodied Airbus A320 and A321 (95 planes in the Air China fleet) and Boeings 737-800 (119 aircrafts). The carrier has 104 long-range crafts: 53 Airbus A330s, 35 Boeing 777s, 13 double-deck Boeing 747s and three Boeings 787 Dreamliners. In the coming years 18 Boeing 737 (including eight new variant MAX), 12 Dreamliners and 10 wide-body Airbus A350s will join the fleet. The line also ordered 20 single-aisle Chinese COMAC C919 planes. Building a group in China. Some 53.5 per cent Air China belongs to the public company, China National Aviation Corporation. In 2010, it acquired a majority stake in Shenzhen Airlines which carries over 20 million passengers a year. Air China also owns Air Macau (a 66.9 per cent stake), Beijing Airlines (51 per cent) and Dalian Airlines (80 per cent). Air China cooperates with the largest Hong Kong airline, Cathay Pacific - a shareholder since 2006 (30 per cent of the shares while Cathay holds 20 per cent of the shares of Air China) and with Lufthansa through a joint maintenance company, AMECO (Air China has 75 per cent of shares). The Chinese group has yet to invest outside the country.

WHAT’S NEXT Air China has launched its flights from Beijing to Warsaw on September 21. The connection will be operated four times a week. The carrier will work with LOT - both companies belong to the Star Alliance. Representatives of the Chinese airlines have also spoken with MinTrea about buying LOT’s shares, but according to our sources, the talks are at an early stage and will not be conclusive in the near future. They might be successful because Air China is looking for a foothold in Europe, and the Polish government is sympathetic to the Chinese capital. The challenge for MinTrea will be to preserve a role for LOT more important than just delivering passengers for the new owner. 

7

MARITIME ECONOMY

Stormy seas for freight companies Seaborne container market crisis will ricochet into Polish importers while boosting performance of railways.

Zosia Wąsik, Business Analyst South Korea’s Hanjin Shipping, the world’s seventh largest container shipping company, filed for bankruptcy on August 31. Their failure reflects a major crisis within the seaborne container transportation industry; it suffers from oversupply of large volume ships, which drives prices down and results in financial woes among the ship-owning companies. Hanjin Shipping’s 66 freighters carrying a total USD 14.5 bln in cargo, including goods destined for Poland (worth USD 300 mln), will remain unloaded at sea unless the company pays its debts. Other freight and transportation companies could possibly fail, or scale down their supply, affecting more transportation sectors, receivers of goods of goods, and ports. Declining port handling volumes. Polish ports handled 69.7 mln tonnes of cargo in 2015, a 1.4 per cent increase compared with a year earlier. For years container loading and unloading (19.5 per cent of all the port handling) has driven the Polish ports’ growth, especially in Gdynia and Gdańsk. However, in 2015 the container volume decreased 12 per cent on 2014. The bearish trend is also easy to spot across other Baltic Sea ports (for instance Lithuania’s Klaipeda) due to shipping companies’ woes on one hand, and Russian trade embargo, on the other. Container handling volumes are likely to shrink further in the future, offset by other goods (fuels and wheats). Entire supply chain to suffer. Delayed shipments of goods to ports affect the entire supply chain including road and railway transport. Intermodal freight is on the rise in Poland each year, with railways carrying 584,000 TEU containers in 2010 and doubling the volume in 2015. In expectation of further increase in seaborne cargo transportation, railways have planned PLN 6 bln investment projects in the Pomorze region in order to enable railway connections with ports. Ground shipping, including companies delivering goods from ports across Poland and neighbouring countries, will also be affected by the seaborne container crisis.

Polityka Insight – Infrastructure Report September 2016

Long-distance railways to benefit. Although local and regional logistics companies could suffer from declining intermodal transportation volumes, their long distance railway counterparts are jumping at the opportunity. Railway cargo services between China and Europe might be more expensive, but are faster and quality of these connections is improving thanks to investments along the so-called New Silk Road. The new Chengdu-Łódź cargo railway link is already on the rise. Should the crisis of seaborne container shipping claim other victims, volumes of goods sent via railways are to increase, turning one-time clients into longer-term customers. Warehouses to remain intact. Interest of developers and tenants in warehouses is going up; Poland’s vacancy rate for warehouse space continues to fall and currently stands at just 5.5 per cent. Changes to container handling volumes will have no impact on the segment - most of the goods arriving to the sea ports are immediately loaded onto the trucks or trains and transported directly to their destination. Moreover, warehouses in TriCity, the most exposed to changes in the seaborne cargo market conditions, constitute mere 3 per cent of the country’s entire storage space.

WHAT’S NEXT Hanjin Shipping bankruptcy will result in a shortterm increase in seaborne cargo container transportation rates, as businesses will urgently need to find cargo space on other vessels. However, prices would decline again after the rebound, potentially leading to more bankruptcies in the sea freight sector. Even the market giant Maersk has launched thorough restructuring. The previously lucrative China-Europe route is getting tighter and tighter with development of alternative railway transportation route. Thus shippers will seek new markets where railway or road transportation is no alternative; these will mostly be Pacific routes. Polish ports are likely to weather the storm thanks to increased seaborne fuel imports. However, their less-diversified revenue streams will make them more vulnerable to market downturns.

8

INDUSTRY

Poland’s Aviation Valley bets on innovation Podkarpacie’s Aviation Valley is where 90 per cent of Poland’s aviation production originates from. Poland-made parts supply the world’s largest manufacturers.

AVIATION VALLEY’S BIGGEST COMPANIES Company

Annual revenue

Polish site

MTU Aero Engines Pratt & Whitney Rzeszów

PLN 1.35 bln PLN 1.18 bln

Rzeszów Rzeszów

PZL Świdnik Polskie Zakłady Lotnicze Hamilton Sundstrand

PLN 868 mln PLN 797 mln PLN 463 mln

Świdnik Mielec Rzeszów

Dominik Sipiński, Business Analyst Dominant position of foreign groups. The Aviation Valley comprises nearly 150 companies, which hold a 90 per cent share in the Polish aviation production and employ around 24,000 people. A majority of them can be found in the Podkarpackie voivodeship. The largest player, US Pratt & Whitney, owns factories in Rzeszów (PZL Rzeszów), Kalisz and Niepołomice. In 2014, their combined revenue amounted to around PLN 1.5 bln. In 2014, the revenue of the MTU Aero Engines factory near Rzeszów amounted to PLN 1.35 bln, the revenue of the PZL Świdnik factory owned by Italy’s Leonardo – PLN 870 mln, while that generated by a part of the US Sikorsky PZL Mielec group – PLN 800 mln. Poland is also home to a number of additional factories, including the US Hamilton Sundstrand, Italy’s Avio and Germany’s Recaro.

Chances: innovation and development. Polish aviation industry is highly regarded by global groups, mainly due to the involvement of experienced researchers. The Aviation Valley is also extremely innovative, which is attested by, among other things, Pratt & Whitney’s April decision to launch a PLN 213 mln research and development centre in Rzeszów. Valued research and development centres can also be found in universities, particularly technical ones in Rzeszów and Warsaw. NCBiR’s sectoral programme, called INNOLOT, will also offer huge support for the industry. Its total budget amounts to PLN 500 mln, and in the first competition, which was decided in February, NCBiR allocated around PLN 175 mln to winning entities. Beneficiaries included PZL factories in Rzeszów, Mielec and Świdnik.

Focus on components. Enterprises from the Aviation Valley are chiefly second or lower tier suppliers, which specialise in manufacturing advanced or smaller components. More and more companies sign direct contracts with manufacturers of aircraft or aircraft engines. The Polish branch of MTU Aero Engines is the main supplier of blades and low pressure turbines used in Airbus A320 and A380 engines. The Pratt & Whitney factory in Rzeszów manufactures transmissions for new A320neo, and the factory in Kalisz – to several variants of Boeing aircraft. Apart from Black Hawk helicopters licensed by Sikorsky, the factory in Mielec manufactures M18 Dromader and M28 Bryza aircraft, while the Margański & Mysłowski company in Bielsko-Biała – a small EM-11 Orka aircraft.

Risks: costs, emigration and government intervention. A large number of engineers and scientists who could potentially work in the aviation industry decide to move abroad shortly after graduating in Poland. For example, a strong group of Polish experts that specialise in material physics is based in Cambridge. In order to keep them on the domestic front, Polish companies have to offer higher salaries, which increases labour costs. The sector is also afraid of excessive government intervention under the responsible development plan. So far, the Aviation Valley has been able to develop without any preferential treatment, but the sector fears that it would be gradually forced to sell finished aircraft instead of a more profitable production of components.

Most of the production being exported. Combined annual exports of the Aviation Valley amount to around PLN 8 bln, but owing to a large variety of products, it is difficult to obtain aggregated data. In 2015, Polish economy exported aircraft and aircraft parts for a total of PLN 3.14 bln, the latter of which amounted to 57 per cent of exports (PLN 1.79 bln). The US was the main recipient of Polish exports and domestic companies sold parts worth some PLN 822 mln – the result of re-export of parts produced in Polish factories owned by US aviation groups. The value of exports of finished aircraft and helicopters amounted to PLN 1.31 bln – aircraft from PZL Mielec were mainly sold to Ukraine, Australia, Burkina Faso and Mexico.

Polityka Insight – Infrastructure Report September 2016

WHAT’S NEXT The Aviation Valley involves close cooperation among enterprises and universities, which will likely continue to attract investors. In the coming years, the aviation industry in Poland will likely maintain its two-digit pace of growth, with NCBiR’s INNOLOT programme becoming an additional incentive. The decision to increase production in Polish companies by foreign groups would likely benefit the country’s suppliers – particularly small and medium-range ones, such as Sędziszów-based Ultratech or Kraków-based EC Engineering, which are becoming the largest players in the industry’s supply chain. 

9

Road and rail investments On July 31 2015 there were 3,041 kilometres of fast roads in Poland, including 1,553.2 kilometres of highways and 1,495.8 kilometres of expressways. The PO-PSL government adopted the National Roads Construction Programme for 2014-2023 (with perspective until 2025) in September 2015. It assumes the construction of 3,900 kilometres of new fast roads and 57 new ring roads will be built. This should lead to the decrease of an average travel time between the voivodships capitals by at least 15 per cent. The PiS government is currently working on revising the Programme.

At the end of 2014 PKP PLK had ca. 18,500 kilometres of railways under management. 71 per cent of this network allowed for trains speeds not higher than 120 kph. In September, the PO-PSL government adopted the National Railway Programme, which sets out the intvestment priorities until 2023. The strategy does not include any new lines. The total budget of the Programme until 2023 amounts to PLN 67.5 bln, out of which less than PLN 10 bln will come from the national budget. The Programme assumes that some 8,500 kilometres of railway lines will be modernised.

ROADS: CONSTRUCTION UNDERWAY length

contractor

worth

opening date

voivodeship

S5 Kościan-Radomicko

16 km

Mota-Engil

PLN 303 mln

2019

Wielkopolskie

S5 Wronczyn-Kościan

19 km

Budimex

PLN 359.4 mln

2019

Wielkopolskie

S51 Olsztyn bypass

14.7 km

Budimex

PLN 913 mln

2018

Warmińsko-Mazurskie

length

contractor

worth

opening date

voivodeship

line 22 Radzice-Radom

60.2km

PRB „TOR” and PLN 18.7 mln nd. KZN Rail

Łódzkie, Mazowieckie

line 18 Aleksandrów Kujawski-Włocławek

31.7 km

Torpol

PLN 62.7 mln

2017

Kujawsko-Pomorskie

Libiąż station

-

Skanska

PLN 33 mln

2017

Śląskie

E30 Kraków Mydlniki - Kraków Główny Towarowy

4.8 km

Torpol

PLN 304.3 mln

2018

Małopolskie

line 66 Zwierzyniec - Stalowa Wola 67.5 km

Torpol

PLN 34.4 mln

2016

Lubelskie

line 30 - Parczew - Łuków (railroad works)

Colas

PLN 22.1 mln

2017

Lubelskie

RAIL LINES: CONSTRUCTION UNDERWAY

52 km

Polityka Insight – Infrastructure Report September 2016

10

ROADS: TENDERS UNDERWAY length

contractor

offers until

opening date

A2 Warszawa-Mińsk Maz.

14.6 km

18, 19 firm declared interest

-

2020

Mazowieckie

A6 Szczecin-Rzęśnica

3.5 km 16 firms declared interest

-

2020

Zachodniopomorskie

S1 Pyrzowice-Podwarpie

9.7 km 23 firms declared interest

-

2018

Śląskie

S3 Brzozowo-Miękowo

22.4 km 16 firms declared interest

-

2020

Zachodniopomorskie

S6 Gdynia - Lębork

65.5 km

20-22 firms declared interes

-

2019

Pomorskie

S6 Sławno-Słupsk

25.0 km

23 firms declared interest

-

2019

Zachodniopomorskie

S6 Słupsk-Lębork

40 km

20 firms declared interest

-

2019

Pomorskie

S7 Kraków-Małopolskie border

55.4 km

28 firms declared interest

-

no data

Małopolskie

S7 Napierki-Płońsk

71.2 km

17-19 firms declared interest

-

2020

Mazowieckie

S7 Warszawa-Grójec

29.3 km

19-20 firms declared interest

-

no data

Mazowieckie

S10 Szczecin-Stargard Szczeciński

6.4 km

18 firms declared interest

-

2020

Zachodniopomorskie

S11 Kępno ring road (part 1)

4.4 km

10 bids from PLN 66 to 113 mln

-

no data

Wielkopolskie

S11 Kępno ring road (part 2)

7.0 km

19 firms declared interest

-

2019

Wielkopolskie

S14 Łódź Western Ring Road

28.5 km

22 firms declared interest

-

no data

Łódzkie

S17 Warsaw Eastern Ring Road

2.5 km

20 firms declared interest

-

no data

Mazowieckie

S17 Tomaszów Lubelski ring road

9.6 km

16 firms declared interest

-

2020

Lubelskie

S19 Lubelskie border -Sokołów Małopolski

54.2 km

20-22 firms declared interest

-

no data

Podkarpackie

S19 Kraśnik-Lasy

33 km

25 firms declared interest

-

2019

Lubelskie

S19 Lublin-Kraśnik

42 km

19 firms declared interest

-

2019

Lubelskie

Lubelska junction

junction

20 firms declared interest

-

no data

Mazowieckie

Wrocław bypass

9.9 km

tender underway

-

2019

Dolnośląskie

S61 Szczuczyn-Raczki

63 km

22 firms

2020

Warmińsko



declared interest

-Mazurskie

6.5 km

14 firms

Warmińsko



declared interest

-Mazurskie

24 km

21 firms

Warmińsko



declared interest

-Mazurskie

3 km

14 firms

Zachodniopomorskie



declared interest

S61 - Szczuczyn bypass S61 Suwałki-Budzisko tunnel in Świnoujście

Polityka Insight – Infrastructure Report September 2016

- - - -

no data 2020 2022

voivodeship

11

RAIL LINES: TENDERS UNDERWAY length

contractor

offers until

opening date

voivodeship

E-59 Leszno-Czempiń

ca. 36 km

11 firms declared interest

-

2019

Wielkopolskie

E30 Kraków Mydlniki - Kraków Główny Towarowy

4.8 km

9 firms invited to bid

-

2019

Małopolskie

E30 Trzebinia–Jaworzno Szczakowa 14.2 km

11 firms declared interest

-

end 2017

Małopolskie

13.4 km

12 firms declared interest

-

end 2017

Małopolskie

tender underway

16/09/2016

no data

whole country

11 firms declared interest

-

no data

Wielkopolskie

E30 Krzeszowice-Trzebina

implementation of ERTMS/GSM-R 13600 km line 354 Poznań - Piła

93 km

7 firms declared interest - no data lines 31, 32, 36 - Rail Baltica bypass ca. 255 km

Podlaskie, Mazowieckie

line 30 - Parczew - Łuków (signalling)

52 km

3 bids (PLN 21.2-26.3 mln) -

no data

Lubelskie

line 30 - Parczew - Łuków (railroad works)

52 km

9 bids (PLN 22.1-33.2 mln) -

no data

Lubelskie

line 8 - Czachówek - Warka

19.3 km

8 firms declared interest

-

2020

Mazowieckie

line 8 - Warka - Radom

42.7 km

11 firms declared interest

-

2020

Mazowieckie

line E59 Leszno - granica woj. dolnośląskiego

ca. 36 km

9 firms declared interest

-

2019

Wielkopolskie

Warsaw rail bypass

ca. 12 km

11 firms declared interest

-

2018

Mazowieckie

E20 Sochaczew-Swarzędz

237 km 3 parts: 10-11 bids - 2017

Mazowieckie, Łódzkie, Wielkopolskie

line 447 Warszawa-Grodzisk Maz.

24.5 km

9 firms declared interest

-

2018

Mazowieckie

line 229 Lębork-Łeba

32.4 km

7 bids (PLN 0.7-2.4 mln)

-

no data

Pomorskie

lines 140, 148, 157, 159, 173, 689 i 691 Chybie - Nędza/Turze

ca. 60 km

9 firms declared interest

-

2019

Śląskie

E30 within Kraków

19 km

9 firms declared interest

-

no data

Małopolskie

line 7 Otwock-Lublin

149.8 km 8-9 firms declared interest - no data

Mazowieckie, Lubelskie

E75 Sadowne-Czyżew

35.5 km

10 firms declared interest

no data

Mazowieckie

line 8 Skarżysko Kamienna-Suchedniów

13.2 km

16 bids (PLN 21.6-33.9 mln) -

2017

świętokrzyskie

line 201 Nowa Wieś Wielka-Maksymilianowo

31.6 km

20 bids (PLN 41.6-65.1 mln) -

no data

Kujawsko-Pomorskie

lines 821 i 822 - Rzepina bypass

9.3 km

18 bids (PLN 29.3-42 mln) -

2017

Lubuskie

line 274 Wrocław-Smolec

ca. 10 km

12 bids (PLN 20.8-27.3 mln) -

no data

Dolnośląskie

line 68 Lublin-Stalowa Wola

105 km

13 firms declared interest

no data

Lubelskie

Central Rail Line - Olszamowice station

-

12 bids (PLN 55.4-75.8 mln) -

November 2017

Świętokrzyskie

Central Rail Line - Włoszczowa station

-

11 bids (PLN 56.8-73.8 mln) -

November 2017

Świętokrzyskie

line 353 Ostrowite-Jamielnik

19.4 km

12 bids (PLN 35.7-53.9 mln) -

no data

Warmińsko-mazurskie

line 353 Jamielnik-Olsztyn

80 km

11 bids (PLN 14.1-25.5 mln) -

no data

Warmińsko-mazurskie

line 156 Bukowno-Jaworzno Szczakowa

10.7 km

10 bids (PLN 31.2-44.6 mln) -

no data

Śląskie

line 62 Bukowno-Sławków

7.8 km

12 bids (PLN 22.1-29.9 mln) -

no data

Małopolskie, Śląskie

line 281 Jarocin-Żerków

11.3 km

10 bids (PLN 25.4-37.6 mln) -

no data

Wielkopolskie

line 94 Kraków-Przeciszów

43 km

10 bids (PLN 46.8-61.1 mln) -

no data

Małopolskie

line 353 Poznań Wschód-Wydartowo

68 km

4 bids (PLN 8.6-9.7 mln)

-

no data

Wielkopolskie

line 149 Knurów-Leszczyny

11.1 km

11 bids (PLN 24.6-30.7 mln) -

no data

Śląskie

line 151 Krzyżanowice-Chałupki

7.6 km

-

-

11 bids (PLN 24.2-38,1 mln) -

no data

Śląskie

line 14 Łódź Kaliska-Zduńska Wola 41.9 km

tender underway

30.09.2016

no data

Łódzkie

line 207 Gardeja-Malbork

tender underway

7.10.2016

no data

Pomorskie

56 km

Polityka Insight – Infrastructure Report September 2016

12

RAIL LINES: TENDERS UNDERWAY length

contractor

worth

line 106 Boguchwała - Czudec

11.4 km

tender underway

line 66 Zwierzyniec-Stalowa Wola (phase II)

67.5 km

7 bids (PLN 23-32.5 mln)

line 131 Kłobuck-Miedźno

11.8 km

tender underway

opening date

voivodeship

10.10.2016

no data

Podkarpackie

-

no data

Lubelskie

26.10.2016

no data

Śląskie

ROADS: TENDERS TO BE ANNOUNCED length

contractor

worth

opening date

voivodeship

Warsaw Eastern Ring Road (Drewnica-Zakręt)

3.6 km

no bids

unknown

unknown

Mazowieckie

S61 Ostrów Mazowiecka-Budzisko

191.5 km no bids PLN 7.2 bln unknown Mazowieckie, Podlaskie, Warmińsko-Mazurskie

RAIL LINES: TENDERS TO BE ANNOUNCED length

contractor

worth

opening date

voivodeship

line 104 Chabówka–Nowy Sącz

76 km

no bids

no data

no data

Małopolskie

line E59 Piła-Szczecin Dąbie

197 km no bids ca. PLN 2 bln 2017 Wielkopolskie, Zachodniopomorskie

Rail Baltica Białystok-Sadowne

104 km no bids PLN 1 bln no data Mazowieckie, Podlaskie,

line 221 Gutkowo-Braniewo

87.5 km

no bids

no data

2017

Warmińsko-Mazurskie

Podłęże-Piekiełko connector

58.5 km

no bids

PLN 7.1 bln

no data

Małopolskie

Dominik Sipiński Business Analyst (+48) 22 436 71 65 [email protected]

Polityka Insight – Infrastructure Report September 2016

13

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