Adria Airways CEOs Schuster, Kowarsch face €78 million lawsuit
Former executives of now-defunct Slovenian airline Adria Airways, Arno Schuster and Holger Kowarsch, are facing a €78 million ($77.9 million) lawsuit which has been filed by the carrier’s trustee. The ex-top managers of Adria are accused of breaching the country’s legislation regarding insolvency by implementing questionable accounting while running the cash-strapped air carrier.
The bankruptcy administrator of Adria Airways, Janez Pustatičnik, filed a €78 million lawsuit, one of the largest compensation claims in Slovenia’s court history, on August 26, 2022, according to the local media Necenzurirano. Pustatičnik has asked the Court to place top executives under an obligation to cover the financial damage caused to Adria Airways creditors, suspecting that such a bankruptcy case might be intentional.
The lawsuit follows another attempt from Slovenian authorities to demand accountability from the airline’s management. In 2021, Slovenia’s National Bureau of Investigation filed criminal charges against four individuals for €3.6 million that allegedly went missing from Adria Airways’ bank accounts. Besides Schuster and Kowarsch, the lawsuit also named Adria Airways' financial advisor Klaus Platzer and Eggo Laukamp, head of procurement at 4K Invest, according to reports in Slovenian media.
So, what led to this quickstep of charges?
— sierra5 (@sierra5net) February 15, 2018
Founded in 1961, under the initial name of Adria Aviopromet, the Slovenian airline entered the aviation market by offering leisure flights between the coast of the Adriatic Sea and various destinations across Germany, the Netherlands, Scandinavian countries, and the United Kingdom.
The business had been running well for decades. With air traffic steadily growing, the airline was constantly expanding its network and growing its aircraft fleet.
In the early 1990s, Adria faced major business development changes.
In 1986, Adria Aviopromet separated from its main investor, Serbian company InterExport, and became an independent airline. A few years later, in 1996, the government of Slovenia purchased a 100% stake in the company and rebranded the airline as Adria Airways.
After becoming the country’s national air carrier, Adria Airways started offering scheduled regular flights between Balkan cities and destinations in western Europe from its main hub at Ljubljana Airport (LJU).
The flag carrier succeeded to survive the global financial crisis of 2007-2008 and continued developing its business under the status of the national Slovenian airline. But in 2016, a Luxembourg-based fund 4K Invest bought out 96% airline’s stake from the government.
The new owner of the airline appointed a new chief executive to run the business. It was one of the directors of 4K Invest, German businessman Arno Schuster.
Since then, Adria Airways went through a three-year bumpy ride leading to a scandalous bankruptcy.
Short lived subsidiary: what happened to Darwin Airlines €11 million in 2017?
In July 2017, Etihad Airways agreed to sell to Adria a 33% stake in its regional carrier Darwin Airlines. Before its sale, Switzerland-based Darwin used to operate scheduled domestic and international flights as Etihad Regional. After the takeover, Darwin Airlines was rebranded as Adria Airways Switzerland but continued operating flights with its old air operator’s certificate (AOC).
Darwin’s operations under Adria’s control did not go well.
In November 2017, just five months after the merger, the Swiss authorities suspended Adria Airways Switzerland’s AOC for scheduled operations because of the airline’s financial difficulties.
In December of the same year, the airline went bankrupt, ceased all operations for good, and handed over some of its aircraft to the parent company Adria Airways.
According to the Swiss prosecutor's office, at the time of the takeover, Darwin Airlines had around €11 million in its accounts. However, after the airline announced its bankruptcy, the money disappeared.
Adria Airways – privately owned airline
Meanwhile, what was happening with Adria Airways’ business?
The new CEO envisioned Adria Airways as a leading provider of ACMI services [Aircraft, Crew, Maintenance and Insurance - ed. note] to other air carriers across Europe.
Yet, the airline’s finances were headed the opposite way. Adria Airways financial reports showed that the carrier experienced a deep dive from a net profit of €3.2 million in 2016 to a net loss of more than €5.4 million in 2017.
The large loss was followed by numerous flight cancelations and multiple flight delays daily, negatively affecting Adria’s reputation at the time. The airline had to allocate hundreds of thousands to compensate the affected passengers and was in debt for several million euros for wet-leased planes of other carriers.
In February 2018, Schuster stepped down from his CEO position. His duties were handed over to another German businessman, Holger Kowarsch, who was Schuster’s partner at 4K Invest and Adria Airways financial advisor between March 2016 and December 2017.
— Adria Airways (@adria_airways) March 25, 2018
Despite the financial struggles, the airline’s new management promised an expansion boom during the high summer season of 2018. The airline announced plans to significantly increase flight frequencies on various leisure destinations and to launch several new routes from its hub in Ljubljana, including to Sofia (SOF), Geneva (GVA), Bucharest (OTP), Hamburg (HAM), Dusseldorf (DUS), Dubrovnik (DBV), and Brac (BWK).
The airline planned to serve the new destinations using six Saab 2000 aircraft taken over from the defunct subsidiary Darwin. However, the ambitious plan fell through, as the aircraft were transferred to the airline only after the summer air travel peak ended, at the end of September 2018.
Due to capacity shortage during the summer 2018, Adria Airways was canceling flights and its passengers suffered significant delays. Out of the seven intended new routes, only the route to SOF airport remained.
The carrier ended 2018 with a €18.6 million loss in addition to unfulfilled financial obligations to airports, suppliers, leasing companies, airports, employees, and other creditors.
2019: immediate bankruptcy
Adria Airways started the year 2019 with major network cuts from its home base, axing nine destinations.
In April 2019, the airline announced it scrapped its order for 15 Sukhoi Superjet SSJ-100 planes. Then, in the fall, lessors repossessed two Bombardier CRJ900 planes due to unpaid liabilities.
As of September 2019, the ailing air carrier owed at least €151 million to various parties, including aircraft lessors.
On September 30, 2019, Adria Airways filed for bankruptcy, ceasing all operations.
Ex-executives suspected of intentional Adria Airways bankruptcy
Following the airline’s collapse, Slovenia’s National Bureau of Investigation as well as Adria Airways bankruptcy administrator struggled to find the airline’s missing millions.
Slovenian media offered a wide selection of theories on what might have happened to Adria’s missing funds.
Some suspect 4K Invest foreign subsidiaries provided consultancy services to Adria, with associated costs ranging from €100,000 to €165,000 per month that were not reflected in the company’s annual financial reports. They point at the mysterious disappearance of 4K Invest website immediately after the Slovenian airline’s collapse.
4K Invest also disappeared from the business registers of several countries and removed all publicly accessible data regarding its activities weeks before Adria Airways announced the end of operations, according to local media reports.
The Adria Airways bankruptcy administrator Pustatičnik argues that the top managers knew about Adria’s insolvency for a while but did not ask 4K Invest to find a solution to cover outstanding financial liabilities to creditors, this way violating Slovenia’s insolvency laws and regulations.
The list of Adria Airways creditors consists of a number of various airlines the now-defunct carrier had partnered with. It includes Austrian Airlines, Air Serbia, Air China, Aeromexico, Brussels Airlines, Ethiopian Airlines, Egypt Air, and Air New Zealand as well as Croatia Airlines, EVA Air, Montenegro Airlines, LOT Polish Airlines, SAS, South African Airways, Solinair, Shenzhen Airlines, Singapore Airlines (SIA1) (SINGY), Swiss, Lufthansa (LHAB) (LHA), TAP Air Portugal, Thai Airways, Turkish, United Airlines, and many more, according to EX-YU Aviation.
Pustatičnik has already recognized around €87.9 million worth of claims submitted by creditors while the remaining part of claims worth €63 million is currently being contested in court. Even though a part of Adria’s assets, such as AOC, brand name, flight school, and headquarters, have been already auctioned, those funds are too little to cover the carrier’s debts.
It is estimated that the bankruptcy process will last at least until 2024.
In the current €78 million lawsuit, the bankruptcy administrator demands the airline’s former bosses, including Schuster, Kowarsch, but also Sven Kukemelk, who became Adria’s managing director in March 2019 (just a few months before the bankruptcy), to cover all financial damages caused to the airline’s creditors.
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