Air Serbia 101

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Everyone who has been following Serbian aviation will know that in less than a year, the local market underwent a revolutionary process at the end of which a new airline emerged- Air Serbia. When Etihad announced its intentions to takeover Jat Airways, it seemed that anyone and everyone in Serbia felt that they should publicly express their views and opinions regardless of how familiar they were with civil aviation. It’s worth pointing out that from the start almost everyone agreed that something had to be done with Jat Airways; disagreements emerged over what kind of business model the airline should follow.

Scepticism related to Air Serbia’s future started long before the airline’s business plan was made public. As early as February 2013, roughly the same time when first takeover rumours surfaced, a large number of sceptics did not believe there were any good enough reasons for a premium airline such as Etihad to even consider investing in a failing carrier such as Jat Airways. Even though I was part of the minority which believed that this scenario was very much possible, I can understand where the anger of the majority was coming from. For years and years, Jat Airways CEOs were politically appointed people with no aviation skills or knowledge- I have even dedicated entire posts on this blog to talk of this problem. Some of these CEOs have even managed to make the airline a laughing stock by proposing, for example, to sell tickets in post offices and on the streets.

In addition to a non-existent business plan, the airline’s fleet renewal strategy was often discussed as its fleet of 10 Boeing B737-300s were well over 25 years old. The airline also operated a fleet of 4 regional, turboprop aircraft (Atr 72-200), however, these were often neglected as the Boeing fleet constituted the airline’s backbone. Though the aircraft were safe, their comfort and efficiency were well below the industry standard which prevented the airline from being competitive not only internationally but also domestically. The latter was a serious problem for the Serbian carrier as its market share at Belgrade airport was constantly dropping over the last several years as a result of the liberalization of the Serbian market. In the end, Jat Airways managed to stop this negative trend and so it kept a market share of around 40% at Belgrade airport. Naturally, Jat Airways’ management, without any aviation knowledge, did this by considerably reducing its fares on almost all routes. Even though its passenger numbers did manage to recover, its yields collapsed. This is because the airline, one could argue, introduced a new business model- one that required a light cost structure. The airline’s management was probably not aware of this hence why the airline’s state only worsened with the passing of time. On the outside the airline seemed to be doing ok but behind the scenes the situation was precarious as the airline was slowly moving towards bankruptcy.

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In early 2013, the situation went from bad to worse as the airline’s winter timetable collapsed as a result of bad C check scheduling. In other words, a considerable part of the airline’s fleet was grounded which left the management with no alternative choice but to cancel numerous flights. This further hurt the airline’s image and reputation among the travelling public. It is also worth mentioning that the airline failed to keep up with modern aviation trends as it lacked a competitive frequent flyer programme as well as the option of online check-in. Simply put, Jat Airways was a dying dinosaur of an airline.  

The first major development took place on 15 April 2013 when the two airlines, Etihad and Jat Airways, formalized their cooperation. Two months later, Etihad launched daily, direct flights from Abu Dhabi to Belgrade with the smallest aircraft in its fleet, Airbus A319. Throughout the summer season, Etihad experts evaluated the overall state of the Serbian national carrier before formally announcing a minority takeover on 1st August 2013. Even though the official takeover was scheduled to take place on 01st January 2014, the airline took immediate charge of Jat Airways. By mid-September, Etihad proposed a new CEO, Danny Kondic, a man with vast aviation experience. Regardless of his experience and professionalism, a certain Serbian aviation portal did not waste its time to attack the government’s decision for allowing the previous (politically appointed) CEO, Velibor Vukasinovic, to be deposed. According to this portal, Mr Vukasinovic had done a lot to save Jat Airways’ summer operations by leasing a total of four new aircraft; two Boeing B737-300 from Bulgaria and two Atr 72-500 from a Danish leasing company. Even though this was a good move and it did help with the summer schedule, the candidate proposed by Etihad had far more experience from internationally acclaimed airlines and aviation businesses. In other words, by bringing a new CEO such as Mr Kondic, the government ensured that the airline has a long-term development strategy. Furthermore, Vukasinovic might have saved the summer schedule from collapsing but he still did not show any intention of dealing with the fundamental problems with which the airline was faced. What the portal missed was that Vukasinovic merely prolonged the status quo for a bit longer before the whole structure would have come down crushing.

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On top of everything, Mr Vukasinovic never worked directly for an airline; his aviation experience comes from working for government institutions which have little in common with running a successful aviation business. Just because Mr Vukasinovic was successful in his previous jobs does not mean he would have run Jat Airways/Air Serbia successfully, especially not since he did oppose the takeover. Many in Serbia tend to forget that running an airline and working for a civil aviation institution is not the same thing. The qualities required for each post are completely different; one is a technocrat while the other is a businessman. By opposing the deal with Etihad, Mr Vukasinovic proved to all of us that he was not a businessman and that he probably did not understand in what state Jat Airways truly was- in other words, it was on the brink of bankruptcy. Only Etihad with its fresh capital injection could have saved it, which it did, especially since the Serbian government was in no position to provide the funds needed to restructure and revitalize Jat Airways.

One can interpret Mr Vukasinovic’s departure as a symbolic one. It marked the end of an era where Jat Airways was a political toy misused by successive governments. It had become obvious that the only way for Jat Airways to survive was for a professional and financially strong partner to step in and introduce a modern work ethic and business strategy. Etihad did exactly that and positive results were noticed from the very start. Besides introducing new corporate identity, fleet and a revised flight schedule the airline managed to become, in just two months, the main factor of growth at Belgrade airport. During November 2013, the first month of Air Serbia’s operations, the airline recorded a 12% increase in passenger numbers. Even though passenger statistics for the month of December have not yet been published, Belgrade airport has forecast its own passenger growth to be close to 20%.

Belgrade airport’s phenomenal passenger growth could not have been achieved without Air Serbia and its new business strategy. Air Serbia’s future ambitions have been recognized in both Bucharest and Sarajevo where both Tarom and B&H Airlines have stepped forward and offered to cooperate with Air Serbia.

In the next blog post, I will take a closer look at what kind of airline Etihad and its team have created in Belgrade. In addition to this, I will present its main advantages and challenges.

The Uniqueness of the Serbian Aviation Experts

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One does not get many chances to use ‘Serbian’ and ‘aviation experts’ in the same sentence without a dose of sarcasm or irony.It is a public secret that people in charge of Serbian aviation are usually there as a form of reward for their stellar and uncompromising allegiance to their political party. To be fair, political appointments do not represent the sole mechanism for employment since nepotism seems to be just as popular.

Though political appointments and nepotism are present in all societies of this world, the fact that this occurs in Serbia should come as no surprise. However, it seems that these practices are rooted so deeply within the Serbian mentality that qualified people are left with no other choice but to choose between emigration and working for a pathetic salary where career advances are not based on merit. Since most talented and competent Serbs seek ways to emigrate, the local aviation business is run by people who are there just because working for the national carrier (or any other government institution) beats being unemployed. Before continuing any further, I would like to emphasise that this trend does not apply to those who operate or service the aircraft but rather to those who are responsible for the management of the aviation business in the country.

Since 2000, when democracy replaced authoritarianism, little has been done to prepare the Serbian industry, especially the national carrier, for the unavoidable liberalization of the aviation market.

Both the airport and the national carrier saw a succession of ‘experts’ lead the Serbian aviation forward into regional leadership (we are still waiting for them to tell us what region they actually meant).

In May 2012 Serbia held national elections where a new coalition was formed. Everyone was anxious to find out what the new government coalition planned for Jat Airways and if their policies would bring about a change.

Beating all expectations the new government formed a task group, made up of experts, who were supposed to come up with a plan which would revitalize the national carrier and, according to the minister of transport, reduce the losses so that the airline might manage to just about break even.

In theory, this solution is simple and effective.

However, the only problem is that the experts in this group were either political puppets or pilots.

For the airline to be restored to profitability unpopular measures had to be introduced so as to reduce costs. Political puppets would be unaware of this necessity as most of them are unfamiliar with the strategies employed within this particular field. However, it is highly likely that pilots would be aware of the necessity of these measures, as they are familiar with the working conditions of their colleagues who  fly for low cost airlines or other legacy carriers which previously undertook these measures. Without doubt the pilots would ignore these harsh measures in order to preserve their perks and benefits.

A positive outcome from the work of this task force is that they have concluded that Jat Airways needs to reduce its workforce by at least a half. Though we can partially give them credit for their conclusion, one should not have high expectations as even politicians have made similar statements in the past. At this point it has become quite clear that we should not expect any fundamental changes within the airline as nothing seems to have changed from the previous times when ‘experts’ were called in to save the day.

Another positive outcome from this whole story is that these ‘experts’ have agreed to put forward a fleet renewal plan. However, a country like Serbia, which seems to be determined to join the European Union, has failed to embrace the notion of transparency. The whole process has been cloaked in mystery and kept away from the public eye. Only vague information has been leaked to the public revealing absolutely nothing.

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So what is the actual problem?

There are two major chronic problems with Jat Airways which will will continue to cripple it in the future. The first is the very organization of the airline, while the second is, once again, its fleet.

The airline plans on reducing its workforce by almost 50%, which should reduce its losses, but will not solve its long-term problems.

So what are these long-term problems Jat is facing? The first is that the carrier needs to decide what kind of market it wants to serve. Will it aim at catering for the needs of the point to point travellers or will it attempt to transform its Belgrade hub into a true Balkan crossroad? Until now, the abrupt liberalization of the Serbian market and the failure of various governments to prepare the national carrier for the transitional shock have forced the national carrier to mutate into some sort of a hybrid carrier which is stuck between two worlds.

Jat tries to compete with low cost carriers (most notably Wizz Air) by offering competitive fares with an uncompetitive cost structure. Though this might have a positive impact on the average load factor, it has the exact opposite impact on the airline’s finances. Without the much needed autonomy, the airline was (and still is) unable to take the adequate measures which only increased its losses and its debt.

Government officials stated on numerous occasions that they have no intent to turn Jat Airways into a low cost carrier. This means that Jat Airways has to keep its level of service equal to that offered by legacy carriers but at the same time it has to have a relatively low cost structure which will enable it to compete against the low cost carriers.

Though this is relatively difficult to achieve it is far from being impossible. The most important thing for Jat Airways to do is to revise its regional network by taking into consideration the state of its fleet and what it can do with it.

Its regional network will not only cater for the needs of the point to point passengers but it should be organized in such a way that it allows onward connections in Belgrade through the creation of several waves of departures.

The Balkan Peninsula is very competitive in terms of the number of carriers which are based there. Therefore Jat must optimize its performance within its regional network. First step would be to designate its regional zone as the one that stretches within a 500 nautical mile (nm) radius from its base at Belgrade airport. When competing with the Dash-8, on flights within this area, the Atr is incomparably more profitable. Problems arise on flights that exceed this distance as the Atr is simply not built for similar missions. Beyond the 500 nm radius the speed of the Dash becomes its biggest attribute while at the same time its more comfortable cabin improves the overall passenger experience.

Once the radius and the equipment have been defined, Jat needs to evaluate all possible means on how to offer competitive fares and still make a profit.

The simplest solution would be to divide its fleet into a mainline division and a regional one. The regional one would be comprised of Atrs where both the flight deck and cabin crew would sign separate contracts which would be similar to those used by (ultra?) low cost carriers. Though these contracts might be unattractive for the employees (when compared to the present) they need to enable the airline to engage in price wars so as to beat its competition – especially when facing airlines from its surrounding region which will most likely try to attract the same passengers as Jat. For example, on flights from Belgrade to Montenegro Jat currently needs at least €90 per passenger in order to break even. Its competition, Montenegro Airlines, operates a mixture of Embraer and Fokker jets which are much less efficient on such a short flight. By restructuring the airline and by separating the regional from the mainline fleet, Jat will be able to lower its fares to about €40/50 and still make a profit. This would eventually hurt Montenegro Airlines who will be forced into a pricing war it cannot win. This regional branch could either be a subdivision of the national carrier or a totally new airline which would take over all regional routes from Jat leaving it to operate from Belgrade to all destinations located outside the domestic sphere. The latter solution might be a more favourable one so that neither one of the two companies drains the other financially. It is always better to have two independent carriers operating within their own respective markets.

Though this light cost structure might encourage the management of the airline to expand rapidly, it is wiser to preserve a more conservative approach and expand within regional markets which have a considerable point to point traffic. This means that routes such as Podgorica, Tivat, Ljubljana, Sarajevo, Skopje, Thessaloniki, Ohrid, Dubrovnik and Pula should be considered as primary destinations which should be operated at least daily. Secondary cities such as Sofia, Banja Luka, Varna or Bucharest should be launched three times per week and special attention should be dedicated to these markets so as to develop point to point traffic which should act as a safety net once a more aggressive approach is taken when connections are added to the business equation.

Road and rail transport throughout the Balkans is bad, while its future improvement will be made difficult by the mountainous terrain. Jat Airways needs to use this to its advantage and attract passengers who would otherwise take a bus or train to reach any destination within this region.

Building a network to feed the flights of the mainline division is not enough; the airline needs to find its own market which will be served between the mainline waves of departures. In my opinion the airline should propose a new project entitled ‘Belgrade, a Balkan crossroad’ where it would provide connections for intra-Balkan flights. This programme could make certain routes profitable that otherwise would not be so. A good example of this is the flight from Belgrade to Zagreb. Due to good road infrastructure between the two cities most people opt to travel by car or bus. However, by establishing this route in the post-reorganization period it could feed the mainline’s waves of departures but more importantly it could also offer connections to the regional flights out of Belgrade. Just before the crisis there were roughly 20 passengers flying between Zagreb and Bucharest. Since this route would not be profitable for either Croatia Airlines or Tarom people travelling between the two cities have to either travel by road (which requires crossing several borders) or fly via an alternative hub. If Jat could manage to capture this market (and due to its geographical location it could), it would mean that on a daily basis it could fill 30% of its Zagreb flight with passengers connecting onwards to Bucharest.

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In order for this plan to be successful, careful planning and a light cost structure would need to be set in place. Fleet commonality is paramount hence the reason the fleet should be comprised of Atr 72-500s.

This is naturally a simplified explanation of what is needed for Jat to have even a remote chance of surviving. This is why the work done by the so-called experts should be disregarded since they will only reduce the negative effects but will not solve the actual problem.

If the restructuring plan proposed by the task group does take place then Jat will have a young fleet of regional aircraft, but at the same time this fleet will be operated by an expensive crew (and a generally expensive cost structure). Therefore the problems faced by the airline will simply persist under another guise. At this point the carrier will be left with two choices: either to reduce or to increase its fares.  The first option will attract more passengers, which should work, but at the same it will make the airline bleed money; or the latter choice resulting in increasing its fares beyond rational levels, serving only to tarnish its image among the travelling public. This second choice would  create the perception that, no matter what, Jat Airways will always be the most expensive option.

The fact that this group of ‘experts’ have yet to propose fundamental changes within the airline only goes to prove that they lack the basic knowledge of the aviation business.

 

To be continued…