Balkan Unity. Thank you, but no thank you…

Recently there was much talk related to a creation of a single Yugoslav airline. Many prophesised that this was the only way these airlines could compete and thrive in the modern-day aviation business. While these self-proclaimed experts spread their ‘wisdom’, a relatively small group of people, with some sort of knowledge in aviation, laughed knowing that this would never occur.
Though many would argue that this would fail because of politics, the reality is very different. This project would fail because it is not sustainable, just as the nation of Yugoslavia wasn’t.

In mid-April CAPA published a rather superficial analysis on this proposal, not presenting its readers with the challenges beyond those from the world of politics. A month later the Economist reinvented the wheel by publishing the paraphrased mediocrity calling upon the Western Balkans to commit the same mistake they did roughly a century ago.

Today’s post will be based on the article published in the Economist since it has a wider readership, and is generally more influential than CAPA.

There is little concrete correlation between the title of the article and its content. By reading the title one would assume that there is a pan-Balkan move to unify the airlines into a single larger one. This is not the case,- unless, of course, the author believes that the ex-Yugoslav region is all that matters in the Balkans? The article talks of a meeting between the representatives of four ailing carriers meeting in Montenegro to discuss what they could do in order to fight the arrival of lowcost airlines into their home markets. As expected no concrete decision was taken.

However, the author of the article manages to contradict himself from the very start. In his first sentence he makes a bold statement that all eastern European airlines are sick. Within the same paragraph the author states: ‘Most East European airlines are losing money’. At this point one needs to ask if, according to the author, most of these Eastern carriers are sick, but not all of them are losing money, then what characterizes these profitable carriers as sick? Could it be that the author did not bother to look at the state of several carriers such as Aeroflot, Transaero, Travel Service, LOT Polish Airlines, Wizz Air, Blue Air…?
All of these carriers are far from being ‘sick’, yet they are all based in Eastern Europe.
In addition to attempting to create a false perception of reality in order to support his argument, the author forgot to mention that Eastern European airlines are not the only victims of bad management and the World Economic Crisis. Numerous airlines in the West are struggling just as much as these Eastern ones are. Even long established carriers such as Air France had reported tremendous losses, SN Brussels did the same, while Lufthansa had come forward with a statement that its short-haul operations are not profitable, echoed in a statement by Finnair. Even beyond the borders of the European continent the same trend can be noticed. JAL of Japan has been struggling financially for years now; Qantas has just reported a 90% slump in its profits while American Airlines is currently undergoing Chapter 11 restructuring. Then again, it is worth mentioning the major recipient of government subsidies, Air Canada, which would not be able to survive had it not been for their government bailing them out on numerous occasions. In addition to bailing them out, the Canadian government had blocked numerous Middle Eastern carriers from establishing flights based on demand instead of restrictive bilateral agreements. All in all, civil aviation business is suffering on a global scale; Eastern Europe is just one part of this phenomenon.
It is true that Eastern European airlines are suffering from rising competition from lowcost carriers, but once again, this development is not exclusive to this part of the world, it is a global trend.

The last sentence of the first paragraph should completely discredit the author as it portrays his lack of knowledge when it comes to civil aviation. His mention of Malév’s bankruptcy is completely taken out of context here. Malév’s unfortunate demise did not come as a result of a classic bankruptcy, but rather as a result of bad and inconsistent policies by the CEOs. The final nail in Malév’s coffin came during the tenure of the current CEO of Wizz Air, Tomasz Váradi, who had signed the airline’s fleet renewal. The agreement had been so unfavorable to the Hungarian carrier that it could never make a profit due to additional costs included in the leasing contract. On top of these additional expenses the airline had to battle with weak economic performance of its key markets and the rising cost of fuel. The same man who inked the detrimental fleet renewal was the one to report the case of Malév to the European Commission.
The European Commission clearly breached its own regulation when it claimed that the airline must pay back the subsidies it had received from the Hungarian government. Once the news reached Budapest, the Hungarian government decided that it could no longer finance Malév’s survival and so it decided to shut down the airline. Had the fleet renewal been done properly Malév would have never faced liquidation.

To get back to the topic in hand, I would like to present the key problem to the establishment of this new airline: the hub.
Though each country would still maintain a certain number of routes, there should be one dominant airport from where most of the flights would originate and where most of the regional flights would feed the routes which are not sustainable from other airports. Naturally it would make sense for that airport to be based either in Belgrade or Zagreb. Belgrade which is currently seeing impressive passenger growth and handles more passengers and airlines on a yearly base than Zagreb would be the obvious choice. Not to mention that Belgrade currently has better infrastructure which could be used by this new airline.
However, the million dollar question is: are the Croats are ready to accept this? If we judge by the statement at the end of the Economist’s article where Croatia’s minister of transport says that unless Croatia Airlines revives it should merge with Adria, then we can assume we got the answer to our question. A merger with smaller Adria would mean that Croatia Airlines and Zagreb would become the dominant players. This would not be possible if Belgrade and Jat were added to the equation.

Another major challenge for these airlines is in their fleet structure. Adria’s fleet is the one to pose the greatest problem in creating a new airline. They have 6 CRJ200 aircraft which are highly uneconomical for the modern day aviation business.
For example, a CRJ200 consumes 1.200 kg/h of fuel to carry 50 passengers, while Montenegro Airlines’ ageing Fokker carry double the amount of passengers but consume just 100 kg/h more fuel. This only goes to prove that 6 out of 13 aircraft in Adria’s fleet are bleeding money, a trend which should be reversed through the establishment of a single Yugoslav airline. By pursuing a merger in the current environment, an airline would be created with a fleet consisting of: Boeing B737-300s, a Boeing B737-200, Atr-72s, Fokker 100s, Embraer E195s, Airbus A319s, Airbus A320s, CRJ200s, CRJ900s and Dash-8s. Optimal fleet structure for an airline serving Yugoslavia should be made up of Airbus A319s, A320s and Dash-8s.

The most logical step would be to pursue a merger between Adria and Croatia Airlines, their core fleet is similar as both airlines operate Airbus aircraft. This means that there would be no additional cost to set up maintenance facilities or to provide the employees with additional training. If Adria were to introduce Dash-8 aircraft, their maintenance could be done in Zagreb thus lowering operational costs.
Montenegro Airlines operates out of a small, and extremely seasonal market, so its fate would be dictated by the bigger airlines.

If Adria, Croatia Airlines and Montenegro Airlines were to pursue a merger, should Jat Airways follow suit? Currently the airline operates a fleet of 14 aircraft, 10 Boeing B737-300s and 4 regional turboprop Atr-72 aircraft.
If they were to join this new venture they would have to consider replacing their Boeing fleet with Airbus aircraft in order to create synergy with other carriers within the alliance. This would bring about a new additional problem. The reason why all these airlines are considering unifying is because they lack the financial means to sustain their current operations. This only leads one to conclude that these airlines, even after unifying, could not afford to finance Jat’s transition from an all Boeing to an all Airbus fleet. As the carrier serving the biggest Yugoslav market it would require more than a few aircraft which could be transferred from Adria or Croatia Airlines. In addition to this, additional training of its personnel would increase the costs on top of introducing additional maintenance facilities at Belgrade airport. All in all, the cost of including Jat Airways in this project would cost more than they can afford.

The fact that Jat Airways is not a natural partner for this ex-Yugoslav alliance does not mean it is a lost cause, quite the opposite. This should make the management of Jat Airways realize that they are pursuing cooperation with the wrong airlines. Their future cooperation should be with Serbia’s traditional ally, Romania. Romania’s national carrier Tarom has a similar fleet structure to that of Jat. 18 of their 24 aircraft are directly compatible with Jat’s fleet.
Tarom operates both old and new generation Boeing B737 series, as well as 9 turbo-prop regional aircraft. This means that Jat’s natural partner is not to be found in the west but rather to the east.

Apart from the fleet commonality, both airlines complement each other. Tarom’s strength is in certain western European markets and the Middle East, while its services to Scandinavia, ex-Yugoslavia and Russia are limited to non-existent. Jat Airways is in the complete opposite situation: it has a decent network across Scandinavia and the ex-Yugoslav region, while its service to Moscow was reinforced with an additional three frequencies at the beginning of this summer season. On a weekly basis Jat offers a total of 17 flights between the two cities, 10 on its own metal while the other 7 are offered through a codeshare agreement with Aeroflot.

For Jat, closer cooperation with Tarom is far better than any proposal coming from the ex-Yugoslav capitals.
Yugoslav aviation is in a state of total chaos. Adria which has managed to accumulate over €150 million debt is constantly failing to make itself efficient when facing competition. On top if all, the recent announcement by Wizz Air that it will be launching flights to Ljubljana should result in this bad situation becoming worse for the Slovenian national carrier. With 6 highly inefficient aircraft in its fleet they will not be able to launch a price war against Wizz Air. I would like to point out that when I mention a price war I am referring to lowering the prices but at the same time not bleeding money. This can be achieved through efficient fleet and a competitive cost structure, neither of which is present in Adria.

On the other hand we have Croatia Airlines which, despite a modern Airbus fleet, 6 Dash-8 aircraft and a Star Alliance membership, manages to fail. Recently it even threatened the management of Zagreb airport that it would axe flights to key destinations if they allow, or encourage, lowcost airlines to launch flights to the Croatian capital. So not only are they discouraging the management from doing their job, thus distorting the ideal of free market, but at the same time they are also encouraging protectionism, which is a sign of a management which has failed to modernize and embrace modern business trends. A bad relationship with its staff has led to numerous strikes while the airline lacks a clear strategy when it comes to its future.
I will be audacious enough to compare Croatia Airlines and British Airways. I will do so not because they are similar airlines, or because they are of the same quality, but because they are both located in countries with similar aviation geography. This means that both airlines operate out of countries with numerous airports, making it difficult to establish domination over the market. Several years ago British Airways had decided to concentrate its operations in London by terminating international flights from secondary airports and establishing a domestic network. Croatia Airlines has not done so, and the airline still insists on offering flights from Zagreb to Europe via its coastal cities. This is only making them less competitive internationally. The icing on the cake was when the Croatian government wanted to appoint the new CEO who was previously accused of harassment by one of the female employees. Once again, this goes to prove the utter failure of their management.

Despite their fallacies, the biggest problem for both Croatia Airlines and Adria is that their master, Lufthansa, relies on these airlines to feed its growing network rather than to become self-sustainable companies. Then again, Lufthansa’s faith in Croatia Airlines might be dwindling as they have decided to launch their own flights from Berlin to Zagreb.

The other two airlines in the region, Montenegro Airlines and B&H Airlines, are a joke and will survive only as long as they receive subsidies from their respective governments. The Serbian government should consider abandoning altogether this proposal as Yugoslav airlines are willing to work with Jat Airways only now when they are in a desperate position. We all remember why Jat Airways was forced to terminate its flights to Dubrovnik back in 2009, or who was behind Master Airways (and why it closed down), or why Jat Airways did a favour to Montenegro Airlines by allowing them to take over most of the passengers between Montenegro and Belgrade some years ago…! Additionally the article fails to point out what would happen with the south Serbian province of Kosovo whose independence is not recognized by either Serbia or Bosnia.

The best part of the article, which only goes to prove how little the author knows about civil aviation, is when he calls upon the ex-Yugoslav airlines to unite in the same manner as SAS did. The article fails to state which city should act as the central hub, as does Copenhagen in the case of SAS.
What the author fails to realize (one of many things I fear) is that SAS is currently struggling to survive due to a heavy cost structure, a difficult relationship with the unions, a large share of its fleet being ineffective and old, plummeting shares in the last five years, and it is currently under attacked from lowcosts such as Norwegian Air Shuttle and Flybe Scandinavia…

Now that I think of it, JAT’s offspring are already in the same situation as SAS. All that is needed is for them to unite under one common brand.

They should resurrect the Air Yugoslavia brand, after all this experiment will have as much success as that country did.

Who dominates in Belgrade?

 

Since I started writing this blog I have spent a lot of time looking at the flaws of Serbia’s national carrier, Jat Airways. So today, my focus will be less on Jat and more on the general situation at Belgrade airport.

 

The summer season kicked off with two extremely strong weeks whereby Belgrade airport saw passenger numbers soar by 27%! At the end of the month the numbers were slightly more modest with a 17% rise. These numbers were more than impressive, but could we say that they are surprising? Belgrade, just like the rest of Serbia was cast into darkness and seclusion by much  of the world throughout the 90s. The decade was one of the darkest periods in the history of Serbian aviation. One could even argue that it was darker than the period of the Second World War when Aeroput just like other European airlines was grounded. On the other hand the 90s were a very successful period for numerous airlines around the world, but not for Jat.

The 90s have come and gone and now it’s time for both Jat Airways and the airport to enjoy a well-deserved period of prosperity. Unfortunately Jat has been unable to use this to its own advantage but on the other hand the airport has been doing very well indeed..

But what is happening with the other carriers? In 2011 Belgrade airport saw its passenger numbers rise by roughly 20%. No matter how impressive these results are we cannot say that all airlines present in Serbia managed to turn Belgrade into a success story.

Some traditional airlines in Belgrade such as Austrian Airlines or Swiss managed to reinforce their already strong presence in Belgrade. Others like CSA or Malév have been failing to cope with the growing competition in the market. Finally some underdogs like Tarom or airBaltic managed to do wonders and consolidate their position at the airport.

Both Tarom and Malév launched flights to Belgrade in December 2009. Tarom did this in a modest manner by using their regional turboprop aircraft operating the route three times per week. On the other hand Malév launched Belgrade with a massive ticket sale and by operating the inaugural flight with their B737-700 carrying airport officials and journalists onboard.

With the resumption of the normal fare structure Malév’s glory started to fade as passenger numbers began to shrink. The airline was forced to reduce both frequencies and capacity on the route. On the other hand Tarom has been adding frequencies, bringing the total to 5 during the 2011 summer season,and their load factor was more than impressive at 71%.

For the sake of simplicity I have divided the airlines into their alliances, whereas those that do not belong to any have been simply tagged ‘the non-aligned’.

As June is the introductory month of the summer rush I have taken the results of Belgrade airport and analyzed them in greater detail.

First stop is a simple insight into the market share of the four players at Belgrade:
70% of June traffic was carried by airlines which are not part of any alliance. A large percentage of the market is held by Jat Airways and Montenegro Airlines: naturally Jat as the national carrier of the republic, and Montenegro thanks to the large demand between the two countries.

Right behind the non-aligned bunch is Star Alliance with 22% of the market. Airlines that dominate within this alliance are Lufthansa, Swiss, Austrian and Spanair. Of these only Lufthansa saw a slight decrease in passenger numbers when compared to last year. However, their numbers are so impressive that even such a small decrease still puts them way ahead of their fellow Star members.

On the other hand Swiss almost doubled its passenger numbers which climbed from 8,728 in 2010 to 13,137 in 2011. This sharp increase was mostly the result of the additional frequencies from Zurich which were introduced in order to offer greater connecting possibilities to North America.

One of the true winners of this alliance has to be Austrian Airlines. They are the only airline from the Star Alliance family to see fierce competition on the route they operate out of Belgrade. In addition to good old Jat, the airline faces the Austrian no-frills airline, Niki. To make things even worse Niki announced the revision of their Belgrade operation which, among other things, includes an additional 5 frequencies during the winter season. With these new flights not only will Niki steal the O&D passengers from Austrian but will start competing for the transit passengers. Unlike Jat Airways, Niki uses their new Embraer E190 jet on the route; not to mention that soon they will become a member of the oneworld airline alliance. By becoming a member of oneworld they will assist Malév in filling the void left by British Airways’ withdrawal from Belgrade. No matter how fierce their competition is Austrian Airlines have managed to keep 51% of the market share between Belgrade and Vienna.

SkyTeam occupies the third position with 8% of the market. Top ranking airlines are Aeroflot, Alitalia, Air France and Czech Airlines. All SkyTeam members except CSA reported growth in June 2011. Most impressive growth came from Aeroflot whose numbers rose from 6,109 in June 2010 to 7,183 year on year. Another airline that managed to see healthy growth was Tarom whose numbers rose from 1,036 in June 2010 to 1,348 in 2011. CSA which had continuously failed to cope with the newly arrived competition suffered greatly and as a result was forced to cut Belgrade from 13 weekly flights to just 4!

Last, and unfortunately least, is the oneworld airline alliance with a pathetic 0,4% of the market! A major blow to oneworld passengers travelling to Belgrade was given last year when British Airways announced their withdrawal from the market prompted by the fact that Serbian citizens still require British visas in order to visit or transit the UK. This has proven to be the major disadvantage to British Airways which, unlike its competitors, could not attract mass transits to North America.

Today only Malév flies the oneworld flag to Belgrade. Unfortunately for them, their future in Belgrade seems uncertain. In June the airline managed to record an average load factor of only 47%, down from 50% same time last year. O&D market between Belgrade and Budapest is next to non-existent which means that Malév has to rely heavily on transit passengers. This puts Malév in a very difficult position and it’s a clear disadvantage when compared to the other carriers in Belgrade. Hopefully once Niki becomes a member of oneworld things will look up for the alliance’s situation in Belgrade.

If we take a closer look at the situation in the market between Belgrade and the Balkans things start to look interesting.

Below is the division of the Belgrade-Balkans market between Jat Airways and other carriers from the region.

In June 2010 the majority of the Belgrade-Balkans market was held by foreign carriers.

A year later this has changed with Jat Airways taking over the majority stake:

This change was probably due to the sharp rise in passenger numbers travelling between major areas of the peninsula. More specifically Jat saw a considerable rise in passenger numbers to destinations such as Istanbul, Athens, Tivat and Podgorica.

Athens remains as the only problematic destination since there isn’t enough demand for a daily B737-300 but it’s too far to be operated by an Atr.

In addition to the above mentioned destinations proving to be a success Jat has regained the monopoly on its Belgrade-Sarajevo route ever since Air B&H withdrew several months ago.

Routes to Croatia have been re-launched with Dubrovnik being the first city. During June Jat Airways managed to record a satisfactory load factor of 71%. Its competition on the route is Croatia Airlines which operates its brand new Dash-8 aircraft. Even if Croatia Airlines is a Star Alliance member and operates a more passenger friendly aircraft on the route, it has failed to attract more passengers. In June 2011 its load factor was only 40%. Both airlines operated equal number of flights between the two cities.

The overall situation in the Balkans is improving with every new season. Year on year passenger numbers between Belgrade and the Balkans have risen by 17%.

In June 2010 that figure stood at 60,559 whereas this year it is 70,678. More than half of these passengers travel between Belgrade and Montenegro. Year on year the number of passengers has risen by 15% (from 36,575 to 42,183).

So what conclusion can we draw from Jat’s positive passenger numbers? Since competition is very much present at the airport could we dare to assume that there is more faith and trust in the national airline of Serbia?

With these positive numbers the future doesn’t seem that grim for the 84 year old airline.

 

Atr vs Dash-8

Introducing a new model of aircraft into the fleet is never an easy task. Before doing so the airline needs to take into consideration numerous different challenges which it might face on the way. These different challenges vary according to the kind of model the airline plans on introducing. For example, numerous airlines that have introduced the A380 needed to make sure that both their home airport and destination airports were ready to handle them with the installation of, for example,  specialized gates and wider taxiways. When speaking of smaller aircraft, not necessarily regionals but, for example, members of the Boeing 737 family, challenges are usually smaller but not to be ignored.

 

The region of ex-Yugoslavia hosts a bunch of crippled airlines trying to become regional carriers without fully understanding what that means. The pack is led by Croatia Airlines which was the only airline to actually successfully replace a model in its fleet with a newer, more advanced one.

One could argue that Montenegro Airlines could make the cut but the fact that their market is far from liberated and that the airline has little competition doesn’t make it fair for us to put them in the same category.

Croatia Airlines’ replacement of their Atr-42 fleet with the Dash-8  was a smart move. Regarding their domestic market it made little difference as all flights are less than one hour. The main difference is that now they can use their fuel-efficient turboprops on the vast majority of European routes.

 

In Belgrade the decision on what to do with the ageing Atrs is not that easy. Jat doesn’t have the domestic market of Croatia, which means that for them it is far more important to define their business plan before making any rash decision regarding the fleet renewal.

One of the possibilities is to postpone the replacement of their B737-300 fleet and instead to concentrate on revising their regional network. With a reinforced regional network additional feed will be enabled in Belgrade and in such a way increase the average loadfactor on their mainline fleet.

 

As described in the previous post, there is a considerable origin and destination market between Belgrade and various areas of ex-Yugoslavia. However,  bus companies currently hold the monopoly by offering lower fares and multiple departure times.

In order to lure more passengers into flying to these destinations, Jat Airways will need to enter a price and comfort war against the bus companies. Most of the roads across this region are bad and travel times are usually very long, whereas they are reachable by air in less than an hour.

In order to be able to make a profit and still offer lower fares it would be advisable for Jat to create a subsidiary airline, similar to EuroLot in Poland.

Lot’s  subsidiary airline operates mostly on domestic flights using regional Atr aircraft. These aircraft are used both to feed Lot’s flights out of Warsaw and also to offer multiple daily departures to various Polish cities at a very low price.

Flights to Montenegro are popular due to the extremely bad condition of the road system making bus rides the equivalent of a ride to hell. That is why Jat should prioritize the resumption of the year round Dubrovnik service since not only is it difficult to access by road but it is also the Croatian city with the greatest potential.

 

By combining low prices with a strong marketing campaign Jat will succeed in stealing passengers from bus companies. With this campaign in place regional cities could be served several times per day, offering numerous connecting possibilities via Belgrade and at the same time giving flexibility to O&D passengers.

 

One main difference between Lot and Jat is that unlike Jat, Lot has a lot of Embraer jets which have enabled it to offer multiple flights per day to various European cities. Jat’s core fleet is made up of B737-300s with a total capacity of 125 seats making it difficult to offer several daily departures to various European cities.

 

This is where another problem arises: if Jat opts to enlarge its fleet of Atrs instead of introducing the Dash aircraft then it will be practically impossible for the airline to send them to key European routes outside the Balkans such as Rome, Milan, Zurich…

By introducing the Dash-8 aircraft they could add additional frequencies to these routes without dumping capacity on them. Double daily B737 would offer 250 seats whereas a daily B737 and Dash-8 would offer 193 seats.

 

The only problem with the Dash aircraft would be the lack of servicing facilities in Belgrade. Jat Thenika would have to be issued a certificate for servicing this model of aircraft.

Since it is not a secret that Jat needs a regional aircraft for longer thinner routes, which might be too long for the Dash, it would be wiser for them to spend more money in enabling Jat Tehnika to service these aircraft and to slowly start building their fleet around Boeings, Embraers and Dashes.

 

As always, Jat Airways needs a strategy that will enable it to reverse its falling market share in Belgrade. Unfortunately with the current management that will most definitely not happen.