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.

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Belgrade, a Yugoslav hub.

 

It is a common Balkan phenomenon for one to come across a speech by an airline or airport official stating that the institution they work for will become a regional leader.

However what these people tend not to do is specify which region we are talking about. Is it the region of that particular city? Is it the country itself? The Balkans? South-East Europe? The whole of Europe?

 

In today’s thread all the Balkan comparisons will exclude Athens and Istanbul as they are in a completely different league when compared to all other Balkan airports.

In the region of ex-Yugoslavia it is no secret that Belgrade has the greatest potential to become a regional leader. This is not my nationalism speaking, nor is it wishful thinking but it’s simple common sense backed by solid facts.

Naturally, the growing economy and the developing tourism industry are fuelling passenger demand. However, these are only contributing factors required to transform Belgrade into a regional leader.

For an airport to become a regional leader it needs to have a strong local carrier. In the case of Belgrade, the lack of a strong domestic carrier is standing between the airport and regional dominance. Jat Airways is a crippled, senile airline currently operating by default.

Jat’s so called regional network includes three cities (Skopje, Sarajevo and Podgorica) whose flights are timed to offer connections during early morning departures.

What Jat failed to think about is how passengers will arrive at their final destination without spending over 7 hours waiting at Belgrade airport. Recently the airline started offering afternoon flights between Belgrade and Skopje, but the only problem with this is that once in Belgrade passengers have nowhere to connect to besides Dubai (via Larnaca), a schedule which

operates only 4 times weekly.

The airline’s incompetence goes so far that they are unable to offer daily flights to major hubs around Europe. Recently both Dusseldorf and Athens have been upgraded to daily services. Dusseldorf is perfectly timed for connections via Belgrade, whereas Athens leaves roughly one hour before the arrival of the regional flights (that is if we exclude the random afternoon frequencies).

 

Loads to Dusseldorf are decent whereas Athens records catastrophic loads, usually below 50%. Maybe it’s time Jat understood that one of the main reasons for a regional network and feeder flights is not to make the route map pretty but rather to fill their outward flights with passengers from the region.

 

However, today I am not going to speak about the importance of feeder flights in general, but rather how they could play an important role in giving Belgrade a clear advantage over other cities in the region.

The key to Belgrade’s success is in the origin and destination (O&D) market. The O&D market is made up of passengers travelling between points A and B, that is they are not using Belgrade as a connecting airport.

 

With a regional network in place the newly launched flights departing Belgrade would be fed by the O & D market, thus guaranteeing satisfactory load factor

 

For example, when Malev introduced flights to the Yugoslav region, they had to invest a lot of money in advertising in order to secure decent loads and to attract connecting passengers to Budapest. Jat would not need such a large investment in this region as the brand is already known. What Jat needs is to reinstate services to Yugoslav cities. It was a good start when they reintroduced Dubrovnik as this was once one of the most important destinations for JAT (Yugoslav Air Transport).

There is another problem at this point. Since the dissolution of Yugoslavia, the younger generation has no sentimental link to the cities on the Adriatic coast. For a lot of young people Dubrovnik is just another city in Europe trying to attract Serbs to spend their money there. On the other hand, for the older generation, Dubrovnik is more than just a city, it is a reminder of better days way back when…..! The O&D market is shrinking every year and Jat should act before all is lost.

This is something Jat needs to understand when entering these markets. We are no longer living in the heyday of Yugoslavia. The market has both changed and shrunk since then.

The best example is this summer season; even if there are 2 weekly frequencies between Belgrade and Dubrovnik, the loads are still weak. This summer Greece and Turkey remain as top destinations for holidaymakers.

 

Yugoslav expansion should be carried out carefully and with thorough prior analysis; most importantly this expansion should concentrate on offering connections via Belgrade. Numerous tourist destinations have become cash cows for a lot of airlines, the best examples being Larnaca and Malta.

I believe that this new expansion should be undertaken by people who had no connection to the old JAT as emotions are something that have no place in this new business environment. Today these destinations are simply on a par with certain other coastal cities outside the Yugoslav region, Thessaloniki or Venice for example.

 

Recently Lufthansa announced that their European network is losing money and that they need to do something in order to bring it back to profitability.

Interestingly, airlines such as British Airways, Air France and KLM have never made similar statements. This is because all these airlines operate out of hubs that have considerable O&D markets. By relying on this O&D they can always expect a certain number of passengers on their flights, meaning that they do not need to drop their fares in order to attract passengers.

Some airlines that are facing similar problems to Lufthansa are those that developed their hubs in places with a small O&D market (relative to their operations). These artificially created hubs are dangerous places and need extra caution when planning future business steps. Another European airline that has tried to recreate Lufthansa’s success is Latvia’s national carrier, airBaltic. Currently the airline is battling debt and may face closure. This is because such airlines attract passengers with low fares that cannot sustain their route network.

Within the region Slovenia’s Adria tried to create its own its own hub without a substantial O & D market which resulted in the airline owing €100,000,000

That is why Jat Airways should feel blessed that it can still rely on its O&D market to sustain its regional and European expansion.