With relative peace back in the Balkans, the fragmented airline industry is trying to re-establish a semblance of order
Not so long ago, commercial aviation in the Balkans began and ended with JAT Yugoslav Airlines. But the civil war and ultimate break-up of the Yugoslav republics changed all that. From the maelstrom emerged several new, smaller national carriers, largely built around former JAT staff and infrastructure and mostly reliant on visiting friends and relative (VFR) traffic for their revenues.
As a consequence, they lack the critical mass and home market to make a real impact, although the large exile communities in Europe, the thousands of NATO peacekeepers and political shuttle diplomacy are all currently boosting international traffic.
Only Adria Airways and Croatia Airlines, which were both established before the troubles, so far have built sustainable operations. Those are based around ethnic and tourist traffic - although, even for them, profits are difficult to achieve. So, today, the future of regional air transport could well continue to reside in Belgrade.
The rump of a battered JAT survives, and even in its current, much-reduced form remains a dominant force in Balkan aviation. The disintegration of the Yugoslav Federation and subsequent war in Kosovo profoundly affected JAT.
At first, the frequent imposition of sanctions prevented the carrier from maintaining its international connections and implementing the necessary renewal of its ageing fleet. Then the NATO bombing of Serbia, followed by the tumultuous overthrow of President Slobodan Milosevic, gave rise to destroyed infrastructure, closed airports and continued operational disruptions. Finally, the assassination of company president Zika Petrovic last April threw the airline into further turmoil.
Yugoslavia now comprises only the republics of Serbia and Montenegro with a combined population of 10 million, compared with 26 million before the disintegration. The former federation's 18 airports have been reduced to three: Podgorica in Montenegro, and Belgrade and Pristina in Serbia. Former key destination Nis is still out of action as a result of the bombings. Average earnings have plummeted.
From a $1 billion enterprise carrying more than 5 million passengers, JAT last year had revenues of just $120 million and 1.1 million passengers, with losses estimated at $4-5 million, says commercial director Novica Vulic. Overall, he puts the financial cost to JAT of a decade of isolation at $20-25 billion.
JAT restarts
JAT believes that, after these devastating blows, the only way is up. "This is our third start since sanctions were first introduced in the early 1990s," Vulic says, "and we have to proceed cautiously. We have been out of the market and have to make our international market position more secure."
Even during the period from 1995 through to the re-introduction of sanctions in 1998 - when JAT had a full programme - Vulic recalls that operations were a struggle, because the airline had to pay cash for all services abroad, such as fuel and landing fees.
As with all airlines in the region, JAT relies heavily on VFR traffic, which accounts for at least 40 seats on every European flight. "But," says Vulic, "we need to get back into North America, where around 1 million Yugoslav Serbs offer great potential." The airline last operated transatlantic flights in 1992, but is now preparing the way for possible scheduled services in 2003 by planning exploratory "low-risk" charter services between June and October this year linking Belgrade with Chicago, New York and Toronto. Charters will be flown with the airline's single McDonnell Douglas DC-10.
The fact that JAT has only one widebody is yet another problem, Vulic adds. "To operate a schedule to two points in the USA, we need at least two aircraft, and must renew our long-haul fleet. Whether we buy or lease will depend on the financial situation at the time."
But the airline's precarious financial position is casting a shadow over its entire fleet renewal programme. Its debts of around $290 million - made up of $190 million principal and $100 million interest - continue to make its proposed purchase of eight Airbus A319s doubtful.
Although the contract signed by the Milosevic administration remains in force and the delivery schedule is set for two aircraft a year from 2002, Vulic says the airline needs a "period of grace for two or three years" to see how its business develops.
"For the moment, it is almost impossible to invest $600 million [on the Airbus fleet], while we still have $200 million outstanding on the Boeing 737-300s. Within the next three years, we can probably pay off half of our liability on the 737s, and then we will be able to think about investing in the Airbuses," he says. JAT's fleet now comprises 21 operational, if ageing, aircraft, including the DC-10, 17 narrowbody jets and three ATR 42 turboprops
The second thrust of the new strategy centres on eventual privatisation and joining a global alliance. Vulic recognises that much work needs to be done to prepare the airline for both, emphasising that it is a strategy, rather than a priority.
In the meantime, the airline will sell off its peripheral activities first, including JAT Agricultural Aviation, JAT Catering and JAT Hotels. But there are other priorities: the airline needs to improve its service standards and become more efficient.
Some pruning of staff is necessary, although airline operations account for only 3,500 of a total workforce of 4,800. "Around 3,000 is acceptable," says Vulic, "and this can be achieved easily, since around 500 reach retirement age within the next two years. The greater problem is the average age, which is a very high 51 years."
Projecting JAT's future, Vulic says he fears the airline will never get back to its position of 1991, when it was the 13th biggest airline in Europe. "I can see us as an airline with 1.5 million passengers, annual revenues of $200 million, 15 aircraft and 3,000 employees," he says.
For MAT Macedonian Airlines president Dusko Gruevski, 2001 was "catastrophic", even before 11 September. The activities of extremists and militants in early 2001, which led US President Bush to declare that travellers to Macedonia and Kosovo were at risk from terrorism, badly affected air traffic. For a time in September and October, additional insurance premiums incurred costs of $50 per passenger, only half of which the airline felt it could add to ticket prices. For the other half, Gruevski recalls, its shareholders had to "dig deep into their pockets". The result was heavy losses. Gruevski declined to elaborate, but with passenger numbers dropping by 30% to 250,000 and revenues below $40 million, the impact on finances was serious.
Although the removal of Macedonia from the terrorism list in October provided some relief, survival remained management's biggest priority in 2001. A new business plan put together at the beginning of last year had to be abandoned, but is to be revived within the next few weeks, according to Gruevski.
MAT fleet plan
That plan included an assessment of the future shape of the fleet. "The fleet was to be built around the current two 737-300s, plus some additional Boeings of the same size. Then we flirted with the idea of increasing flights to Rome with regional jets. We started leasing discussions with JAT and returned our two McDonnell Douglas DC-9s to the Yugoslav carrier," says Gruevski. But the increased military activity scuppered those plans, and also led to the cancellation of negotiations with CIT Leasing for two brand-new 737-700s.
"We just could not predict what was going to happen, or even if we were going to survive. But now, we are looking for another chance and within the next weeks the future should be less uncertain," he says.
Macedonia is presently peaceful (although the Peace Plan has yet to be finalised and implemented) and stable, and if the Macedonian economy recovers, so will the airline's fortunes.
Macedonia's other airline, Avioimpex, also has suffered and is barely hanging on. It stopped flying from Skopje and has moved a much-reduced operation with a single aircraft to Pristina, which is considered the safer option, following the lead taken by British Airways and Lufthansa.
The divisions in neighbouring Bosnia and Herzegovina are plain to see, with Air Bosna operating in one part of the country, and Air Srpska - set up with the help of JAT - in the semi-autonomous Republic of Srpska. The NATO air strikes on Yugoslavia and the closure of Sarajevo Airport badly affected Air Bosna, although there is optimism for the future, with its ageing Yakovlev Yak-42 due to be replaced with two new Airbus A319s next year.
Air Srpska will only survive, says JAT's Vulic, if it collaborates with Air Bosna, which could lead to the opening of a route between Air Srpska's Banja Luka base and Sarajevo. The present mountainous road journey takes at least five hours in good weather.
Tiny Montenegro Airlines has built up a small number of services from Podgorica westwards, with the coastal city of Tivat also linked into the network, flown with two Fokker 100s. The acquisition of a smaller 50-seat aircraft is planned.
While all airlines in the region were affected by the events of 11 September, the troubles in Kosovo and Macedonia had a less heavy impact on the operations of the longer established airlines in the western Balkans, which are aligned more closely to western Europe. Scheduled traffic at Adria Airways dropped by only 3% to 690,000 in 2001, which Adria's commercial director Bojan Sodnik blames entirely on the fallout from the terrorist action in the USA.
With charter traffic falling by 28% - something Sodnik attributes to a change in policy from seat-only to whole-aircraft charters - overall passenger traffic was down by 8% to 801,000. But a hike in fares enabled the airline to increase revenues by 6% to $110 million. It also managed to stay in the black, estimating profits of $500,000, compared to planned income of $1.5 million. Plans for fleet expansion have been postponed to summer 2003, says Sodnik, when the airline will be looking to add one or two 50/70-seat and a similar number of 100-seat aircraft.
Croatian growth
Croatia Airlines, despite carrying 10% fewer passengers than planned in the final three months of last year, nevertheless posted a 17% full-year gain, reaching 1.25 million.
Rationalisation of its network, in some cases combining routes, increased productivity of the fleet, and temporary suspension of codeshare flights, contributed to the strong showing, the airline says. However, expected revenues of $134.5 million for 2001 were not met. Apart from the operating lease of one 70/90-seat jet aircraft this year, the carrier does not plan to acquire any new aircraft, "until at least 2005".
Croatia says its recent investment in a mid-range Airbus fleet - with its high initial finance cost and long-term indebtedness - would make the acquisition of further new aircraft an unacceptable commercial risk.
All Balkan carriers realise the importance of alliances, both with the flag carriers of Europe and within the Balkans. Many have already established strong links including codeshares with intercontinental carriers from countries with high concentrations of ethnic populations, in particular Germany, the Netherlands, Austria, Italy, Switzerland, and to a lesser extent Scandinavia.
But to minimise the effects of scattered resources and to recreate critical mass, co-operation among the various airlines is seen by most as key to long-term survival. In December 2000, under the initiative of JAT, airlines in the region, including Adria Airways, Croatia Airlines, Macedonian Airlines, Air Srspka and Malév met in Belgrade to discuss the possible creation of a formal regional alliance in south-east Europe. Enthusiasm was initially high, especially on ideas related to combining operations, but little follow-up has occurred, with some blaming subsequent management changes at Malév, Adria Airways and JAT for the inertia.
In any case, collaboration is not endorsed by everybody. JAT's Vulic, for example, says that all airlines in the region must look first at their individual strategic aims before trying to share out responsibilities. "As to JAT, we must protect our position. We are not in a position to discuss details now, nor share our market with others," Vulic insists.
Croatia Airlines is similarly inclined, saying that it is not interested in most of the proposals put forward at the meeting, having already established "high quality business deals in such segments, in co-operation with leading European airlines". The carrier's main interest lies in bilateral co-operation with JAT to re-open a Zagreb-Belgrade link, for which JAT is also striving. But this would first require an air traffic agreement between the two countries. Nevertheless, hopes remain high.
If these plans do progress to the level envisaged by the participants, the fledgling carriers - while having flown the nest - may still have JAT as the mother bird to guide. But for now, the grand idea of a single, powerful carrier for the Balkans remains as far away as ever.
Source: Airline Business
