The Czech Republic's split from Slovakia at the end of 1992 - the population of Slovakia is half that of its bigger neighbour - has further complicated matters for CSA by wiping out its former domestic market. The carrier abandoned its last Czech domestic route from Ostrava to Prague this summer, preferring instead a block seat arrangement on Air Ostrava's six daily flights.
Unfortunately for CSA, Air Ostrava has serious international scheduled ambitions out of Prague and seems intent on direct competition with its larger rival. Air Ostrava began seven weekly services from Ostrava via Prague to Amsterdam in June and also flies from Prague to Nuremberg and from Ostrava to Vienna. The carrier plans to inaugurate flights from Prague to Zurich and Salzburg by early next year and also operates regular charter flights from Prague to Verona and Braunschweig in Germany.
CSA executive vice president marketing Jirí Prusa believes there is space for a national competitor out of Prague, provided the new entrant avoids destinations that already have too much capacity and opts for a regional network. 'There are a lot of regional destinations in central Europe waiting to be served.' However Air Ostrava seems undeterred by Zurich's capacity surplus and the intensification of competition to Amsterdam with Delta Airlines' new fifth-freedom service to Prague from New York via the Dutch capital.
While some CSA executives are tempted to dismiss Ostrava Air as small fry, CSA president and chairman Antonín Jakubse is more circumspect. 'It would be very bad to underestimate anybody because I could be very badly surprised later on,' he says. Ostrava Air currently operates two Jetstream 31s, two ATPs, three Czech-built L-410s and a Cessna Citation 3 business jet, but is looking at leasing new or used jets of up to 120 seats, says Jaroslav Fojtek, the carrier's commercial manager. Since last April Air Ostrava has been owned by the Chemapol Group, a large Czech chemical and pharmaceutical trading company.
Meanwhile the situation across the young border in the Slovak Republic is less clear. Before the division of the former Czechoslovakia, regional carrier Tatra Air was incorporated as a Slovak company under a dual arrangement which also left Slovak interests holding less than 3 per cent of CSA Czechoslovak Airlines, renamed CSA Czech Airlines earlier this year. The split into the Czech Republic and Slovakia leaves Bratislava-based Tatra Air with the chance to establish itself as the national Slovakian carrier, though a number of rival regional carriers, including Air Slovakia, may also aspire this role. Tatra Air's routes currently include services from the Slovak capital, Bratislava, to Zurich and Frankfurt.
Jakubse believes the Slovak Republic would like its own big national carrier, though the proximity of Vienna - just 50 minutes away by car from Bratislava - is a problem as many Slovakians opt to fly out of the Austrian capital. Jakubse admits there has been a substantial loss of feeder traffic from Slovakia to Prague as a result of the split. 'Some people are not eager to fly with Czech Airlines so they go to Vienna,' he says. CSA's main remaining Slovakian services are to Tatra and Kosice.
Along with a shrunken national market, CSA has been going through a major restructuring since the sale of Air France's 19.1 per cent stake to state-owned Konsolidacni Bank in March 1994. The main reasons for Air France's withdrawal are common knowledge, says Prusa. 'They were trying to protect their interest and this could not be reconciled with what was best for Czech Airlines. Most probably any alliance with any other airline in central Europe would have gone the same way,' he says. The main conflict was over CSA's desire to maintain some of its own long-haul routes rather than feed Paris/Charles de Gaulle.
CSA believes the purely commercial relationship with Air France is much more sound. The two carriers continue to codeshare on services between Prague and Paris and Air France still offers ground handling services to its Czech partner at many overseas airports. CSA has decided that for the moment the main alliance goals - commercial cooperation, gaining technological know-how and financial investment - can best be achieved separately.
Although the carrier is talking to carriers in North America and Asia in an attempt to become a small player in a triangular alliance, the focus is on commercial cooperation, says Jakubse. 'We are aware we are a very small company and we are trying to find somebody willing to discuss CSA as part of a mosaic in Europe,' he says. The carrier's preference is for future investment to come from Czech institutions, while expertise is being gained through specialist partners with management contracts in areas such as catering and ground handling.
The main aims of CSA's financial and commercial restructuring are to rationalise the network, raise productivity, boost yields and load factors, and increase cash flow.
Under international accounting rules, CSA made a small profit of CzK104 million ($3.7 million) on revenues of CzK7.4 billion in 1994. However the company lost CzK676 million under Czech accounting rules, a reduction of 60 per cent from the previous year. CSA's executive vice president finances and planning, Frantisek Slaby, says the main reason for the variation in results was the differing treatment of finance leases - under Czech rules finance leases remain off the balance sheet and the full aircraft leasing payment is accounted as a cost - and currency losses and gains. Auditors Ernst & Young also put a different residual value on the Russian fleet, he adds. CSA is budgeting for a loss of around CzK400 million this year and hopes to break even in 1996, says Slaby.
So far the performance in 1995 is encouraging, with operating revenues up 8.8 per cent and passenger numbers up 17 per cent in the first seven months. Load factors also increased from 61.7 per cent to 64.6 per cent. Utilisation of the carrier's western aircraft has been boosted through higher frequencies, while the fuel inefficient Russian aircraft are flying less, says Prusa.
The carrier has stabilised its fleet at around 22 aircraft, increasing overall capacity by retiring two Tupolev Tu-134As and leasing two new Boeing 737-400s from Gecas. The carrier's two leased ATR42-320s will be replaced by two purchased ATR42-320As from September. With the exception of CSA's remaining Russian aircraft - four Tu-154Ms and three Tu-134As - and the new ATRs, the remainder of the carrier's fleet is on finance lease and includes two Airbus A310s, five B737-500s and four ATR72-200s. The 12-year export credit supported Japanese leverage leases for the A310s were renegotiated last year, saving the carrier CzK200 million, says Slaby.
The financing of western aircraft has always been a major headache for CSA. Under the old communist regime during the 1980s the carrier paid some CzK2.5 billion in cash to the state budget. After 1989, CSA had to face the effects of the Gulf war and global recession with zero cash reserves at a time when it needed new western aircraft and higher frequencies to compete with western airlines. The resulting cash shortage has forced CSA to use 100 per cent lease financings, which do not require downpayments, for most of its aircraft.
CSA's historic cash shortage is still a fact of its everyday life though the carrier hopes to be cash self-sufficient in 1996. The first cash crisis came at the end of 1993 when the airline had to resort to a CzK500 million ($18.5 million) loan from shareholder Konsolidacni Bank to cover the installments on western aircraft. That interest-bearing loan was repaid in full last year and has been replaced by a new CzK560 million interest free loan, also to cover aircraft payments, repayable over five years.
Provided CSA's cash situation improves as planned, it will be looking to replace its three remaining Tu-134As in two years' time and is already studying the options. These could include more ATRs or B737-500s, or the Avro RJ75 or Fokker 70. Alternatively, CSA may invite Airbus to propose a full replacement deal covering this and other CSA aircraft. 'We could send back the Boeing aircraft if Airbus offered the right deal,' says Slaby.
CSA's restructuring has been in full swing since the second quarter of 1994. On the commercial side, Prusa says his main aim is to standardise the timetable to avoid variations in aircraft types and flight times from one day to another. The network is also being developed 'more intensively as opposed to extensively', he says. Route expansion will be ruled out until frequencies have reached an adequate level. 'My view is either we fly somewhere or we don't,' says Prusa.
The entire network is under review, with frequencies on short-haul services being increased directly or through codeshare or block space agreements with carriers such as Austrian to Vienna, Malev to Budapest, KLM to Amsterdam, LOT to Warsaw and Lufthansa to Munich.
CSA is also taking a long look at its long-haul services to New York, Chicago, Montreal and Toronto, and to Singapore and Bangkok via the Gulf. 'The issue is to review whether we should continue flying there. We are talking to potential partners about how we can cooperate,' says Prusa. CSA currently operates to the Far East twice a week and to new York four times a week in the summer and twice a week in the winter. Frequencies to the other North American destinations are one or two a week.
If the carrier cannot find a way to boost frequencies some long-haul routes could be dropped, says Prusa. The US and Canada seem less likely to be affected due to the amount of VFR and ethnic travel from there.
Prusa rules out the development of Prague as an east-west hub, arguing that there are too many cities aspiring to this role. Instead his aim is to boost CSA's share of the Czech market by wooing back those passengers lost to rival carriers after travel opened up. This means point to point European services will be given priority treatment, reducing the dependency on feeding long-haul operations, says Prusa. The Czech population is growing rapidly due to immigration and the Slovaks have a strong community in the US and Canada.
Tourism is also booming with 80 million visitors last year, eight times the national population, and an annual growth rate of 10 per cent. CSA's goal here is to boost the number of visitors coming from further afield than Austria or Germany so that more will travel to the Czech Republic by air. Though it is already full to capacity, last year Prague airport only handled 3 million passengers. A new terminal under construction will raise capacity to 4.8 million in 1997, though plans are also needed to address the hotel infrastructure shortage. CSA Airtours sells air travel packages into and out of the Czech Republic and charter services are on the increase, though due to the difficulty of funding aircraft only spare capacity is used.
Prusa's second preoccupation after the network is a reduction in distribution costs. This means careful CRS cost control and a possible reduction in CRS participation; the establishment of a central bank settlement plan for the airline; a reduction in the carrier's 55 sales representations worldwide; and the expansion of travel agency sales. Distribution costs are currently about $2 per passenger per segment, estimates Prusa.
Low yields are a major problem due to the old state airline mentality that high loads are good regardless of seat price. A Sita Strategy yield management system was introduced in March to give the carrier experience with basic yield management. 'We have very good load factors on the long-haul routes, but due to the discounts we are losing money,' says Prusa.
These commercial shifts are taking place against a backdrop of structural and philosophical change. Jakubse's main aim is for CSA to be a service-oriented company in which individual responsibility is paramount. He hopes to achieve this by breaking the airline down into a number of inside and outside 'divisions', each with control of its own costs, revenues and profits. Ultimately only the core airline functions will be centralised with other functions managed by separate divisions, says Jakubse.
Already the company has three external subsidiaries - Amadeus, Slovak Air Services and CSA Airtours - and eight vice presidents oversee internal divisions spanning a range of functions. While CSA's financial situation means everything has to be approved in detail from the top, Jakubse's ultimate aim is for most nitty gritty decisions to be taken by the divisions. 'In the near future I would just like to control the financial situation of these functions and just talk money and quality of service,' he says.
Quality of service is a major driver, and while the airline's increased productivity has been helped by a small reduction in employees to around the 4,000 mark, CSA has placed a lot of emphasis on training. Generous salary increases in 1993 and 1995 were needed to stem the loss of valuable employees to western carriers. But there is no danger the airline will lose its labour cost advantage in the near future. 'When we lose our competitive labour costs we will be better than our competitors,' says Jakubse.
CSA is edging along the narrow precipice between success and failure, with the latter a real possibility. But after Air France, the airline's fiercely independent stance has been backed by a rational strategy and a conviction that CSA will find its way.
Source: Airline Business