As CSA Czech Airlines prepares for the European single air market, president Miroslav Kula believes the carrier has already proved it can survive even the most testing challenges
Two economic downturns, deregulation and the emergence of the low-cost sector have tested the mettle of most airline management teams over the past decade. On top of this, east European airlines have had to adapt from the days of the Soviet era to the disciplines of the western market economy - arguably the stiffest challenge of all. While some are still finding their feet in this vastly different world, the experience of CSA Czech Airlines demonstrates that although adapting quickly to such huge change is demanding, it is nevertheless possible.
CSA has certainly had to learn quickly how to survive in a competitive environment, which should stand it in good stead when the Czech Republic, along with seven other Eastern European states, joins the European Common Aviation Area (ECAA) in 2004 as a first step towards becoming a full member of the European Union (EU).
CSA president Miroslav Kula has been in the thick of things ever since the so-called velvet revolution of 1991 ended totalitarian rule in the country and ushered in a new era of liberalisation. In the early years after the collapse of communism, CSA's very existence was under threat. "Our first target was to survive," Kula recalls. "We had a prime minister, Vaclav Klaus, who saw liberalisation as something holy. He made it clear that if we were not able to survive on our own, we would disappear. The government was not going to help us. He said he had no doubt that carriers would serve Prague and he didn't care whether this was CSA or someone else."
This was the aftermath of the Gulf War and airlines around the world were in dire straits. "Most European carriers received subsidies. We received nothing," says Kula, estimating that losses at that time were equivalent to around half the carrier's equity base. Looking back at that testing period, Kula is philosophical. "At the time we were not too happy," he admits. "Now I can see we are in a better position than if we had been protected too much. We had to find a way to survive."
As if the Gulf War legacy was not enough to contend with, back at home, Czechoslovakia was going through a painful partition between the Czech and Slovak republics, which in 1992 forced the carrier to change its name from Czechoslovak Airlines. "We had to change the name, the livery, everything," says Kula.
At the same time, CSA, in common with other east European carriers, had sought an alliance in the West, bringing in Air France to take a minority stake in 1992. However, also in common with others, the equity tie was ultimately unsuccessful, and Air France, preoccupied with its own restructuring problems, sold the stake back to a Czech bank in 1994.
Nevertheless, by then CSA had already begun the move to upgrade operations and to replace its Soviet-built fleet. This subject is dear to the heart of Kula, who was then head of technical operations before stepping up to become president in 1999. The carrier took its first Airbus A310 in 1991, followed by Boeing 737s and ATR72s in 1992. The last Soviet aircraft, a Tupolev 154, left the fleet in 1999.
The airline had to adapt to change in other ways too. "My knowledge of English was zero. I had to learn and so did all my staff," says Kula, who is now more or less fluent. "I remember when Air France came over to Prague and they asked how are you able to operate with no support, limited documentation and no spare parts?" The answer was, the carrier did everything in-house. "Our people are very flexible," says Kula. "When we said we would introduce the 737 and ATR72 at the same time, Air France said we were crazy, but we did it successfully. We are used to innovation." CSA now undertakes third-party maintenance for the likes of Lufthansa and Hapag-Lloyd, and was the first carrier to use the winglet version of the 737.
Kula is at his most enthusiastic when talking about technical operations, eager to point out that airline chief executives with an engineering background are far from a dying breed. He proudly points out that he knew Lufthansa chairman-elect Wolfgang Mayruber when he was head of technical operations at the German flag-carrier, and first met Gordon Bethune, Continental Airlines' well-known boss, when he was in charge of the 737 programme at Boeing. "The key is to have excellent vice-presidents of finance and sales & marketing," says Kula. He is immensely proud of his achievements in revolutionising the fleet make-up. "It was a huge challenge. I am so pleased I was able to be in the right place at the right time."
But Kula says changing the airline's working culture has been a more important challenge. "The attitude of a lot of staff to the customer was 'buy it or leave it'. They didn't care," he says of the old days. Kula had to develop a service culture throughout the company. "We had to teach people to do it, and sometimes push people to do it," he says. All this was carried out internally, without the aid of management consultants. "Nobody had the experience in transforming from one era to another. Who was able to give us advice? Nobody."
SkyTeam benefits
What help CSA did have came mainly from Air France, now again a partner through its the SkyTeam alliance which CSA joined in 2001. Despite the failure of the previous equity tie-up in the early 1990s, Kula believes the two sides had learnt valuable lessons. "In my opinion we started from the wrong side. We started with an equity stake. We didn't start with commercial co-operation." He notes that both carriers had major internal problems after the Gulf War. "Now we are starting from the opposite way with SkyTeam. Later we may share equity - why not? But what is important is commercial co-operation."
Kula is enthusiastic about SkyTeam and the way the alliance is organised. "There are no second-tier airlines in SkyTeam," he says. "We highly appreciate the way Air France, Delta and Alitalia treat us as a partner." He sees the possible entry of KLM, Northwest and Continental Airlines into SkyTeam as a positive step and is unconcerned about the implications of KLM and Air France competing for feed at their respective Paris Charles de Gaulle and Amsterdam Schiphol hubs. "They will have to talk about that. For me it is not very different whichever one I fly to." CSA still has a codeshare deal with KLM.
CSA has a presence in North America from which to build if SkyTeam does enlarge. Besides flights from Prague to Toronto and Montreal (to serve a strong ethnic market), it has summer service to the major Continental hub at New York Newark as well as year-round at New York Kennedy. The Czech Republic already has open skies with the USA and CSA has antitrust immunity with Delta, which was approved a year ago more or less as a SkyTeam package.
However, the recent European Court ruling which outlawed nationality clauses in bilateral deals has raised uncertainty over such open skies agreements. It also unclear to what extent the EC will seek to influence the bilaterals held by the new states, the Czech Republic included, when they join the single aviation market in 2004. Kula is cautious about the prospects of Brussels negotiating on behalf of the member states.
CSA talked to all three major alliances before choosing SkyTeam, fearing that if it did not join, Hungarian flag-carrier Malév might pip it to the post. Kula is surprised that the oneworld alliance hasn't shown more interest in Malév, given the fact that Polish LOT Airlines has joined Star, leaving oneworld as the only major alliance without an east European base. Like CSA, Malév and LOT have both seen equity-backed relationships with EU carriers come to a sticky end. LOT was tied to the now-defunct Swissair Group until the latter's demise in 2001, while Malév and Alitalia had a partnership in the mid-1990s which ended in a similar way to the first CSA-Air France deal.
Kula was impressed by the level of interest shown in CSA by SkyTeam and the fact that Delta was much involved in the discussions. "When we talked to Star it was just to Lufthansa, never United, and with oneworld it was just BA, never American. This told us they weren't really that interested," he says, adding that the interest seemed to centre on picking up feeder traffic. "When we joined SkyTeam, it was also a brand new alliance, which presented more opportunities for us than joining an established alliance."
CSA is developing a role for Prague within SkyTeam as a hub for eastern Europe, and is looking to extend its network in Russia and the CIS. He also sees possibilities for Prague to act as a hub for some routes between Italy and Scandinavia where Alitalia does not have its own direct services.
Further afield, CSA is looking to do more in Asia with SkyTeam partner Korean Air, linking with the latter's Seoul hub. At the moment CSA does not have the aircraft to fly Prague-Seoul, however, and will have to wait until around 2005-7 when it will replace its A310-300s with Airbus A330s or Boeing 767s. This will also allow it to link with Delta's main Atlanta and Cincinnati hubs. The original western aircraft were taken on 10 to 12-year leases, which are coming up for renewal, so giving Kula some added flexibility.
Relaxed privatisation
SkyTeam partners may well participate in an eventual privatisation programme. "It will happen, the only question is when," says Kula. "There is no reason to be in a hurry. We don't desperately need the cash." As he points out, current market conditions are not ideal and a sale is unlikely until 2004 or later. Even so, the Czech national and local governments are likely to retain a controlling stake.
By then, the Czech Republic, along with other central European peers, will be a member of the European single air market and, shortly afterwards, of the full EU. CSA looks in better shape than most to meet the challenges this presents, including abiding by state aid rules and conforming to various environmental and social legislation. Kula sees this as a positive development. "I am really looking forward to it. I have no doubt there will be new opportunities for us. I am absolutely not afraid to open the doors to more competition."
CSA has already been scouting for destinations in western Europe where it can take advantage of the new freedoms that come with the single market, including opportunities to fly beyond and behind. However, Kula refuses to give any clues as to where these might be. "We would like to use opportunities in richer markets," he says, adding that he believes this presents a great opportunity for CSA to increase its level of business passengers, currently trailing at only 10%.
He also believes CSA can rest easy over state aid restrictions. "After 11 September, practically all European airlines received compensation. We received nothing," he says. Kula is confident his relatively young fleet will meet European environmental standards, and says Czech social regulations are already close to meeting EU standards.
EU membership will certainly help solve one of the anomalies that annoys Kula. Under Czech law, financial accounts have to be presented under local principles, even though CSA has adopted international accounting standards (IAS). In its local accounts, which have their own rules for the treatment of leases, CSA showed an operating loss of CZK152 million ($5 million) last year. That also reflects a 15% depreciation in the value of the Czech Koruna. Yet under IAS dollar accounts, the airline showed an operating profit of $25.7 million. Kula notes with some relief that this anomaly will be resolved with EU membership, when IAS principles will have to be accepted by the Czech authorities.
He points out that the Czech Republic already has a relatively open bilateral regime, including liberal agreements with most EU states. He adds that there are only limited options for outsiders to come into Prague and compete for the home Czech market - the country has just 10 million citizens "and, frankly, they are not so rich", he says.
Prague may see more low-cost carriers, however. EasyJet, through its Go acquisition, and bmibaby already fly to Prague from the UK, and the Czech capital's status as an all-year-round leisure destination is likely to see others follow. Kula seems relatively sanguine about this prospect, pointing out that much of the extra traffic is new business generated by low fares. He admits that yields have declined, but says the carrier's cost structure is not that different from the low-cost sector - and cites this as an important reason for not letting wage demands go too high.
Average salary levels in the Czech Republic are much lower than in the EU, but Kula concedes that all Czechs, and not just airline employees, "are dreaming about dramatic increases in salary levels". CSA is negotiating a new collective wage deal by the end of the first quarter of 2003 and Kula says "the demands by the unions are very high". Wages will rise to EU average levels, but it will be a gradual process, he adds. "It will happen, but it will not be possible for this to increase dramatically."
Kula admits that CSA itself had considered low-cost options. "We were thinking about lowering the quality of service to compete, but decided not to go down this route," he says. However, as he points out, the carrier's biggest competitor on the London route is not a low-cost carrier but still BA. In fact, he complains that BA has timed its Prague flights to depart London Heathrow just minutes before CSA's flights. "This has had a greater effect on our yields than the low-cost sector," he says.
If Kula seems confident about the challenge of joining the single European air market, perhaps it is because he has seen the carrier tackle far stiffer tests in the past decade and knows it has the ability to survive.
REPORT BY COLIN BAKER IN PRAGUEPHOTOGRAPHY BY ETIENNE DE MALGLAIVE
Source: Airline Business
