Polish flag carrier LOT is preparing to fend off a rush of low-cost carriers targeting the country by starting up its own budget airline
Each hour in Krakow's main square, a trumpeter plays from the top of a tower before stopping abruptly, recalling the moment a lethal arrow silenced a Polish bugler as he tried to warn the city of impending Tatar invasion in 1241.
His quick thinking and prompt action saved Krakow. And it is such a strategy that flag carrier LOT Polish Airlines is emulating as it tries to fend off another invasion: the assault by low-cost carriers seeking to plunder the country's air transport market.
As if it were not enough for LOT to see its former chief executive assist in establishing the country's first budget carrier, Air Polonia, the state-controlled airline has also watched two other serious, well-financed Central European contenders - SkyEurope Airlines and Wizz Air - stake a low-cost claim to its territory. Poland is also a target destination for Western budget airlines such as Germanwings, Air Berlin and easyJet.
Hardly surprising, says LOT executive vice-president Piotr Dubno, that the carrier feels under siege. "LOT is the leading airline, which makes us a little vulnerable," he says. "We're the market leader and in that position you don't see these things happening to you."
Dubno believes two forces are driving the low-cost interest in Poland. Existing budget carriers are trying to escape the intense competition in Western Europe by looking for new markets and, with its population of 40 million, Poland is by far the largest of the EU's new members. Only a fraction of its people, maybe 3-5%, have ever travelled by air; the often-poor quality of surface transport and relatively low Polish wages could make budget flights an attractive prospect.
But although the new breed of low-cost airlines are intent on luring passengers away from tedious bus journeys rather than necessarily tackling carriers such as LOT head-on, the national airline is bracing itself. With few secondary airports in Poland, the low-fare competitors are setting up at Warsaw Okecie and other main airports, depriving LOT of a possible diversification advantage.
Protect interests
Dubno says the market is still unsettled and LOT's extensive experience enables it to act quickly to protect its interests. "This is the beginning of the game. We see a chance in which, utilising our knowledge of the market, we can quickly be ready to offer a low-cost product best suited to what the customer really wants - and benefit from our knowledge before the low-cost airlines acquire it."
LOT's strategy centres on creating its own budget airline this November, wholly owned by the flag carrier but operating as a completely autonomous business. It is committing €1 million ($1.2 million) to the carrier which will have two bases, Warsaw and Krakow, and may initially use up to five Boeing 737s transferred from the LOT mainline fleet.
So far unnamed, the airline will be introduced in two phases. From the beginning of November, it will start operating as a charter carrier, drawing on the sustainable and predictable charter traffic to which LOT currently dedicates part of its 737 fleet. This preliminary operation will focus on routes to the Mediterranean and north Africa.
"We see this market as a stable cash-flow source," says Dubno. "We know how many passengers there are, where they want to fly and when. We believe that there will be a major low-fare airline battle this autumn, a fight for liquidity, and this [charter traffic] will give a stable leg to our low-cost division."
The second phase, which LOT will implement by February 2005, will involve the airline moving into pure low-cost services in line with other budget carriers. It intends to serve primary destinations such as London, Paris and Frankfurt, building its network rapidly to about a dozen routes. But Dubno says LOT is wary of cannibalising its own operation: "It will not fly from the same airport in Poland, to the same airport at the destination, as LOT."
While LOT is prepared informally to offer technical support and perhaps guarantee aircraft lease payments in order to reduce risks and instill confidence in the carrier, it is nevertheless keeping its distance to give the venture as much independence as possible. It may locate the airline's headquarters away from Warsaw - which would also help reduce costs - and only two LOT representatives will be on the seven-strong supervisory board. Rather than transfer traditional airline thinking to the new carrier, LOT has chosen managers from outside the industry - including the carrier's president, Piotr Kociolek.
Analysis is under way to determine the new airline's level of on-board service - it will not necessarily be a no-frills carrier - and to finalise marketing strategies. Branding is still being discussed. "We want it to be connected with LOT in perception. Because it is part of the group, it is much more likely that the operation will be more highly regarded in terms of punctuality and reliability," says Dubno.
"We believe success lies in sales and market penetration. The major chance for our low-cost organisation is to use our experience and data, and define the segments we would like to attract and serve. Our target is the five to six million passengers who will be in a position to travel in the next five years," he adds.
LOT's business plan for the new airline sets an initial target load factor of 75%, rising to 85%. Depending on demand, the carrier will expand with one or two more aircraft each summer. Dubno says: "We aim for this to be a separate airline and don't rule out being approached by financial investors asking to put money into it. We're treating it as a financial investment. Low-cost carrier growth is faster than that in LOT's own areas - and we want to take part in that growth."
Low-cost tinderbox
External investors have already demonstrated their confidence that Poland is the low-cost tinderbox of Central Europe. Although backers have become increasingly sceptical about investing in traditional airlines, Poland's budget carriers have appeared able to attract finance with ease. SkyEurope Airlines, the ambitious Slovakian operator that has blossomed since starting flights two years ago, has already set up a base in Warsaw and is opening a second at Krakow - the result of a $20 million commitment to establish a strong presence in Poland, backed by institutions such as Dutch bank ABN-Amro, the European Bank for Reconstruction and Development and private sponsors.
Similarly, Wizz Air has staked a claim to being one of the best-funded startups in recent times after securing up to $49 million in support from US private equity fund Indigo Partners, while rival Air Polonia is undergoing a change of ownership that will see $10-20 million put into the company by a group of venture capitalists.
SkyEurope Airlines lays claim to being the first east European low-cost airline and chief executive Christian Mandl says it is pressing home this advantage. "It will be important for every airline to reach a critical mass," he says. "So far we're under the impression that we're stimulating the market. There are a lot of people who are flying for the first time. We've not been stealing passengers from other airlines but rather from the bus or the train."
Having concentrated on planting a firm foothold in Warsaw, from which it serves seven major European cities, SkyEurope has turned its attention to Krakow, which it compares to Prague as a tourism attraction. Its new Krakowbase, scheduled to open at the end of September, will serve Amsterdam, London, Bergamo, Paris and Rome. The carrier is also stepping up frequencies on routes such as Warsaw-London and has not ruled out domestic services.
Polish demand
Mandl says it is still too early to judge how quickly Poland is adapting to the budget airline phenomenon, but he believes SkyEurope is trying to democratise air travel and load factors indicate the demand is there.
While SkyEurope's advance is indicative of airlines' readiness to enter the Polish market, Mandl questions whether the country's airports are equally prepared. "What's important is to look at the cost structure of the airports," he says. "The airports are not that efficient."
Cost competition within airport services is essential to budget airlines, yet there are areas - such as fuel supply - which are still monopolised. Mandl says Poland's airports need to adapt quickly to the low-cost trend. "Airports don't benefit much from passengers paying for business-class tickets," he adds.
There is evidence of a shift in thinking. Warsaw Okecie Airport, for example, recently converted an old arrivals building into a dedicated terminal, named Etiuda, which has minimal facilities and is designed for budget airline use.
As the budget networks develop, Polish cities stand to benefit from stronger air links. Even some of the country's largest cities - such as Lodz, Katowice and Wroclaw - have few direct connections. Traffic has typically been routed through Warsaw. The lower cost structures of the budget airlines will enable them to open routes uneconomical to other carriers.
Wizz Air, with its distinctive pink-and-white Airbus A320s, is demonstrating this flexibility by selecting the industrial city of Katowice as its southern base, while Gdansk covers the north. Among the routes it plans to open soon are Katowice-Liverpool and Gdansk-Dortmund.
"Katowice is, from a base point of view, much better than Krakow, which is a holiday destination," says Natasa Kazmer, speaking for the Wizz Air board, pointing out that some 18 million people live within 200km (120 miles) of Katowice - a figure greater than the population of Hungary. "It was an extremely good strategic move to start there."
The airline might have expected only 30% of its traffic to come from locations outside its bases, but Wizz has found the figure is more than 50% - evidence, says Kazmer, that passengers are prepared to discover unusual destinations by using low-cost carriers.
She says Poland's airport infrastructure is relatively well developed. Katowice airport, which handled over 90% more passengers in the first half of 2004, has just completed an expansion of its terminal facilities. Wizz Air's perception is that Poland is reacting quickly to the arrival of budget airlines. Kazmer says: "We're pretty sure Poland will be one of the first countries to wake up. It's sensitive to business opportunities."
Wizz already claims to be Poland's largest budget airline, having just taken delivery of its sixth A320. It will have eight by March 2005 and intends to expand by about 10 aircraft a year until its fleet reaches 30 to 40. Kazmer says the airline's young fleet, high aircraft utilisation and "lean and mean" staffing structure make it a strong competitor.
Pessimists might suggest it will need to be. Poland's new budget airlines have ridden the summer peak but there is a sense of apprehension about the impending winter. "The competition is already tough now," says Kazmer.
Warsaw-based Air Polonia expanded from Boeing 737 charter operations to become Poland's first budget airline and has opted to develop its network partly by forging strategic ties with other low-fare carriers - Germany's Hapag-Lloyd Express and Italy's Volareweb.
But the airline is also reviewing its network strategy following its change of ownership, says sales director Marek Slawatyniec. "We intend to concentrate on our main routes and will no longer offer flights with stopovers - such as our Katowice-Poznan-Brussels route. We're stopping this kind of operation."
Low-cost airports
In a further illustration of cost-cutting, the airline is preparing to transfer its services to lower-cost airports in Europe. Its network currently includes Paris Charles de Gaulle and Rome Fiumicino but, as the winter schedule begins, it will shift to the secondary Paris Beauvais and Rome Ciampino airports.
Strategic routes, such as Warsaw-London, will be served daily if possible. But the airline is well aware of the fierce competition - three other budget airlines, including the UK's EasyJet, are also operating between the two capitals.
"We're still convinced we are treated as an important Polish airline," says Slawatyniec. "We're very hard on costs now and we believe that, with the new investors and their know-how, and very decisive initiatives to cut costs, we will be able to survive."
There is a Polish proverb that says: "When the forest is ablaze, there is no time to feel sorry for roses." If the competition this winter turns out to be as fierce as some expect, there will be little sympathy for struggling carriers. Poland's low-fare airlines will hope that they - unlike the Krakow bugler - avoid a sudden and untimely end.
REPORT BY DAVID KAMINSKI-MORROW IN WARSAW
Source: Airline Business
