Market Monitor

Central Europe’s low-cost carriers take off

By launching a subsidiary in Abu Dhabi, Hungary’s Wizz Air has made a statement of intent. Until recently, it was the Gulf airlines looking to invest in Central and Eastern Europe (CEE), rather than vice-versa. But Wizz Air has been able to leverage its success on the growing CEE market to look globally. Within CEE, the rise of low-cost carriers like Wizz Air is helping spur consolidation, with more successful flag carriers seeking inorganic growth and economies of scale.

In December 2019 Hungarian budget airline Wizz Air announced plans to set up Wizz Air Abu Dhabi, a joint venture with Abu Dhabi Development Holding (ADDH).[1]The new airline aims to build a low-cost network between Europe and the Middle East, and over time link to the fast-growing markets of South Asia and Africa as well. The deal should help Europe-focused Wizz Air grow globally, while fulfilling state-owned ADDH’s aim of boosting Abu Dhabi’s position as an air transport hub, and supporting the emirate’s economic diversification.

 

Air Serbia, a rare success for Etihad?

The central European carrier’s move eastwards is significant; until recently, most attention was focused on airlines from the Gulf moving into CEE, rather than vice versa. A breakthrough came in August 2013, when Abu Dhabi’s Etihad took over a 49% stake and management control of the Serbian, and formerly Yugoslavian, loss-making national flag carrier Jat Airways, which was later renamed Air Serbia.

Etihad’s difficulties with its investments in other airlines are well documented: stakes in Alitalia, Air Berlin and Jet Airways have all ended unhappily. By comparison, the Air Serbia partnership has been successful, overhauling and expanding a struggling carrier, while feeding new traffic into Etihad’s Abu Dhabi hub. The airline carried a record 2.81m passengers in 2019, up 9.5% on 2018, and launched nearly two dozen new flight connections from Belgrade and Nis, in southern Serbia. More new destinations will be added this summer. [2]

The partnership with Etihad has not been without controversy in Serbia, partly because of concerns that the Serbian state has shouldered a disproportionate amount of cost and risk. The extent to which it is profitable without government support is debatable. However, Serbia now has what few other countries in south-east Europe have: a growing national carrier.[3]

When Etihad’s initial five-year partnership agreement with Air Serbia came to an end in 2018, the Abu Dhabi airline decided to retain its equity stake while largely relinquishing management control. Air Serbia is no longer dependent on Etihad financially, and some key decisions on route network growth and fleet planning without requiring prior consent and approval from Abu Dhabi, says Luka Popovic, an aviation expert and chief editor of the website Ex-Yu Aviation News. This suits both parties: Etihad is undertaking a retrenchment programme.[4]

 

Cooling Gulf interest

Etihad’s direct entry into the CEE aviation market sparked interest in potential deals involving other carriers from the Gulf and further afield. In 2015 Slovenia’s president reaffirmed hopes that Qatar Airways would invest in Adria, the country’s ailing state-owned airline, and the Qataris were also touted as a potential buyer for Croatia Airlines – another struggling state-owned enterprise. Indonesia’s Garuda was another suitor for Croatia Airlines. And it was later revealed that in 2015 then-Prime Minister Victor Ponta had spoken to Turkish Airlines, Qatar Airlines, Emirates and Etihad about a strategic investment in Tarom, Romania’s state-owned national carrier.[5]

However, Etihad’s travails in Europe and the more cautious approach taken by many Gulf carriers in recent years has meant that interest from the Middle East has cooled off. Adria was sold to an obscure German private equity fund, and ceased operations last year, while Croatia Airlines and Tarom remain in the state’s hands.

 

LCCs rule the roost

Meanwhile, low-cost carriers (LCCs) have continued to grow across the region. Ireland’s Ryanair was a groundbreaker, but the market leader is now Wizz Air, which has a low-cost market share of around 40% in CEE.[6]Between them, the two airlines have 70% of the CEE low-cost market, and a 30% overall market share, according to Gabor Bukta, an analyst at Budapest-based Concorde Securities. He adds that Ryanair operates with the highest load factor in Europe, averaging 96%, while WizzAir averages 94%, but with a fleet including larger planes in which it is tougher to sell all the seats.

The two carriers – as well as rival EasyJet – have provided intensive competition for incumbents, including Germany’s Lufthansa, which also owns Austrian Airlines and Swiss. As Popovic notes, most of these – including Air Serbia – have, like counterparts elsewhere in Europe, moved to replicate LCC models to an extent, by reducing their on-board product, and introducing additional charges and ancillary services.

The LCCs now have their tanks parked firmly on Lufthansa’s lawn in Austria, the traditional aviation hub for the region, where the German airline previously had a 75% market share. In January 2019 Ryanair completed the full acquisition of Vienna-based airline Laudamotion, which it is expanding as a separate brand. Some months previously, WizzAir opened a new base in Vienna, which it is also developing. Bukta expects a continued squeeze on Lufthansa’s position in Austria, and is particularly bullish about Wizz Air’s prospects. RyanAir may face a bottleneck from delays to the delivery of the 210 Boeing 737 Max aircraft that it has on order.[7]

 

Flag carriers look to expand

But as Air Serbia shows, the developing CEE market still has space for more than just the two big LCCs. Polish state-owned carrier LOT carried a record 10m passengers in 2019, and is now pursuing inorganic growth as well. In January 2020 it acquired German airline Condor for a reported €300m, in a deal that could boost economies of scale in a competitive market, and provide the Polish company with valuable slots at Frankfurt and charter leisure business to balance its scheduled services. Some have questioned the wisdom of the acquisition – James Shotter’s analysis in the Financial Times is particularly worth reading – but LOT’s ambitions in expanding its long- and medium-haul business from CEE is nonetheless notable, particularly as it moves it into areas in which it does not currently compete with the LCCs.[8]

LOT’s expansion is partly driven by government policy priorities but, as Popovic notes, it is not alone: Italy, Serbia and Montenegro are openly backing their national carriers, while the Dutch government has bought back a stake in Air France-KLM.

Aegean Airlines, Greece’s privately-owned flag-carrier, is also looking to inorganic growth, and in December confirmed a bid for Croatia Airlines, which the Zagreb government has been looking to sell for years. The merger is expected to boost economies of scale with both airlines operating similar aircraft, and support Aegean’s expansion into the Croatian market, which like Greece’s is tourism-driven.[9]

 

Growth prospects

Tourism is an important driver of passenger growth in CEE, and a desire to support the industry is one reason that regional governments have been happy to encourage LCCs, despite pressure on flag carriers. Demand from the growing diaspora is another factor. Broadly, the region is under-penetrated by air transport compared to western Europe. For the time being, MENA-based airlines are likely to hold off from direct investments in the CEE aviation sector. But for financial investors and potential business partners, the region’s airlines still present worthwhile opportunities.

 

Andrew MacDowall is a correspondent and consultant focusing on emerging markets, particularly central and eastern Europe. He has bylines for publications including the Financial Times, Guardian, and Politico, and advises clients on opportunities, risks, and target assessment in a range of markets.


Sources:
[1] https://www.reuters.com/article/wizz-air-abu-dhabi/update-1-wizz-air-seeks-middle-east-growth-with-new-abu-dhabi-airline-idUSL8N28M2Q0
[2] https://simpleflying.com/etihads-airline-investments-have-been-a-disaster/; https://seenews.com/news/air-serbia-passenger-traffic-grows-95-in-2019-685391; https://www.exyuaviation.com/2020/02/air-serbia-to-further-grow-operations.html
[3] http://country.eiu.com/article.aspx articleid=1532192137&Country=Serbia&topic=Politics&subtopic=F_6; https://www.exyuaviation.com/2019/04/air-serbia-expected-to-post-2018-profit.html
[4] https://www.exyuaviation.com
[5] https://business-review.eu/news/tarom-was-pitched-to-turkish-airlines-qatar-airlines-emirates-and-etihad-says-ex-pm-ponta-146202
[6] https://wizzair.com/static/docs/default-source/downloadable-documents/corporate-website-transfer-documents/results-and-presentations/rns-results-release-f19_final_9d8c0f10.pdf
[7] https://wizzair.com/en-gb/information-and-services/about-us/news/2019/06/04/wizz-air-further-expands-in-vienna-br-6th-aircraft-and-6-new-low-fare-routes
[8] https://www.reuters.com/article/us-thomas-cook-condor-sale-lot/polish-carrier-lot-acquires-german-airline-condor-idUSKBN1ZN0OA; https://www.ft.com/content/cab53690-4721-11ea-aeb3-955839e06441
[9] https://simpleflying.com/why-does-aegean-want-to-buy-croatia-airlines/

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