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Croatia Airlines: could its network attract a bidder?

29-Aug-2013

Following recent reports that the Croatian Government plans to sell a stake in its 98% owned national carrier by 15-Oct-2013, media reports have linked Garuda Indonesia, China Southern and Etihad Airways with a possible bid for Croatia Airlines. All three have denied that they are in talks about an acquisition, but attention is likely to focus increasingly sharply on the loss-making Zagreb-based carrier.

Around 20% bigger by number of seats than Air Serbia (formerly Jat Airways), in which Etihad recently bought a 49% stake, Croatia Airlines is a member of the Star Alliance and has codeshares with a number of European alliance partners. In this first part of a planned two part report, we analyse Croatia Airlines’ network and ask whether it might have some appeal to a prospective bidder. In part two, we will examine its finances and cost base and consider their impact on the possible privatisation.

Domestic monopoly, but only 20% of the international market

Operating with an all-economy class product, Croatia Airlines is a monopoly operator of domestic scheduled airline seats in Croatia. On international routes, however, although it is the number one carrier, its share of seats is only 20% and LCCs easyJet, Ryanair, Germanwings, Norwegian Air Shuttle, Vueling and Jet2.com occupy six of the top nine positions.

LCCs have a market share of around 50% on international routes from Croatia (ranked by number of seats, source: Innovata, week of 26-Aug-2013). The Star Alliance, of which Croatia Airlines is a member, has a share of 43% of international seats in Croatia. There is virtually no international capacity from Croatia to destinations outside Europe.

Top 20 airlines in Croatia ranked by international seats 26-Aug-2013 to 1-Sep-2013

Rank

 Airline

Share of total seats

1

Croatia Airlines

20%

2

easyJet*

16%

3

Ryanair*

11%

4

Germanwings*

9%

5

Lufthansa*

7%

6

Norwegian Air Shuttle*

4%

7

Austrian Airlines*

3%

8

Vueling Airlines*

3%

9

 Jet2.com*

3%

10

Aeroflot*

3%

11

Monarch Airlines*

2%

12

British Airways*

2%

13

SmartWings*

2%

14

Turkish Airlines*

1%

15

SAS*

1%

16

Iberia*

1%

17

Qatar Airways*

1%

18

S7 Airlines*

1%

19

Eurolot*

1%

20

Condor Flugdienst*

1%

LCC penetration of Zagreb hub is still low, but higher elsewhere

Croatia Airlines’ main base is at Zagreb and it also bases significant capacity at Split and Dubrovnik. It is the largest airline at Zagreb, ranked by seats, with a market share of 60%. Star Alliance partners Lufthansa, Turkish Airlines and Austrian Airlines also have a significant share at Zagreb. At Split, Croatian’s 22% share of seats puts it in second place, behind easyJet's 28%, and LCCs Germanwings, SmartWings and Norwegian are also present. At Dubrovnik, its 21% share just beats easyJet's 20% for first place, although LCCs Norwegian, Jet2.com, Monarch and Vueling are all present too.

With regard to its smaller Croatian bases, it is number two at Zadar with 16% of seats, behind Ryanair on 64%, and at Pula it is also number two to Ryanair (with 21% versus Ryanair’s 35%).

Croatia Airlines top 10 bases by seats: 26-Aug-2013 to 1-Sep-2013

Zagreb Airport seat capacity by airline: 26-Aug-2013 to 1-Sep-2013

Split Airport seat capacity by airline: 26-Aug-2013 to 1-Sep-2013

Dubrovnik Airport seat capacity by airline: 26-Aug-2013 to 1-Sep-2013

Gaps in the network

Croatia Airlines’ network is strongly focused on Europe (including domestic destinations), with only one destination, Tel Aviv, outside the continent. Its route map has some noticeable gaps in some of Europe’s largest countries for air travel, in particular Spain and the UK, in each of which it only has one destination (London and Barcelona), and also in Scandinavia and Portugal.

Croatia Airlines map of destinations

It reaches a number of additional destinations through codeshares with Austrian Airlines, Brussels Airlines, Lufthansa, SAS, SWISS, TAP Portugal, Turkish Airlines and US Airways. 28% of its seat capacity is domestic, with 72% international. Most of the international seat capacity (85%) is to Western Europe, with 13% to Eastern/Central Europe and 2% Middle East. Croatia Airlines is reportedly considering adding long-haul routes onto its network (Aviation News Online, 05-Aug-2013).

Croatia Airlines Network Summary: at 1-Sep-2013

Domestic

8

Europe

22

Middle East

1

Total non-stop passenger destinations

31

Croatia Airlines’ number one country destination is Germany, where it flies to five cities (Frankfurt, Munich, Düsseldorf, Kassel and Berlin). France, the UK and Italy, three of Europe’s remaining four top aviation markets, also feature in its list of top country destinations, as do Switzerland, Austria, Belgium and Denmark, which are home to Star Alliance hubs.

Croatia Airlines international seat capacity by country: 26-Aug-2013 to 1-Sep-2013

Domestic monopoly

Croatia Airlines is the only operator on all of its domestic routes, which are dominated by routes from its main hub Zagreb to its other two significant hubs Dubrovnik and Split.

Croatia Airlines top nine domestic routes by seats: 26-Aug-2013 to 1-Sep-2013

Croatia Airlines market position on its top nine domestic routes by seats: 26-Aug-2013 to 1-Sep-2013

Route

Croatia Airlines
rank by
seats on city pair

Competitors on city pair

Zagreb- Dubrovnik

1

Monopoly

Zagreb- Split

1

Monopoly

Zagreb- Zadar

1

Monopoly

Pula- Zadar

1

Monopoly

Zagreb- Pula*

1

Monopoly

Dubrovnik-Split*

1

Monopoly

Split-Osjek*

1

Monopoly

Zagreb-Brac Bol*

1

Monopoly

Dubrovnik-Osjek

1

Monopoly

Top 10 international routes include Star hubs and several leading market shares

Croatia Airlines’ list of top 10 international routes contains five linking Croatian airports with Star Alliance hubs Frankfurt, Munich and Zurich, in addition to Europe’s other major aviation hubs London Heathrow, Paris CDG and Amsterdam. Balkan destinations Skopje and Sarajevo complete the list.

Croatia Airlines top 10 international routes by seats: 26-Aug-2013 to 1-Sep-2013

Croatia Airlines is number one on nine of its top 10 international routes and top two on all 10. It has four monopoly positions on this list and a further four where codeshare partner Lufthansa is a significant operator. It faces competition from non-partner airlines on only four of the routes, but it is number one on all four. There is LCC competition (from easyJet) on only one of its top 10 international routes, from Zagreb to London (Croatia Airlines flies to Heathrow, easyJet to Gatwick).

Croatia Airlines market position on its top 10 international routes by seats: 26-Aug-2013 to 1-Sep-2013

Route

Croatia Airlines
rank by
seats on
city pair

Competitors on city pair

Zagreb-Frankfurt

1

1 Croatia Airlines, 2 Lufthansa

Zagreb-Skopje

1

Monopoly

Zagreb-Munich

2

1 Lufthansa, 2 Croatia Airlines

Split-Frankfurt

1

1 Croatia Airlines, 2 Lufthansa, 3 Condor

Zagreb-Zurich

1

Monopoly

Zagreb-Sarajevo

1

Monopoly

Zagreb-Paris CDG

1

1 Croatia Airlines, 2 Air France

Zagreb-London Heathrow

1

1 Croatia Airlines, 2 easyJet (to LGW) 3 British Airways

Dubrovnik-Frankfurt

1

1 Croatia Airlines, 2 Condor, 3 Lufthansa

Zagreb-Amsterdam

1

Monopoly

Other international routes are a little more competitive

Looking at international routes outside its top 10, a little more competition is evident. Nevertheless, out of 16 additional important international routes, Croatia is a top two operator on 15. It is number one on seven and enjoys a monopoly on five. Where there are other players, these take the relatively friendly form of a codeshare partner on four of these routes. Croatia Airlines faces competition from non-partner airlines on seven of the 16 routes, including LCC competitors on six.

Croatia Airlines market position on selected other international routes by seats: 26-Aug-2013 to 1-Sep-2013

Route

Croatia
Airlines
rank by
seats on
city pair

Competitors on city pair

Zagreb-Vienna

2

1 Austrian Airlines, 2 Croatia Airlines

Zagreb-Brussels

1

Monopoly

Zagreb-Copenhagen

1

1 Croatia Airlines, 2 Norwegian Air Shuttle

Split-Rome Fiumicino

2

1 easyJet (peak summer months only), 2 Croatia Airlines

Split-Munich

2

1 Lufthansa (summer season only), 2 Croatia Airlines

Dubrovnik-Zurich*

1

Monopoly

Zagreb-Paris CDG

1

1 Croatia Airlines, 2 Air France

Split-Vienna*

2

1 Austrian Airlines, 2 Croatia Airlines

Split-Zurich*

1

Monopoly

Dubrovnik-Athens*

1

Monopoly

Dubrovnik- Paris CDG

1

1 Croatia Airlines, 2 transavia.com France (to Paris Orly)

Zagreb-Pristina

1

Monopoly

Zagreb-Barcelona*

2

1 Vueling, 2 Croatia Airlines

Split-Paris CDG*

2

1 easyJet (peak summer months only), 2 Croatia Airlines, 3 transavia.com France

Split-London*

3

1 easyJet, 2 Wizz Air, 3 Croatia Airlines, 4 Norwegian Air Shuttle

Dubrovnik-Vienna*

2

1 Austrian Airlines, 2 Croatia Airlines

No presence on seven of top 20 international routes from Croatia

As we have seen, Croatia Airlines has a fairly strong position on many of its key routes, including a monopoly on domestic routes and top two positions on almost all major international routes. However, its relatively small share (20%) of all international seats from Croatia tells a different story from that suggested by this analysis of its competitive position on its major routes.

The key to resolving this apparent contradiction is to look at all major international routes from Croatia. Croatia Airlines is not present on a number of important international city pairs, including Dubrovnik to London and Barcelona and Split to Prague, Milan and Cologne/Bonn. Moreover, some major European destinations, for example Madrid, are not served from Croatia at all. This suggests that there could be an opportunity to stimulate demand to a number of destinations with an attractively priced offer.

Top 20 International routes to/from Croatia by seats: 26-Aug-2013 to 1-Sep-2013

 

Origin

Destination

Total Seats

Croatia Airlines
rank by seats

1

Zagreb

Frankfurt

7,878

1

2

Dubrovnik

London Gatwick

6,162

Not present

3

Split

London Gatwick

5,988

3

4

Zagreb

Munich

4,778

2

5

Zagreb

Vienna International

4,704

2

6

Split

Frankfurt

4,230

1

7

Zagreb

London Heathrow

3,732

1

8

Split

Paris Charles De Gaulle

3,378

2

9

Zagreb

Paris Charles De Gaulle

3,268

1

10

Split

Rome Fiumicino

3,256

2

11

Dubrovnik

Barcelona El Prat

3,240

Not present

12

Zagreb

Istanbul Ataturk

3,044

Not present

13

Dubrovnik

Frankfurt

2,854

1

14

Dubrovnik

Vienna International

2,828

2

15

Split

Munich

2,684

2

16

Split

Prague Václav Havel

2,618

Not present

17

Split

Milan Malpensa

2,592

Not present

18

Dubrovnik

Paris Orly Field

2,538

1

19

Zagreb

Budapest Ferenc Liszt International

2,478

Not present

20

Split

Cologne/Bonn

2,288

Not present

Seasonal capacity fluctuations and low frequencies

A number of Croatia Airlines’ routes are operated only in the summer, reflecting the leisure focus of much of its network. According to data from Innovata, its seat capacity in the four week period commencing 6-Jan-2014 will be only 60% of its capacity in the four week period commencing 12-Aug-2013. This compares with a figure of 80% for all airlines in Europe. This strong seasonality presents a challenge to achieving year-round profitability.

The leisure orientation of the network also reveals itself in Croatia Airlines’ relatively low frequencies on many of its routes. It serves five domestic routes with only one frequency per week and only five with more than one daily frequency. It serves 11 international routes with only one weekly frequency and only seven more than once daily.

Croatia Airlines number of domestic destinations served by frequency/week: 26-Aug-2013 to 1-Sep-2013

Croatia Airlines number of international destinations served by frequency/week: 26-Aug-2013 to 1-Sep-2013

Does Croatia Airlines have enough value to attract a bidder?

In spite of its domestic monopoly, any interest in Croatia Airlines from a foreign bidder would likely focus on the international market from Croatia to the rest of Europe, since Croatia’s international market is almost 13 times the size of its domestic market.

However, Croatia Airlines has only 20% of seats in the overall international market from Croatia and this will likely be seen as a weakness to a carrier from, say, Asia or the Middle East seeking significant additional access to the rest of Europe. It seems less likely that a European airline will make a bid for a stake in Croatia Airlines since they can already access its markets directly.

Croatia Airlines has some good positions on the international markets that it serves: it is the number one or number two airline by seats from Croatia to 19 out of its 22 international European cities. These strong market rankings could potentially be of interest to a bidder seeking access to those cities.

However, many of the cities that it serves rank among Europe’s principal aviation destinations and are likely to be served already by any significant international airline. It is possible that the smaller five or 10 European airports served by Croatia Airlines would represent new destinations for a bidder, but they may not be sufficient to generate significant interest.

Nevertheless, a potential bidder seeking a small foothold in Europe may be interested in the opportunity presented by the planned expansion of terminal capacity at Zagreb to add destinations, particularly those with year-round demand, and to increase frequencies. Any new owner would also need to be satisfied that Croatia Airlines can develop an efficient cost base in order to price its product attractively against growing LCC competition and become sustainably profitable. In the second part of our report on the carrier, we will examine its cost base and financial performance.

Croatia Airlines market position by seats from Croatia to its European destinations

Airport rank
by
international
seats

Destination served by Croatia Airlines

Croatia Airlines rank
by seats from Croatia
to city represented

1

London Heathrow Airport

4

2

Paris Charles De Gaulle Airport

2

3

Frankfurt Airport

1

4

Amsterdam Airport Schiphol

1

5

Munich Airport

1

6

London Gatwick Airport

4

7

Rome Fiumicino Airport

2

8

Barcelona El Prat Airport

2

9

Zurich Airport

1

10

Copenhagen Kastrup Airport

2

11

Vienna International Airport

2

12

Brussels Airport

2

13

Düsseldorf Airport

2

14

Berlin Tegel Airport

4

15

Athens International Airport

1

16

Venice Marco Polo Airport

2

17

Lyon Saint-Exupéry Airport

2

18

Belgrade Nikola Tesla Airport

2

19

Pristina International Airport

1

20

Skopje Airport

1

21

Sarajevo Butmir International Airport

1

22

Kassel Calden Airport

1


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