Cyprus Airways' fortunes bound to tourism and ties to Greek economy

A British colony until 1960, the earliest airline service was established in 1947 as a joint venture with BEA, which assumed all responsibility for the airline's operations in 1958. Following independence, the new government of Cyprus took a controlling share and reduced the BEA portion to less than 25%.

However in 1974, ethnic tensions between the Greek and Turkish Cypriot communities resulted in an invasion and occupation of the northern third of the island by Turkish troops that closed the primary airport at Nicosia. Without an airport, the airline ceased to operate until a new terminal was constructed at an existing runway near Larnaca in 1975.

Starting over in a more complex environment

The airline gradually re-established service but roughly 36% of the island's area was now designated as a Turkish Republic. Despite the fact the entire island entered the EU in 2004, the Turkish-claimed area still exists and Nicosia remains a divided city with Cypriot Turks granted EU passports only if they can prove that they were originally residents of the undivided Cyprus.

Due to this ongoing dispute, the Turkish-occupied region is served exclusively by Turkish carriers - primarily Pegasus Airlines - and has service only to points in Turkey from a small airfield near Ercan.

After the demise of Turkish Cypriot Airlines (KTHY), declared bankrupt in Sep-2010, the Turkish north has announced the launch of a new carrier, Northern Cyprus Airlines, hailed as a first in the Turkish Republic of Northern Cyprus (TRNC) as it was formed through a partnership between the state and private sector.

KTHY was established in Dec-1974 with its first scheduled flight operated 3-Feb-1975. In 2005, the Turkish government sold its shareholding in KTHY to Ada Airlines. To avoid bankruptcy, the management had decided to sell the company in Jun-2010. After the end of the bidding period, the Turkish carrier Atlasjet was the only bidder. On 21-Jun-2010, the airline announced via their website that they had ceased all operations until further notice and eight days later, on June 29, 2010 it was announced that the airline had gone out of business.

The foundation agreement for Northern Cyprus Airlines was signed at Lefkosa on 18-Jan-2011 by the TRNC government, representatives of the Turkish Cypriot private sector and Turkey's national carrier Turkish Airlines (THY).

Founded with capital of TRY20 million, Northern Cyprus Airlines will be 60% owned by Turkish Cypriot businessmen, 30% of shares will belong to the TRNC state and 10% to THY. It expects to commence passenger and cargo operations in Mar-2011.

Turkish Airlines' chairman Hamdi Topcu said his company aimed at connecting Turkish Cypriots to the world and it would use its knowledge and experience for TRNC's new national air carrier.

Primarily a spot for tourists

Cyprus Airways continues to base itself at the airport in Larnaca in the south, also serving a smaller airport to the west at Paphos. And, just to keep things interesting, the UK retains two military zones in the Greek-controlled portion of the island. This is quite a bit to be happening on an island that is less than 10,000sqkm.

According to the CIA World Factbook, almost 80% of the economy is driven by services and is heavily dependent on tourism. More than 70% of the labour force is engaged in service delivery. Its top trading partner, both for imports and exports is Greece.

Based on these parameters, Cyprus Airways is primarily involved in transporting tourists with a fleet of 12 aircraft; two A330-200s, three A319s and seven A320s. The A332s and A319s have a designated business-class compartment while the A320s have convertible seats that adjust to demand.

The A330s are deployed to London and Paris while the other destinations are operated with single-aisle fleet. As illustrated by the chart below, frequencies are less than daily to many destinations and a considerable number of cities have service with en-route stops, a relatively unusual pattern in today's market. Also noteworthy are some changes from the January schedule.

In January, the carrier served Saudi Arabia and Egypt. Both have been dropped, though Egyptair continues to fly the Cairo route, but without a codeshare. As of March, CY will fly once weekly to Vienna but the daily service operated by Austrian Airlines has also disappeared.

Destination	Weekly flights
Amsterdam	5*
Athens	24
Beirut	7
Brussels	4
Damascus	2
Frankfurt	4*
Heraklion	3
London	14
Manchester	3
Milan	5*
Moscow	3
Munich	2*
Paris	7*
Rhodes	3*
Rome	5*
Salonika	10*
Sofia	3
Tel Aviv	6
Zurich	3

Source: OAG Feb 2011
* en-route stop

A shrinking market

The second chart shows the nature of the problem; the number of visitors to Cyprus is declining, in some cases rather dramatically. In the past five years, visitors from the UK have declined by almost 30% and from Germany, a nation that has weathered the recession rather well, visitors are off by nearly 25%. Even Greece, the nation with the strongest ethnic and economic ties, has recorded a 2% decline.

The airline is serving a shrinking traditional market, and Asia, the source of many new travellers, has shown an increase from 2005 but remains below the numbers set in 2000 and well below the 1985 peak. For a carrier serving a tourist-focussed client base, this is a serious problem. And looking at service by others, many operate only one day a week, most likely carrying package tour groups for holidays.

Limited low-cost accessibility

Given its Mediterranean location and holiday traffic, one might assume that it is well served by Europe's low-cost carriers. But that too, has not happened; easyJet flies four times weekly from London and Ryanair twice weekly form Girona. Condor also operates a smattering of flights from Germany in patterns that serve package tour operators.

Selected Foreign Visitor Numbers 1980-2010

Origin	1980	1985	1990	1995	2000	2005	2010
All Countries	353,375	813,607	1,561,479	2,100,000	2,686,205	2,470,063	2,172,998
UK	111,359	238,295	691,532	850,000	1,362,913	1,391,849	996,046
Germany	29,101	56,146	99,672	235,000	173,718	182,689	139,190
Greece	33,586	42,892	70,578	65,000	100,105	130,156	127,667
Asia	74,294	177,150	158,994	*	106,772	81,536	97,669

Source: Cyprus Tourism
* No figures

Unfortunately, the airline is therefore limited in its potential and constrained by the static numbers of visitors. The presence of UN troops on the island at the disputed border doubtless has some effect on the destination's perception.

To add to concerns of falling tourist numbers, the south's second largest carrier, charter airline Eurocypria, ceased operation on 04-Nov-2010. Eurocypria was established on 25-Mar-1992 as a wholly owned subsidiary of Cyprus Airways, as the first Cyprus-based charter airline.

On 28 June 2006, Cyprus Airways sold Eurocypria to the Government for CYP13,425,000, mostly due to the poor financial situation at Cyprus Airways and because it was one of its few ventures to make a profit. It operated charters to more than 20 countries in Europe, North Africa and the Middle East.

After Eurocypria's demise late 2010, Cyprus Airways was urged by travel agencies to take over its charter routes, especially to/from Germany, to maintain tourist inflows. It was announced in Dec-2010 that Eurocypria may be back in the air early 2011, under a different name. The company has received interest from Cypriot, Greek and Russian investors to take over operations, fleet and routes but as yet there has been no announcement.

Outlook is not good

AT present, government-owned Cyprus Airways has one A320 in storage, though it is due to add an A319 in 2011. It has operated at a loss in 2009 and 2010, which likely accounts for some of the schedule changes that are evident in 2011. But unless the tourism market rebounds, there is little opportunity for change. Given the massive economic and structural problems evident in neighbouring Greece, the island is unlikely to see any resurgence soon. At best, it is "stuck" in its current role and, absent any political change, appears to have little prospect of being more.