04-Jun-2012 5:31 PM

Bulgaria Air strengthens its European network with new E-Jets, but cost reduction is also essential

Analysis

Bulgaria Air is strengthening its European network with the introduction of Embraer E-Jets to its fleet. Expanding its regional fleet will allow the airline to increase frequencies across its network and better match supply with demand through the use of smaller aircraft than previously.

As LCCs make inroads into its home market, the higher cost legacy carrier must look to consolidate a higher yielding market segment using frequency, but this is a complement to, not an alternative to cost reduction.

As the national carrier of Bulgaria, Bulgaria Air is based at Sofia Airport and operates scheduled services, ad hoc charter services and business jet transportation. Meanwhile Wizz Air is making its presence felt.

Summary

Bulgaria Air is introducing Embraer E-Jets to its fleet to strengthen its European network and increase frequencies across its routes.
The airline's focus is on consolidating and strengthening its existing network rather than launching new routes.
Bulgaria Air operates a small fleet with six aircraft types, including two E190s, and plans to operate nine E190s by the end of 2016.
The airline's main market is Western Europe, where it allocates over two-thirds of its capacity.
Hungarian low-cost carrier Wizz Air is the second-largest carrier in Bulgaria and is competing with Bulgaria Air on several routes.
Bulgaria Air's strategy of adjusting capacity and frequencies, along with cost reduction, is crucial for maintaining its market position in the face of low-cost competition.

The summer 2012 schedule will see the carrier increase its capacity to almost 40,000 seats per week before declining significantly in winter 2012 to just over 25,000 seats per week. The large majority of Bulgaria Air's operations are international, across Western and Eastern Europe and the Middle East, with a small domestic network consisting of two domestic services, Sofia-Varna and Sofia-Burgas.

Bulgaria Air system-wide seats per week: Jun-2012 to Nov-2012

Bulgaria Air has minimal expansion plans by way of new routes, with only Sofia-Prague, Sofia-Palma de Mallorca and Sofia-Beirut launched on the summer 2012 schedule. Sofia-Prague service was announced after it was revealed CSA Czech Airlines planned to cancel operations on the route.

New Bulgaria Air routes in summer 2012

Route	Frequency	Aircraft	Operating from/to
SOF-PRG	Six times weekly	BAe 146	25-Mar-2012
SOF-PMI	Twice weekly	E190	27-Mar-2012 to 27-Oct-2012
SOF-BEY	Twice weekly	E190	18-Jun-2012

Bulgarian introduces smaller aircraft on key routes

Instead of mainly launching new services, Bulgaria Air is focusing upon consolidating and strengthening its existing network through increasing frequency on its current routes. The Embraer E190s will be placed on existing routes previously operated with larger A319 and A320 equipment.

Bulgaria Air took delivery of its first E190 aircraft on 09-Mar-2012 and its second on 14-Apr-2012. The aircraft are configured in a two-class layout with 108 seats. The airline is reportedly planning to receive its third E190 in 3Q2012 and plans to operate nine by the end of 2016. The initial aircraft were to be placed on services from Sofia to Brussels, Paris Charles de Gaulle, Amsterdam and Moscow Sheremetyevo which previously were operated using a mix of A319 and A320 equipment.

By 01-Aug-2012, the airline will be operating E190 aircraft on services from Sofia to Amsterdam, Beirut, Berlin Tegel, Brussels, Frankfurt, Larnaca, Moscow Sheremetyevo, Palma de Mallorca, Paphos, Paris Charles de Gaulle, Tel Aviv and Zurich. Some of the airline's busier routes will also be operated with larger aircraft.

A small but varied fleet has pluses and minuses

Bulgaria Air operates a small yet varied fleet, with six aircraft types and 14 aircraft in total. Aside from the airline's two E190s, it operates three A319s, three A320s, two BAe 146-200s, three 146-300s and one Avro RJ70 (which is used for its charter operations).

The airline's only orders are for five additional E190s.

Versatility of size permits better targeting of frequency on key routes, but inevitably increases unit costs. Hence, for example, the ageing BAe 146 aircraft, with similar capacity to the E190s, will presumably be phased out over the next couple of years, as Bulgaria Air takes delivery of more of the E-jets.

Bulgaria Air international capacity share by region (seats per week): 28-May-2012 to 03-Jun-2012

Bulgarian's focus is on Western European routes

Bulgaria Air's main market is Western Europe where over two thirds of its capacity is allocated; its top 10 international routes are all to Western European destinations.

Bulgaria Air top 10 international routes (seats per week): 28-May-2012 to 03-Jun-2012

Wizz Air is eating at Bulgarian's market share

Bulgaria Air is the leading carrier in Bulgaria with just over a quarter of the system capacity (25.4%) however, Hungarian low-cost carrier Wizz Air is stepping up as the second largest carrier in the country (16.1%). Until 2011, Wizz Air's Bulgarian unit, Wizz Air Bulgaria, operated from Sofia Airport, however, due to operational reasons it merged its operations with Wizz Air.

Wizz Air is now the main contributor to Bulgaria's international low-cost penetration rate of 29.9%. Domestically there is no low-cost operation.

Bulgaria Air system capacity by carrier (seats per week): 28-May-2012 to 03-Jun-2012

Bulgaria Air and Wizz Air currently compete on seven routes, though only two directly, as Wizz Air primarily operates to secondary airports. All seven feature on Bulgaria Air's top 10 services based upon capacity it offers per week on the routes.

Direct competition between Bulgaria Air and Wizz Air

Route	Bulgaria Air		Wizz Air
Route	Frequency	Aircraft	Frequency	Aircraft
SOF-BRU	10 times weekly	A319/BAe 146/E190	Three times weekly (to CRL)	A320
SOF-FRA	Five times weekly	A319/BAe 146/E190	Twice weekly (to HHN)	A320
SOF-LHR	Five times weekly	A319	Daily (to LTN)	A320
SOF-MAD	Daily	A319	Three times weekly	A320
SOF-MXP	Five times weekly	BAe 146/E190	Daily (to BGY)	A320
SOF-CDG	Daily	E190	Twice weekly (to BVA)	A320
SOF-FCO	Five times weekly	BAe 146/E190	Three times weekly	A320

The targeted frequency strategy will be critical to Bulgaria Air's future - but that is only one leg to maintaining market position

As low-cost operations permeate Bulgaria Air's key markets, the carrier's strategy of strengthening its existing network through adjusting capacity and frequencies, rather than going for route and market growth would seem sensible. The introduction of new fuel efficient, smaller jet aircraft which are able to operate some of the airline's thinner routes. Higher frequencies, on suitable routes, are key to maintaining network economics and generating higher yielding business and, where Bulgarian's costs are inevitably considerably higher than competitors like Wizz, these must be priorities.

The new aircraft will also make it easier to adjust capacity over winter while still maintaining frequency, an option that is more limited when having to rely on the larger A320 family aircraft Bulgaria Air currently operates.

This at least is the theory. If it is intended as a substitute for cost reduction across the whole airline then it is unlikely to help Bulgarian maintain its position in its home market. The recent history for smaller flag carriers in Europe, when confronted by the low-cost strength of the genuinely efficient point-to-point operators is not a positive one.

The frequency strategy can not stand on one leg alone. Restructuring and continuing cost reduction will be essential to maintaining stability.