28-Jun-2017 9:03 PM

Air Serbia: the youthful 90-year old marks first year of New York service, suspends Abu Dhabi

Analysis

Air Serbia celebrated its 90th birthday on 17-Jun-2017, making it the world's eighth oldest airline still in operation (counting also its predecessor brands Aeroput, JAT and Jat Airways).

The airline was most recently relaunched in 2013, after Etihad Airways invested in a 49% stake. Under the Air Serbia name, which will turn four in Oct-2017, it has returned to profit (but has yet to announce its 2016 results) by reducing unit costs and realigning its network and commercial positioning.

In a busy month for symbolic milestones, 23-Jun-2017 marked the first anniversary of Air Serbia's only long haul operation: Belgrade-New York. The route has enjoyed better load factors than the airline as a whole, but with soft yields.

Under CEO Dane Kondić, Air Serbia is continuing to evolve. A recent review of its five-year business plan has led to a decision to increase its focus on shorter routes, specifically suspending its services from Belgrade to Etihad's Abu Dhabi hub and Istanbul. It has also re-equipped its Airbus A320 family with higher density seating, migrated to Sabre and introduced an unbundled ticket offer. An expanded codeshare strategy has helped to offset increased competition, but the threat from LCC Wizz Air is growing.

Air Serbia to cease Belgrade-Abu Dhabi in Oct-2017

The Belgrade-Abu Dhabi service had been one of the first network changes after the Etihad investment. Starting at four times weekly using A319s, this increased to a daily service at the start of the summer 2014 season and was upgauged to a daily A320 service in summer 2016.

Air Serbia will cease operating the route at the end of Oct-2017, leaving its codeshare partner Etihad as the sole operator, with a daily service. As a result of its decision, Air Serbia expects to increase the utilisation of its narrowbody Airbus fleet.

Air Serbia ceased Belgrade-Istanbul in Mar-2017

In Mar-2017 Air Serbia ceased flying between Belgrade and Istanbul Ataturk. The airline said that the route had underperformed against its expectations and had suffered from declining point-to-point passenger traffic and yield. Its exit came after similar decisions by airlines to withdraw from, or cut capacity in, Turkey.

Air Serbia's withdrawal from Belgrade-Istanbul coincided with the entry on the route by its new codeshare partner AtlasGlobal. Turkish Airlines also operates to Ataturk, while Pegasus Airlines operates between Belgrade and Istanbul Sabiha Gökçen.

Air Serbia said that it would continue to serve the Turkish market with seasonal flights through its charter brand, Aviolet.

Belgrade-Venice launched on 1-Jun-2017

It has not all been a case of route suspensions for Air Serbia this summer. On 1-Jun-2017 the airline launched a nonstop four times weekly service between Belgrade and Venice. This is Air Serbia's third destination in Italy after Milan Malpensa and Rome Fiumicino.

Air Serbia is the only operator on Belgrade-Venice and Belgrade-Milan, while Alitalia also operates on Belgrade-Rome.

Belgrade-Malta extended to whole of summer season

On Belgrade-Malta, Air Serbia has extended its seasonal three times weekly service from peak summer (June to September) to embrace the whole summer period (late March to late October).

Wizz Air entered this route in May-2017 and plans to operate year round. This is the fourth route on which the ultra LCC now competes with Air Serbia.

Further European growth under consideration

In Mar-2017 Russia and Serbia reached an agreement on the operation of a daily Serbia-Krasnodar service by Air Serbia until the next round of consultations between the aeronautical authorities. The administrative permission for the temporary operation of scheduled Serbia-Krasnodar service was provided by Russia's Ministry of Transport.

Air Serbia has reportedly considered increasing its activities in Banja Luka, including the possibility of opening a new base in the Bosnian city, which it serves five times weekly with ATR turboprops from Belgrade.

It is also reported to be considering flights to the Croatian destinations Zadar, which has not had a direct Belgrade connection for more than 20 years, and Brac, which has never been served from Belgrade. Air Serbia already flies to the Croatian cities Split, Pula, Dubrovnik and Zagreb.

Possible long haul developments

Air Serbia's growing confidence can be seen in possible network developments under consideration beyond Europe. New York remains its only long haul destination, but this may change over time.

In late 2016 Air Serbia was reported to be considering plans to launch direct services to China, which is not currently served by any airline from Serbia, according to OAG.

However, Serbia's Prime Minister Aleksandar Vučić said at the Belgrade Tourism Fair on 23-Feb-2017, "Air Serbia is not in a position to commence direct flights to China" (exyuaviation.com, 24-Feb-2017). Mr Vucic and HNA Group discussed a potential Beijing-Belgrade service operated by Hainan Airlines during the World Economic Forum in Davos in Jan-2017.

Air Serbia's attention may also be turning towards India. InterGlobe, the parent company of the Indian LCC IndiGo, has expressed interest in working with Air Serbia for services between the two countries (Ex-Yu Aviation, 7-Jun-2017). InterGlobe regional representative for Serbia Zoran Dražeta said: "If Air Serbia accepts the offer and becomes a partner, we could secure up to 1,000 passengers per week, maybe even more... This is a major opportunity for Serbian tourism, as well as the hospitality sector".

Air Serbia has also reportedly considered using its incoming fleet of A320neo aircraft on services to North Africa and Asia.

Air Serbia's only current long haul route is Belgrade-New York, launched in 2016

Unless and until other long haul routes are added, New York JFK is Air Serbia's only long haul destination.

Launched in Jun-2016, this five times weekly service deploys 254-seat A330-200 equipment in a two class configuration (236 economy seats and 18 business class seats) and is the first direct link between Serbia and the US since 1992. According to OAG, Air Serbia is be the only operator on any route between Serbia and North America.

According to media reports, Air Serbia reported strong and growing passenger load factors on the route through the past year (EX-YU Aviation, 23-Jun-2017) with a near even split of passengers originating at either end of the route (47% from North America and 53% from Europe).

Available data from the US Bureau of Transportation Statistics for the route cover the period from Jun-2016 to Dec-2016. They show load factors varying between 55.4% (Oct-2016) and 93.9% (Aug-2016). The average load factor over the seven month period was 74.4%, which compares favourably with Air Serbia's overall reported load factor across the network in calendar 2017 of 72.4%.

Nevertheless, these load factors fall short of what leading airlines on routes between Europe and North America typically achieve and they leave scope for improvement, particularly in the light of weak yields in the market.

Air Serbia hopes to connect more regional services to long haul routes to compensate for lower fares, according to Mr Kondić (EX YU Aviation News, 24-Apr-2017).

Mr Kondić said that while the carrier is pleased with the performance of Belgrade-New York service, it is not happy about the prices in the market.

Mr Kondić also noted that slot constraints at New York JFK "dictate timing" and the airline's schedule is not ideally suited to higher yielding business travellers.

Its outbound flights depart Belgrade at 07:50, arriving in New York at midday (Monday, Tuesday, Thursday), or at 13:15, arriving at 17:25 (Friday and Saturday). The return flights depart New York at 14:40, arriving in Belgrade at 05:30 (Monday, Tuesday, Thursday), or at 19:30, arriving at 22:20 (Friday and Saturday).

Air Serbia load factor from Belgrade (BEG) to New York JFK (JFK): Jun-2016 to Dec-2016

Air Serbia has significantly added to its codeshare partners

Air Serbia has further expanded its codeshare strategy, adding five new airline partners in 2015 and four more in 2016 - namely Air Seychelles, El Al, NIKI and Montenegro Airlines. Existing codeshare deals with Etihad Airways and airberlin were also significantly strengthened in 2016.

In Mar-2017 Air Serbia began a codeshare with AtlasGlobal, taking its total number of codeshare partnerships to 20 airlines (half of which have been added since the beginning of 2015).

Etihad equity partner airlines feature strongly in Air Serbia's list of codeshare partnerships.

Air Serbia codeshare partners

Adria Airways	AtlasGlobal
Aegean Airlines	Bulgarian Air
Aeroflot	El Al
Air China	Etihad Airways
Air Europa	Etihad Regional
Air France	KLM
Air Seychelles	LOT
airBaltic	Montenegro Airlines
Airberlin	NIKI
Alitalia	TAROM

Codeshares have helped to mitigate growth in competition

Air Serbia's expanded number of codeshare partners has helped it to fend off growing competition on its network.

Based on data from OAG for the week of 26-Jun-2017, Air Serbia is the sole operator on 22 out of its 41 routes, a drop from 26 out of 44 routes in the same week of 2016. Monopoly routes represent 41% of its seats in Jun-2017, reduced from 46% in Jun-2016.

However, if monopoly routes are added to those where the only competitor is a codeshare partner, the situation looks better.

There are currently 30 routes where Air Serbia either has a monopoly or a duopoly with a codeshare partner - only slightly fewer than the 32 routes in this category a year ago. Moreover, these routes account for 67% of its seats in summer 2017, up from 62% in summer 2016.

Air Serbia competitive route summary: Jun-2016* and Jun-2017**

		Jun-2016*	Jun-2017**
Total Air Serbia network:	Number of Air Serbia routes	44	41
Air Serbia monopoly routes:	Number of routes	26	22
	Percentage of Air Serbia's seats	46%	41%
Monopolies + duopolies w/ codeshare partners:	Number of routes	32	30
	Percentage of Air Serbia's seats	62%	67%

Load factor improvement is a priority for Air Serbia

In 2016, Air Serbia's network growth was driven by the launch of its New York service and four new European routes: St Petersburg in Russia, Kiev in Ukraine, Hamburg in Germany and Ohrid in Macedonia, which widened the airline's network reach to 44 destinations in summer 2016.

In 2016 Air Serbia increased its total ASKs by 11.2%, but this growth was distorted by an increase in average stage length as a result of network developments such as the New York route launch. Data from OAG indicate that scheduled seat numbers were just below flat in 2016 (reduced by 0.3%).

Passenger numbers grew by 2.7% to 2.62 million and load factor gained 1.7ppts to 72.4% in 2016. Air Serbia's load factor gain has been creditable in recent years - it was only 64% as recently as 2013 - but further improvement is a priority for Air Serbia.

Strong and growing competition from LCCs places downward pressure on yield, leaving load factor as the main lever for improving unit revenue (revenue per ASK, RASK).

Air Serbia annual passenger numbers (million) and load factor (%): 2013-2016

Air Serbia's seat capacity to fall in 2017

OAG data for scheduled seats in 2017 indicate a cut of 3.7% this year (based on the first 50 weeks of 2017) and a slightly bigger cut of 5.3% in summer 2017.

Its network total of 41 routes in summer 2017 is a net reduction of three compared with 44 in summer 2016 (based on the weeks of 26-Jun-2017 and 27-Jun-2016). Although it has launched Belgrade-Venice, it has withdrawn from Warsaw (operated by codeshare partner LOT Polish), Varna, Kiev and Istanbul.

Air Serbia weekly seat numbers: 2014 to 2017

Air Serbia's business is highly seasonal

Capacity reduction, particularly in the summer schedule, is part of Air Serbia's ongoing restructuring, in an effort not only to improve load factor but also to reduce seasonality.

In 2017 it can be calculated from OAG data that Air Serbia's winter low week has 42% fewer seats than its summer high week.

This is less than the 45% reduction from high to low in 2016, but reflects Air Serbia's high seasonality compared with the 33% drop that applies across all European markets.

Load factor gain achieved in 1Q2017

In 1Q2017, when scheduled seat numbers increased modestly before the summer cuts, Air Serbia reported passenger growth of 8%, to 453,859. ASKs grew at the faster rate of 20%, again reflecting an increase in average stage length driven mainly by the New York route.

Air Serbia's focus on passenger load factor improvement led to a gain of more than 3ppts to 67% in 1Q2017, up from 63.6% in 1Q2016.

Air Serbia also enjoyed a dramatic increase in cargo tonnage to 1,490 tonnes in 1Q2017 - up by 70% year-on-year.

Air Serbia's lack of growth contrasts strongly with Wizz Air's expansion in Serbia

Air Serbia's 2017 capacity cut will broadly take its seat count back to its 2014 level.

This contrasts with strong growth by its leading competitor, the LCC Wizz Air, particularly on the routes to/from Europe that account for 90% of Air Serbia's seat capacity (week of 26-Jun-2017, source: OAG).

On routes to Europe, Air Serbia reduced its seat capacity by 2.3% in 2016 and OAG data point to a cut of around 5% in this market in 2017. By contrast, Wizz Air increased its Serbia-Europe seat numbers by 14% in 2016 and will grow its capacity in this market by a further 42% in 2017.

Air Serbia still leads comfortably at Belgrade, but its share is falling

Air Serbia remains by some distance the biggest airline by seats at its main hub of Belgrade, but its share is eroding. For the week of 26-Jun-2017, Air Serbia has 52% of seats at Belgrade, compared with 58% in the same week of 2016.

Over the same time period, Wizz Air's share has grown from 7% to 10%.

Belgrade Nikola Tesla Airport: airlines by share of seats: Jun-2016 and Jun-2017

Jun-2016*	Jun-2017**

LCC penetration in Serbia is relatively low, but growing

LCC penetration in Serbia is lower than elsewhere in Europe, but this is also changing.

According to data from OAG and CAPA, LCCs have a 21% share of seats to/from Serbia in the first five months of 2017. This is less than the share of around 40% for LCCs on all routes within Europe, but represents growth from a level of 17% in calendar 2016 and 16% in 2015.

In the week of 26-Jun-2017, Air Serbia faces LCC competition on seven of its 41 routes, representing 20% of its seat capacity. In the same week of 2016, it faced LCC competition on six routes out of 44, representing 16% of its seat capacity.

Wizz Air competes with Air Serbia on four routes: from Belgrade to Paris (where Wizz serves Beauvais and Air Serbia serves CDG), London (where Wizz serves Luton and Air Serbia serves Heathrow), Larnaca and Malta (Wizz Air entered this route in 2017).

There is also LCC competition on three other routes from Belgrade: to Amsterdam, which Transavia entered in 2017; Stuttgart, operated by Eurowings; and Stockholm, operated by Norwegian.

Serbia's number two airport, Nis, is dominated by LCCs

The fast growing Nis Airport is now Serbia's second largest by seats, although it is only about 6% of the size of Belgrade by total seat numbers in the week of 26-Jun-2017.

Air Serbia does not operate from Nis, which is dominated by LCCs Wizz Air (49% of seats) and Ryanair (37% of seats).

Podgorica Airport, in the capital city of Montenegro, is Air Serbia's second largest airport by seat numbers. Here it is the number two airline, with a 14% share of seats. Its codeshare partner Montenegro Airlines is the biggest airline presence and has a 37% share.

Air Serbia has moved to the Sabre distribution system and refitted narrowbodies with new seats

Air Serbia's development has also continued in areas other than the network.

In Apr-2017 the airline completed a transition to the Sabre sales, check-in, and boarding system after more than a year of planning. The move has enabled it to offer a range of new options to passengers, such as seat selection, additional check-in bags, lounge passes and mobile boarding passes.

Mr Kondić called the upgrade to Sabre "a tremendously complex operation", which involved hundreds of staff. Air Serbia staff were assisted in the project not only by Sabre personnel, but also by employees from Etihad.

In Jun-2017 Air Serbia finished refurbishing its 10 A320 family aircraft (eight A319s and two A320s) with 1,500 new Recaro BL3520 seats, allowing a higher density configuration and improved legroom.

Air Serbia's 2016 financial results not yet reported

Air Serbia has not yet announced financial results for 2016, although its supervisory board chairman Siniša Mali reportedly said earlier this year that a third consecutive profit was expected (EX YU Aviation News, 08-Feb-2017).

In 2015 Air Serbia had achieved a second successive year of net profit, with a result of EUR3.9 million - up 44% from its EUR2.7 million profit of 2014. This represented a strong turnaround from a net loss of EUR73 million in 2013.

Its 2015 profit represented a net profit margin of only 1.3% of revenue and it may be that the 2016 margin was lower, even if it was expected to be positive.

Air Serbia: financial highlights 2013 to 2015

EUR million except where stated	2013	2014	2015
Revenue	141	263	305
Year-on-year change %	N/A	87%	16%
Net profit	-73	2.7	3.9
Year-on-year change %	N/A	-104%	44%
Net margin %	-51.9	1.0	1.3

Costs are rising - a key issue

If confirmed, the 2016 profit was achieved in spite of increased pressure on costs caused by the launch of trans-Atlantic flights, according to Mr Mali. The airline expected that the New York route would likely generate losses during the first two years of operations, in spite of better than expected passenger demand and cargo traffic.

In addition, costs increased in 2016 as a result of the airline's having to pay for services at Belgrade Airport, from which it had previously been exempt under an agreement between Etihad and the Serbian government.

Etihad relationship appears solid

The decision by Air Serbia to withdraw from its Abu Dhabi route this winter does not seem to reflect in any way on the state of its relationship with Etihad, which continues to carry Air Serbia's code on the route.

Moreover, the Etihad Airways Partners Shared Services Centre opened in Belgrade earlier in 2017. This provides services such as contact centre and loyalty operations for Etihad, Air Serbia, Air Seychelles and Etihad Regional and their loyalty programmes.

Services will be expanded to include airberlin, Alitalia and their respective loyalty programmes. More than 200 Serbian nationals will initially be employed at the centre, increasing to 685 by 2020.

Air Serbia's progress since 2013 is respectable

The past four years of Air Serbia's nine decades have set it on a more healthy footing. It appears to have the backing of its shareholders, Etihad and the government of Serbia.

It has made network changes, pruning unprofitable routes and launching its first long haul destination, and improved its commercial proposition. It has also broadened its commercial partnerships to mitigate increasing levels of competition, so that two thirds of its seats are either on monopoly routes or routes where a codeshare partner is the only other operator.

However, competition from LCCs, particularly Wizz Air, is growing.

A previous CAPA report estimated that ultra-low cost Wizz Air's CASK may be around 50% below Air Serbia's. Air Serbia CEO Dane Kondić has correctly identified costs as a key issue.

A second key issue is the strong level of seasonality in Air Serbia's business. Mr Kondić is starting to address this but it is a structural problem that is typical of leisure markets, and seasonality is an issue that pan European LCCs are better able to absorb.

It may be tempting to interpret the lack of a 2016 results announcement negatively, but Air Serbia's progress since its relaunch in 2013 remains respectable.