Global Economics

Budget Airlines Thrive in Central Europe


The global economic downturn is shifting traffic to low-cost carriers, including Eastern European upstarts such as Smart Wings, Wizz, and SkyEurope

They're no Steve Eisman – the American hedge fund manager who made a fortune essentially by betting on mortgage-backed securities to drop in value – but budget airlines might just end up joining him on the very short list of economic-crisis profiteers.

And the "low-costers" of Central Europe are no exception.

"The economic crisis has its down sides, but it also has its up sides," said Tomas Kika, spokesman for Bratislava-based SkyEurope. In the airline industry, "the low-cost carriers will get the most out of this situation."

Together with Smart Wings of the Czech Republic and Hungarian outfit Wizz Air, SkyEurope has been among the biggest players in the region, operating a fleet of 15 planes until last year. These young airlines have flown local travelers to destinations they never would have reached at legacy carrier prices and brought new tourists to Prague, Bratislava, and Budapest.

All have struggled along with the rest of the airline industry as oil prices soared in the last two years, perhaps none more than SkyEurope. But now these low-costers appear poised to prosper, or at least rebuild, in what the Center for Asia Pacific Aviation, whose 17 publications monitor the airline industry worldwide, predicts will be a boon year for budget carriers.

"Stormy conditions in 2008 have already helped the low-cost segment gain a larger slice of global aviation," according to a recent CAPA outlook report. "Now predicted tougher economic conditions and lower fuel prices will give the sector a major advantage in 2009."

Indeed, with crude oil prices at a third of their summer peak and recession forcing travelers to pinch pennies and migrate from the legacy carriers, the market has shifted in favor of budget carriers.

Wizz Air, the region's largest budget carrier with 20 planes, looks best positioned to prosper in these tough times, according to Liz Thomson, a senior aviation analyst with CAPA. Not only are Wizz Air's fares considerably lower than those offered by SkyEurope and Smart Wings, its recent expansion into underserved markets such as Ukraine and Romania should quickly boost the company's market share in the region.

SkyEurope, though, looks like the player with the most at stake as the market swings to low-cost airlines this year. The company has never turned a profit since fueling up its first jet in 2002 and has seen its fleet decline steadily over the last year amid sharp losses. Most recently, SkyEurope dropped its lease on six planes in January, leaving it with just five aircraft. The company lost nearly 60 million euros last year and saw year-on-year passenger traffic decline 23.5 percent in January.

Given SkyEurope's condition, even bothering to wheel it into the operating room might seem like a waste of time. The company is in the middle of a restructuring founded on cost cutting, discontinuing unprofitable routes, and catering more to business travelers. Ultimately, Thomson said, the airline's immediate fate hinges on the willingness of its investors to support SkyEurope while it struggles to get its house in order this year.

But company executives reckon the economic crisis will help it survive for several reasons.

First, falling demand for air travel – year-on-year passenger traffic in Europe dropped 7.7 percent in December, according to the Airports Council International Europe – has flooded the market with planes available for lease at cut-rate prices, Kika said. While SkyEurope won't completely rebuild its fleet, the company is negotiating several long-term deals to lease new planes for as much as 70 percent less than it was paying for many of the aircraft it lost.

Kika wouldn't say when the deals will be final or how many planes will be leased, only that there would be enough to continue operating 70 flights a day and increase that figure to 100 by summer. In the meantime, SkyEurope is relying on aircraft and crew rented from other companies to maintain around 70 flights daily.

BUSINESS TRAVEL IS KEY

Second, SkyEurope plans to compete hard for business travelers, a market the budget airlines think will grow for them this year as companies cut costs by flying employees on low-cost instead of legacy carriers. Kika said the company has already seen increased traffic on its Rome, Paris, and London connections, all big corporate routes, and that SkyEurope plans to increase services to these capitals.

Wizz Air could challenge SkyEurope for business travelers from Prague, where it will launch operations on 19 February. But the Hungarians' limited service to major European capitals from Prague – four times a week to London, for instance, compared with four times a day with SkyEurope – will give the Slovaks an edge in the Czech capital, their largest and best-performing base.

Then, of course, there are falling fuel prices: "It is helping us," Kika said. "It is helping us a lot."

As a publicly traded company listed on the Warsaw and Vienna stock exchanges, SkyEurope has every incentive to wax optimistic. It doesn't want shareholders to run for the door.

But it's not just SkyEurope executives who are predicting a recovery. Many analysts, Thomson included, are betting on its survival as improving market conditions allow the company to rebuild. If the airline does make it, this could turn into one of the early success stories to emerge from the economic crisis.

Provided by Transitions Online—Intelligent Eastern Europe

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