Czech Airlines has undergone a year of major change – its chief executive explains the focus is now on optimising the network and delivering a profit, reports Martin Rivers.
Late last year, CSA Czech Airlines was among the scores of central and eastern European carriers desperately seeking the lifeline of foreign direct investment. As is often the case in the airline industry, a lot can change in a year.
At that time, Miroslav Dvorak, chief executive of parent company Czech Aeroholding, told local press there was a 70% chance the airline would fail in its hunt for a strategic investor. But in March, Korean Air made good on an early expression of interest and agreed to purchase 44% of CSA. The loss-making Czech flag carrier has since re-entered the long-haul market with an Airbus A330 leased from its new partner.
Christophe Viatte, executive director for network and revenue management, told Routes News earlier this year “there are now ongoing discussions on strategic planning with Korean Air and we do have regular meetings in Seoul; however, for the time being, there is no final decision on future fleet size and network expansion”.
While growth is not on the agenda for now – CSA halved its fleet over the past three years under a restructuring programme – chief executive Philippe Moreels believes the airline has redefined its “strategic raison d’être” and secured its long-term future.
“Back around the end of 2009, Czech Airlines was on its knees and basically close to collapsing,” he tells our sister publication Routes News. “The airline had no cash – despite receiving state aid of €100 million, which was all gone by then – and the government decided that it wanted a change in management.”
Prague Airport was also being considered for privatisation at the time. With 60% of its turnover coming from Czech Airlines, Moreels says the gateway’s €3 billion valuation was “very optimistic”. He should know. The chief executive is a former board member of Slovakia’s first private bank, Tatra banka, and has held positions at the Czech Republic’s CSOB as well as Unilever and Standard Chartered. His 25 years of experience in finance was a key reason Czech Aeroholding brought him in to turn around CSA.
“So Czech Airlines was not only a problem for the state, but also a problem for the airport,” Moreels continues. “In 2009, while I was working at CSOB, Dvorak gave me a call and said, ‘How about doing something different?’ I was dealing with a lot of crises in the banking sector, so I thought the airline industry would be a little bit less crisis-prone, or a little bit more interesting. Well, it certainly has been interesting!”
Strategic plan
With a new management team in place, the airline and the airport collaboratively laid out two strategic priorities. The first was to restructure CSA – whose losses peaked at around $200 million in 2009 – and the second was “to look for a strategic raison d’être” for both companies. After being unified with the state’s other aviation assets under Czech Aeroholding, the flag carrier and its hub began looking east to find a new role for Czech aviation.
Moreels explains that, when restructuring a loss-making airline, a common mistake made by management is presuming the “end-game” is posting your first positive net result. “This is nonsense. The problem is not solved,” he insists. “Making a small profit in the airline industry just means you are going to die in the next crisis. It’s only crisis after crisis.”
Network challenges
Like much of central and eastern Europe, the Czech Republic is in a quandary when defining its aviation sector. Mega-hubs in western Europe attract the lion’s share of connecting traffic, while residual flows are hoovered up by Vienna. Meanwhile, point-to-point traffic is dominated by the low-cost carriers, namely Ryanair and easyJet. Mindful of this, Hungary and Slovakia have both abandoned their flag carriers, while Poland and Romania are trying to find investors for theirs.
For Moreels, there was never any question of transforming Prague into a mega-hub to rival London or Frankfurt. Instead, his team set about identifying a niche that larger gateways cannot provide. “The mega-hubs try to connect everything to everything, but that comes at a cost,” he notes. “It’s huge, it’s congested, it takes a long time to transfer. If you’re not the home carrier, then you’re not really special.”
Describing transferring between flights in the mega-hubs as “painful”, Moreels says he homed in on Asian traffic flows. Prague’s geographical location makes it an ideal springboard for most of Europe, while robust origin-and-destination footfall among business travellers and tourists ensures regional connectivity.
“I don’t like the word hub. I prefer base or gateway,” he explains. “If you have a clearly identified flow of traffic – which we do have with Japan and Korean coming through Prague to Europe – then having a specialised gateway or mini-hub is actually a better alternative. You are going to be treated well; connecting times will be very short; if anything happens you get special treatment. It’s a better transfer experience for passengers.”
He highlights how signage at Prague Airport is now in four languages – Czech, Russian, English and Korean. The Czech Republic and Slovakia are also bases for Korean manufacturers Hyundai and Kia, but it was the “mini-hub” proposition that ultimately won over Korean.
Linking up the networks at either end of the Prague–Seoul trunk route is now a top priority. Korean has already placed its code on 17 CSA-operated services to Europe, including six in Germany. “Geographically, if you want to fly to anywhere in Germany, except Frankfurt, it’s actually better to transfer through Prague,” Moreels notes. On the Asian side, CSA has placed its code on 15 Korean-operated services through Seoul, focusing on Japan (seven routes), Vietnam (three routes) and Malaysia (two routes). Codeshares are also in place for Bangkok, Guam and Koror in Palau.
Asked about the scope for further co-operation, Moreels insists codesharing will remain the priority for now. “We will increase frequencies, connect more and add more codes,” he says, adding that obtaining regulatory approval for Chinese codeshares can be a lengthy process.
In Europe, CSA’s regional footprint is unlikely to undergo any “dramatic” changes. Some destinations on the peripheries of the continent may be axed, although Russia and the Commonwealth of Independent States will remain focal points. Network planners will also review possible new connections, particularly in Germany. “We might open some new ones where we see traffic coming from Korea,” Moreels says. “There are cities where we wouldn’t fly alone, but if we can combine Korean, Russian and local traffic, then it starts making sense.”
Prior to Korean’s investment, CSA had struck a partnership with Abu Dhabi’s Etihad Airways, which now holds a 49% stake in Air Serbia. The agreement with Etihad will remain in place “for the moment”, with the Gulf hub providing effective onward connections to the Middle East, Africa and parts of Asia.
Range of partnerships
Indeed, maintaining a diverse range of partnerships is pivotal to the airline’s strategy. Alongside two dozen codeshare agreements, CSA is seeking to “co-operate opportunistically” with any partners that can “share the burden or the pleasure of flying, depending on how you view it”. Moreels cites the example of CSA’s wet-lease agreement with Air Corsica, which gives the Czech flag carrier an extra ATR 72 for most of the year. CSA also partners with Darwin Airline on routes to Switzerland and Florence.
Co-operation is even taking place in the domestic market. CSA agreed to codeshare with long-standing rival Travel Services over the summer, although it limited the agreement to sixth-freedom routes. Pointing to a sea change in relations between the Czech rivals, Moreels says: “We used to fight each other and to sue each other all the time. At last, common sense prevailed, and we decided this doesn’t really make sense.”
CSA will still compete with Travel Services’ SmartWings brand, he insists, but there are few overlaps between the two networks because “they’re focused on the bikini destinations, and we’re focused on the briefcase destinations”.
Turning to the fleet, Moreels says he will “definitely want at least a second A330 to concentrate on Asia”. CSA and Korean collectively operate seven weekly flights on the Prague–Seoul route, and he sees clear potential for growth.
The existing fleet comprises three ATR 42s, four ATR 72s, nine A319s, six A320s and one A330. An order for seven more A320s was placed by previous management during what Moreels calls the “irrational, exuberant times”. But he believes the current narrowbody fleet is “more than enough”. Deflecting a question about possible cancellations, he says: “It’s too early to say whether there would be changes. I’m interested in more long-haul planes and fewer short-haul planes. It’s a contract we inherited, and I’m considering all options.”
The chief executive’s scepticism about “mega orders” is evident in his wider assessment of the European market. “When you look at the number of firm narrowbody deliveries scheduled for the next two, three years. This is going to be murder. This is going to be blood all over the place,” he warns. “This industry hasn’t been through its worst problems yet, it’s absolute overkill. Europe is stagnating.”
With such an ominous outlook, CSA will keep growth firmly on the back burner while it seeks a return to profitability. Moreels admits he finds the airline industry a “crazy business”, but he says bringing in an outsider was the right move by Czech Aeroholding. “When you love the planes too much, it’s hard to make difficult decisions like reducing the fleet,” he notes.
Asked what the future holds – whether he will return to banking, or stay in the airline industry – Moreels sidesteps the question with his inimitable candour. “I’m not a financial guy at heart, because I think banks messed it up wonderfully in recent years,” he says. “I’m more ashamed to have been a banker. But for me it’s more about the challenge, and getting it done. I want to finish what I started. I’m not a banker anymore, but I’m not an airline guy yet.”
This article was reproduced and edited from an original story that appeared on our sister publication Routes News. The latest bumper World Routes edition of the official air service development magazine is available in your delegate bags or can be read online by clicking here.
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