Банкеръ Weekly

Briefs

GLOOMY DAYS AHEAD FOR THE AIR CARRIERS

Most Bulgarian companies are waiting for the year 2007 with mixed feelings. At that time the national economy will become part of the single European one. However, waiting is over for the local aviation sector since the great opening of doors already started.Doubtlessly, 2005 will be the most difficult year for the branch because of the sudden market liberalisation. The first step was made a week ago, when the Bulgarian Government and the European Union signed the so called horizontal agreement. The document changes the air transport bilateral agreements between Bulgaria and the EU member countries by practically cancelling the trade principle of reciprocity of the flights. This is the principle that served as a main shield to Bulgarian air carriers in their unequal fight with western competitors. Now the agreement should also be ratified by the Parliament.Thanks to that reciprocity, Bulgarian companies enjoyed a guaranteed share of the market. For example, if Alitalia flew three times a week between Sofia and Milan, Italy was obliged either to allow Bulgaria Air to carry out three flights to Italian destinations or to pay financial compensations for the potential differences. Now the application of the horizontal agreement removes that requirement and the flights between Bulgaria and EU countries become unlimited. Therefore, Bulgarian carriers will have to compete with the western giants on absolutely equal terms.Branch experts assure that the new situation will not have an impact on larger companies such as the state-owned Bulgaria Air and the private Hemus Air. Moreover, Hemus managers have often declared they are eager to have the sky opened, because currently the Government restricts them in flying to certain destinations. The main burden of the change will fall on the smaller companies that carry out chartered flights. They earn the main part of their revenues in one particular season and rely on the tourist flows during summer months. From now on, however, they will have to stand against a formidable rival - the ever more popular low-cost airlines, which will fly to Bulgaria without limits once the reciprocity principle is removed. The difference is much like the one that distinguishes an ordinary taxi from a fixed route taxi - the fixed route one offers no comfort and does not drive you to your final destination, yet costs much less. Low-cost airlines can afford dumping prices (for example, an EUR80 ticket for a flight from Koeln to Targovishte), because they have much lower expenses compared to the traditional air carriers. They do not look after aeroplanes but only hire them for each flight. They use lower-quality or even economic airports in order to save from fees that usually amount to EUR35 per passenger. They only sell tickets via INTERNET and do not pay for offices, agent salaries and printing tickets. Still, the biggest difference is that if charter companies make calculations for 50% of their capacity, low-cost carriers do not fly unless the plane is full. Otherwise, they simply pay the money back to their customers without paying huge compensations or accommodating them in hotels until the flight is fulfilled.The bilateral agreements helped for not giving way to the dumping companies. From now on, local air carriers will have to fight for keeping their market share alone. In 2004, the share of regular lines was not so insignificant - 30%, according to the Association of Bulgarian Air Companies. Bulgaria Air, Hemus Air and Viaggio Air carried 18% more passengers from the Sofia Airport compared to 2003. Four million passengers were carried from and to Bulgaria. Over 65% of them (some 2.6 million) used chartered lines where Bulgarian companies have a 45.3% share. The association still refuses to reveal the annual turnover in the sector, but according to experts, it is not lower than EUR300MN. With the market liberalisation the figure will grow further, they comment.One serious problem facing Bulgarian air carriers are the leasing guarantees that are much higher for them than they are for their competitors. After Balkan Airlines went bankrupt, Bulgarian companies are considered risky and lessors require higher guarantees, the Association Chairman Stanislav Stanoulov explained.The fleet of aircraft is the other sore spot. Last year eighteen planes were added to it. Still, buying planes second hand or on deferred payments is far from renovating the fleet. Ten more airplanes are expected to be delivered by the end of 2005.Hemus Air is planning to acquire four planes, two Boeings included. Bulgarian Air Charter will add three Macdonald Douglas planes, and Balkan Holidays Air - two Airbuses. The national carrier Bulgaria Air is searching two more planes, too. Of course, it will lease them. Meanwhile, the German Lufthansa is waiting to receive 22 brand new Airbus machines totally worth USD3BN. Apparently, Bulgarian air companies will have to fight hard.

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