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Special Report - Eastern Europe - Fighting off Competition

Special Report - Eastern Europe

The geography and history of Eastern Europe mark a natural tendency toward hub status. The region is ideally situated to connect a number of diverse regions and cultures. But competition is fierce.

Low-cost carriers (LCCs) have brought new intensity to the struggle. For example, Malév is battling Wizz Air for market share in Hungary. LCCs are especially visible in those countries focused on incoming tourism, such as Slovenia, Croatia, and Montenegro. “During the summer months in particular, LCCs are proving very popular and providing stiff competition to the traditional network carriers,” says Rafael Schvartzman, IATA Regional Vice President for Europe.

Poland’s LCC penetration is estimated at 55%, far higher than most other European countries. LOT Polish Airlines (LOT) is fighting back though. It will be one of the first carriers to receive the Boeing 787 and that could make a huge difference to its fortunes. At least Poland has critical mass, more than can be said for many other countries, whose carriers must rely on transfer traffic to boost numbers. LOT’s first-half results for 2011 have improved by $11.3 million (PLN32 million) compared to the same period in 2010, although it still recorded a loss. CEO Marcin Pirog says the figures are a cause for optimism. “Such results mean a great deal in the context of an increase in the price of fuel,” he says. “Our market share has also become greater.”

Poland’s airports are also feeling competitive pressures. Major cities such as Szczecin and Poznan cannot ignore the proximity of the strong German hubs such as Berlin. Prague, in the Czech Republic, isn’t immune to this phenomenon. German hub Munich, and Austrian gateway Vienna, are viable alternatives. Competition has intensified since Czech Airlines substantially reduced capacity to cope with the global economic turmoil, which has opened up the market to other carriers.

Up in the Baltic States, Riga Airport in Latvia is faring better than most. Some 98% of Latvians speak fluent Russian, making Riga an ideal gateway for travelers from Moscow and beyond. Riga’s airport has enjoyed double-digit passenger growth for the past three years, largely thanks to the success of airBaltic, which is connecting Latvia with other Baltic states and Scandinavia as well as Russia. Around 40% of Riga’s total passenger throughput is now transfer traffic and the ambition is to rival Helsinki as an influential east-west hub.

Meanwhile, Bulgaria traffic growth should average 6.4% up to 2014, similar to Hungary (6.5%). Veselin Peykov, Executive Director of Sofia Airport, says with its modern infrastructure, low charges, and well-developed network, Sofia Airport has the chance to position itself as a convenient point for access to the European Union market for airlines from the East. He admits though that it will be tough as “there are airports in the region that have strong potential and are ambitious to develop as hubs for the east-west traffic flows.”

Articles in this report

Malév: Back to the Future

It all adds up to a complex future, as Eastern Europe contrasts its potential with the micro-management of the European Union as well as a looming financial double dip.

Hungary’s government has embarked on a strong nationalization drive following the global  economic crisis. And its targets include national carrier, Malév. The airline, not unlike many others, has had a troublesome few years because of the financial downturn. Its situation is that much harder because of aggressive low-cost carrier competition.

Malév reports the market is more volatile than usual. While it notes that currencies in Eastern Europe have done well against the Euro and US Dollar, the climate has affected consumer spending.

It intends to concentrate on using its base at Budapest’s Liszt Ferenc Airport to continue offering a network connecting Western Europe with the Balkans and Scandinavia. It doesn’t fly any further east than Amman in Jordan, so isn’t really feeling the force of the Middle East carriers. Still, the new Sky Court at Budapest Airport has added to Malév’s pulling power. The airline reports it believes this will cement its hub status and gives the airline the potential to fully exploit its market niche.

Low-cost competition, particularly from Wizz Air, is not Malév’s only challenge. There is a  proposal for air traffic control charges to go up 10.3% this year, following on from a 12.7% increase in 2010. In parallel, Hungary has presented its Performance Plan under the SES Performance Scheme process to the European Commission. This proposes an average increase of 1.3% (as measured by the Consumer Price Index) per year for the period 2012–15. EU States have agreed that the overall EU-wide level of charges should decrease by 3.5% per year for that period so the plan is still being reviewed.

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