Czech and Polish operators may suffer an inferiority complex, but arguably are outperforming more mature markets in the region
The Czech Republic and Poland were among the few business aviation bright spots in December, according to Eurocontrol’s Business Aviation Traffic Tracker.
Europe saw a reduction in traffic of 5.4% in December, the third downward month in succession. The five biggest business aviation markets all shrank, with Germany recording -3.2%, France -6.4%, Italy -7.4%, Spain -8.3% and the UK -10.9%.
As two of the largest markets in eastern Europe, the Czech Republic and Poland achieved growth of 4.9% and 4.0% respectively in December compared with the same month the previous year. Although the figures remained in positive territory, the annual growth rate nevertheless slowed for both countries. The Czech Republic was 11.3% ahead at year-end compared with 2010, while business aviation activity in Poland ended the year 13.3% ahead.
The Eurocontrol data showed a decline in the central Europe functional airspace block, comprising Austria, the Czech Republic, Slovakia, Hungary, Slovenia, Croatia and Bosnia-Herzegovina, of 3.1% in December, trimming back annual growth for the region to 3.3%.
Commenting on the figures, Fabio Gamba, new chief executive of the European Business Aviation Association (EBAA), said: “This reinforces the now widely shared feeling that 2012 will be a pivotal year. With growing operating costs (among them ATC en-route and landing fees and charges due to adjustments in unit rates, and fuel) combined with depressed demand and tight margins amid austerity measures, operators are now confronted with making capacity cuts which might partially explain the negative trend of the last three months.”
Gamba added: “Such a difficult market is also taking its toll on the industry’s profitability, with indicators tending to show downward yields due to an increasing number of operators offering flights at – if not below – direct operating cost, suggesting the growing necessity for some to keep afloat by artificially stimulating demand.”
Addressing the inaugural conference of the Central Europe Private Aviation Association (CEPA) in December, guest speaker Radek Špicar, director of external affairs at carmaker Škoda, said: “We have had to learn global thinking. We are keeping competitive by going overseas, which has also shielded us from the Eurozone crisis.”
Škoda, now owned by Volkswagen, has opened plants in Russia, Ukraine, Kazakhstan, India and China. Although this diversification has helped the company, Špicar, who is also VP of the Czech Industry Association, was optimistic about the local economy and highlighted the excellent quality of personnel available. Good universities and high standards of tertiary education have produced a strong base of engineers and technicians, he said.
Recent political problems in neighbouring Hungary have underlined the fragility of eastern Europe’s transition to democracy and to a more western-style economic model. But Dagmar Grossmann, who founded CEPA two years ago, says the fact that business and private aviation has emerged so recently across the region may protect the sector’s pioneers from the financial gloom afflicting more mature markets.
“The recent history of eastern Europe is a very complex story. It’s difficult to compare west and east” Grossmann says. “The industry is younger in the east, and aviation companies and brokers have been in existence for less than 10 years. People who have coped with the speed of development may be better at getting through the recession.”
Crosshead: Rapid fleet growth
The European business jet fleet, including Russia, represents 15% of the total world market but owners and operators in the region account for 21% of the jets on order, estimates aviation consultancy Ascend. Given the static market in western Europe, this suggests rapid growth in eastern Europe and Russia. The company says 58 business aircraft (jets and turboprops) are based in the Czech Republic, 42 in Poland, 25 in Slovenia, 19 in Slovakia and 15 in Hungary, an accurate reflection of where the real momentum has been over the last decade or so.
The majority of owners are private individuals, Grossmann says. “Companies here don’t buy Gulfstreams.” And she does not expect much change in the foreseeable future.
“Typical central European [owner] clients will remain private for the next 10 or 15 years. It’s a prestige tool. They may finance their acquisition through a company, but the aircraft is connected to a person and management will not use it as frequently as in the US.”
CEPA was formed to promote the interests of the major players in business and private aviation in those five countries together with Bulgaria, Romania, Croatia and Serbia. But Grossmann believes that despite lying at the “strategic heartland of Europe”, the region still suffers from an inferiority complex and a sense of having to compete with “big brother” to the west.
The Czech Republic made the most rapid progress following the fall of communism, she says. Prague grew almost like Shanghai and now “operates like a planet of its own”, although she notes that local aircraft owners still prefer Swiss or Austrian rather than Czech registration.
How does Grossmann summarise progress in the other CEPA territories? Slovakia, an inevitable junior partner to the Czech Republic after Czechoslovakia split, has begun to see successful business aviation companies emerge. “Vienna is just over the border and everything is easier there. You can talk to banks, for example. Some planes depart from Bratislava instead of Vienna when they don’t want to be seen,” she says.
Delegates at the CEPA conference heard how two Bratislava-based operators, VR Jet and Opera Jet, are both expanding into new markets. VR has based a Cessna CJ3 in Prague and Opera Jet is trialling the Russian market with an aircraft of the same type.
Elsewhere across the region, development has been slower. Grossmann says Slovenia is a small country that has not yet been able to establish its own identity, while Hungary is “really struggling”.
Poland, widely seen as one of eastern Europe’s economic success stories in recent years, in fact imposes high barriers to entry for inward investors, she claims. Compared with the Czech Republic, which now boasts around 20 AOCs and has modernised its approach, she claims an “invisible curtain” still exists in Poland. The language and currency can be problematical and the government sometimes seems little different to deal with than in communist days, Grossmann claims.
Romania is keen to do business and has big potential if it can get on top of the corruption issue, though infrastructure is lacking. The country is “starting from zero” and does not yet have its own AOCs but the attitude is positive. Bulgaria is suffering with high unemployment and has less long-term potential than Romania in Grossmann’s view.
The Czech Republic can probably claim the region’s best infrastructure. Following local authority investment, Prague’s Ruzyne Airport has a dedicated GA terminal that operates 24/7, with no slot issues.
The city’s Vodochody Airport disclosed at the CEPA event that it may turn to a third party to help it build a dedicated FBO by 2014, subject to a successful environmental study.
Sofia and Warsaw have excellent airports, while Gdansk has also expressed its commitment to business aviation. “We’re interesting clients for these airports. We pay immediately!” Grossmann says.
When the time is right, CEPA will consider pushing further east into Belarus, Ukraine and Russia. However, Grossmann describes the latter as a closed market where it is difficult for operators to establish full control. “You’re operating in the dark. You have no legal status,” she says.
Handling companies remain state-controlled in Russia in contrast to most of eastern Europe, where private alternatives are now widely available. In either case, however, she warns that the service ethic may be lacking and operators must go in with their eyes open to ensure they get what they have asked for.
The client has the right to a clean car that is there for them on time, but if ground transport is not supplied as promised, there may be no redress, Grossmann points out. “You have to phone ahead, and make sure the person you’re dealing with is in a position of authority.”
The light jet market is more dynamic in eastern Europe than in the west, although many business jet operators in the region are running on a micro scale, with two or three aircraft and a handful of staff, in a way that would not be viable in established markets.
The difficulty of obtaining of finance for new aircraft, particularly for deals under $10 million where the demand is greater, has been a significant issue. But the picture is improving at locally owned banks and Grossmann predicts that owners will start to turn to these, put off by the tough terms Swiss and other western banks can impose. Local banks that are not connected to a “mother” bank are beginning to see the potential of business aviation, she says.
Russia is more prominent in longhaul markets, and its high net worth individuals favour widebodied jets or large-cabin Falcon 7X, Global Express and Challenger aircraft. The CEPA conference was told that most aircraft serving the Russian market are registered elsewhere and based outside the country, mainly in Europe.
Crosshead: Convincing the client
Grossmann became one of the first locally owned operators to enter the east European market when she set up Grossmann Jet Service in Prague in 2004. “I wanted to create a strong model with no more than five aircraft, but I faced a lot of problems I was not ready for, such as the difficulty of finding experienced staff,” she says.
Grossmann charters out an Embraer Legacy and a third party-owned Hawker 900, but is selling a Citation.
“The target was to attract western clients and I’ve done good charters, but it’s a lot of effort to convince clients that you can offer a safe flight, you have landing permissions, that catering is going to be OK,” Grossmann says.
Wealthy international business people have a perception that salaries are lower in eastern Europe, so costs will be lower. In many countries that simply isn’t true, she says. “You need two people for each position, so there aren’t really the savings you may imagine.”
Another issue is that people who are still relatively new to the idea of commercial and operational freedom are unprepared to take responsibility for their decisions. Large western operators that lack the capability to expand directly into the region have put local agents in, but most have not been bold enough to set up their own operations, either nervous of local culture or uncertain about the scale of the opportunity.
These developments take time, Grossmann accepts. She points out that despite its economic might, the former West Germany took took 10 years to integrate with East Germany.
She doesn’t want to grow her own company if it simply means managing a larger, fragmented fleet, and makes clear that she wants to locate owners who fit (they don’t necessarily have to be Czech). Indeed she has turned down prospective partners who were unwilling to accept her conditions and structures.
Grossmann is prepared for lots of handholding as she accompanies owners into what may be a new arena for them. Some first-time owners focus only on the purchase price of an aircraft but may not be attuned to maintenance and the costs of pilots, for example. Others say they want income from charter flights but can’t advise availability of dates. “It’s an educational process on my part,” she says.
On the reverse side of the coin, it is important to retain the value of the owner’s asset as well as making one’s own margin, and Grossmann claims not all operators take sufficient care over that.
Illegal charter is a much discussed issue in eastern Europe, but Grossmann says: “It’s not as common as in Russia or the Middle East. There is an easy answer. I don’t think a company taking work on an AOC with proper operational control can do it.”
Crosshead: Importance of records
Daniel Luetolf, CEO of Swiss Aviation Consultants, stresses the importance of east European operators monitoring aircraft and, in particular, aircraft records.
Picking up this point, Grossmann questions how will the western market deal with pre-owned aircraft from the east. She suspects brokers will raise doubts over documentation and aircraft history.
Yet it is the “pilot revolution” that most concerns her. “There are a lot of pilots available as they continue to get offloaded by commercial operators such as Austrian Airlines. But they have great power and believe their salaries are too low even at E10,000 per month. It’s the biggest cost factor after initial financing of the aircraft.”
Pliots habitually demand two weeks on, two weeks off or will take an aircraft out to Asia and regard it as working time even if they’re lying on the beach before making the return trip, Grossmann alleges.
She claims this is unsustainable, given initial and recurrent training that can total E1 million over five years. Pilots must reduce their expectations if they want long-term work, she insists. They need to recognise that being paid on time and working safely for a secure company is a better bet than shopping around. “It’s a tough negotiation but this is a partnership,” she says.
Grossmann would welcome a coordinated approach from operators, but admits she is not making herself popular, even among her own CEPA membership, by pressing for this.