Air Serbia's Winning Formula

0:09Hello everyone and thank you for joining us for Window Seat, our Aviation Week Air Transport podcast. I'm Air Transport World Europe and Africa Bureau Chief Victoria Moors and I'm delighted to welcome you on board. This week, I'm joined by Air Serbia CEO Jyji Marek, who has over two decades of industry experience with a range of European airlines, including Malev, Lot, Alitalia and CSA. For our listeners who are not familiar with Air Serbia, the airline used to be called Jat Airways until Etihad came in as a shareholder in 2013. Ten years on in 2023, Etihad exited and Air Serbia returned to state ownership.

0:50Today, Air Serbia is a network carrier with regional, mid and long haul operations and a fleet covering ATRs, E-jets and Airbus narrow and wide bodies. Now, before we begin, I'd like to congratulate Hugh Shee and the whole of the Air Serbia team for winning the 2027 ATW Airline Market Leader Award. So to win that award, a carrier really has to stand out within its own market sector. and what we've seen from Air Serbia is impressive growth from Belgrade creating a really strong connecting hub including new long haul routes. Last year Air Serbia carried a record 4.6 million passengers and the network spanned over 100 schedule and charter destinations and in May Air Serbia launched direct flights between Belgrade and Toronto restoring air links after more than three decades.

1:39This makes Toronto your third North American destination alongside New York and Chicago, and you also serve multiple destinations in China. So it's been a really busy time for you and the team, Yuji. Congratulations on winning ATW's Market Leader Award. And on that note, I'm wondering, casting your mind back to the last year or so, what are the achievements that really stand out and are important to you yourself? Well, first of all, thank you for inviting me for the podcast and also for recognizing what we actually achieved. And when you sum it up, like in your introduction speech, it's actually something we normally missing to step aside and look back what actually we did.

2:18Because like, you know, being the fully stayed on airline from the, let's say, Southeast Europe, growing like over 80 % for pre-COVID levels and opening most of the nation in last three years. Sometimes we are missing time actually to look back. How is it? And when you tell it like from a side, yes, I should say that we should be proud on our team what they achieved. And I think it is about taking that time to step back and reflect. And obviously, that's why we're going to be celebrating your achievements in Milan this December. We've talked there a lot about your growth. And obviously, there has been a lot of growth in all areas of markets that you serve.

3:00Also, we're in an era of very high fuel prices, geopolitical unrest. I'm wondering how that's impacting your growth plans going into 2027. them? Look, definitely it's impacting. But I think the main question is how long these prices will stay because you have different inputs from different leaders of the industry, how long it will last. On the other hand, there is very strong demand. So partly you can offset by the stronger demand and stronger yields. But at the same time, you are working on several plans, how this will go forward. One thing we made, I would say, unique, we decided not to reduce or before the current year, let's say the summer season, we opened more than 12 new destinations and it turned very well back.

3:48So that's definitely, I think it was a good decision. At the moment, we are entering the winter also with the capacity growth because we see at the moment that the demand continues to be strong in a double digit versus the previous year. And anyhow, next year, you know, despite the fuel prices will be high or low, it doesn't really matter. The airline, which will be ending hedging, they will need to react on it as well. And because we are entering the year where we will have not only our 100th year anniversary, but there will be the Expo 27 in Belgrade, there will be the JITECs. So the demand will be multiplied even more.

4:27So, So, you know, we strongly believe that even if the fuel prices will stay high, there is no reason now, you know, it will be rather the short term period, even midterm period. But in the long run, aviation is used to the resilience and, you know, the different cost, let's say headaches. And I'm more than sure that we will get through. And thinking about what I shared at the beginning about the fact that you've been in the industry for 20 years, I'm sure you've already seen plenty of these cycles. And I'm wondering, with that growth theme, how much capacity did you add this summer? And how much are you looking to add going into this winter and next summer?

5:06We were growing this summer between 5 % to 6%, depending on the certain period. And what is positive is that the demand was basically twice as added capacity. So we have also positive, let's say, impact on the yield. and I think that's showing that the market is very healthy in terms of the demand. I'm usually internally comparing this period of uncertainty. In a way, it's a bit similar to the COVID because it's a very strong and deep crisis which is happening because fuel is like a fundamental element of our cost base. However, the difference between now and COVID is that in COVID, everybody has the same rules of the game, which means that you can fly or you cannot fly.

5:50what is different now is that everybody is hatching at different levels with ending the hatch in a different period, but the demand is there. So, you know, people outside of the industry, they don't just transfer the price and increase the prices for the end user. But at the same time, if your competitor is hatched, you cannot outprice yourself from the market because then you will have no passengers. So that's why the crisis, I would say, in terms of consequences is very similar to the COVID. and we will see in, let's say, periods to come that I think there will be some changes and some airlines will be in very severe difficulties.

6:28On the other hand, you know, everybody has now the different rules of the game. So I think it depends on flexibility, how you can adjust your strategy to these kind of things and how you can, let's say, get over it being maybe next six months, next one year. We will see. I can really see the parallel that you're drawing there because it's kind of confusing in terms of the fact that it's tough operating conditions, but also strong demand. And how do you navigate your way through that? Obviously, you mentioned their fuel hedges. What's your hedging position going forward into next year? We are one of the few, I think, which were not hedged.

7:10So we get very strong impact, let's say, I would say in the end of Q1 and Q2. Q3 was very strong in terms of demand and yield. So despite that there was a strong impact, we've been able to offset that by the revenue. And we will see how it will going towards the winter season at the moment. The demand indication is very strong, but the problem is nobody knows really where the fuel will be evolving. There was a period when the fuel was going down. It's again back and it's kind of fluctuating. So difficult to forecast. Yeah. And like you say, if you're managing to hold those yields, what really matters is whether or not those increased costs are you're able to pass them through in any way.

7:53While we're on the subject of the challenging environment, obviously one of the aircraft types that you don't operate yourself but you bring in is Airbus A220s. They come from Air Baltic, which has been going through its own challenges because of the financial conditions. Has that been impacted at all with Air Baltic going into Chapter 11? Look, except some, let's say, external PR activities and questions from the public, we don't see any operational impact so far. We've been also reassured by the Air Baltic management that the wet lease, let's say, arrangement will not be impacted. We have ongoing cooperation also for the next year.

8:37From passenger, let's say, point of view, the aircraft is very appreciated. On many of those aircraft also, there is an internet available. So we have very good, positive, let's say, MPS impact from this operation. And from our perspective, it's a good cooperation to actually decide of our future fleet strategy development, because obviously we raise the size, including the WETLs at close to 40 aircrafts. Next year, we will be over 40 aircrafts. And sooner or later, we will need to take a decision on the next fleet development. and the best is to test the product in the real life and have the real operational data what that aircraft can achieve and deliver.

9:19And it sounds as though the A220 is being very well received by your passengers. You brought me on nicely there into fleet strategy. You mentioned that you've got 40 aircraft at the moment. You really do operate a very wide spectrum of aircraft, right the way from regional turboprops all the way up to A330s. Which areas of the fleet are you looking to renew and when might you take decisions on those? Look, because as you told at the beginning, we are basically hub and spoke carrier, which also having the long haul destination, which we are expanding. So obviously we need the feed to the network as well.

9:57We have more than 100 destinations. So that's why that's answering in a way also why we have such a fleet mix. So for us, I would say core feeding within the, what we call in wider Balkan region is obviously ATR. We currently have 10 units. We are looking also how potentially we can still grow. For some period of time, we saw that 10 will be sufficient. But now also with the fuel, let's say prices increasing, we are looking into the option to expand that fleet. Then our core fleet for many years was basically Airbus 320 family, consisting of 319, 320. 319 is the aging fleet so we are replacing that with the 320 and partly we are also replacing the Z Embraer E1 generation and obviously then we are going towards long haul which is 330, 200 we have 4 of them so at the moment like ATR I would say the fleet is more or less stable if we find some interesting options on the market we will add 1 or 2 or 3 units our main activity around the fleet is now happening about phasing those 319s, bringing in 320s and growing the fleet of Embraer E-195s.

11:10I'm wondering whether from what you said just before about Air Baltic and the A220, how would you see that fitting sort of with the e-jets that you've already got and the A319s? Could that potentially consolidate that part of the fleet for you? There is no secret that 320 with 180 seats and ATR on the other hand with a 72, we need something in between, which at the moment is a 319. And in the future, either being A220 or Embraer E1s, 95s or E295s, more or less that will be this kind of, let's say, I would say the regional segment where we need something in a capacity between. and at the moment on wet lease we have the A220s testing them.

11:54We have also Embraer's 90s on the wet lease. So, you know, that definitely will be the segment and on the market there are only two, either Embraer or Airbus A220. And how many do you see yourself needing under the strategy for that particular segment? Look, we strongly believe that, you know, if we will talk only about the replacement, we talk between 10 to 15. but we are on the market which is growing much faster than the rest of the Europe. The GDP in this region is also very strong. Demand is usually double of the GDP. So we are definitely forecasting conservative levels that this market will continue to grow 5 % minimum for next let's say 5 to 10 years.

12:37It will be rather closer to 8 % which means that it's very easy calculation from the fleet of 40, how many aircraft we need to add every year just to keep growing with the demand. And talking about that demand, that really pulls us through onto the idea of network development, where you're going to put this additional capacity. Under your strategy, which I believe that you've been working on your long-term strategy recently, where do you see your growth and development lying geographically? Would that be more on the long-haul side, more on the regional, a little more on the short haul routes that you do?

13:12Look, with having the destination over 100, which I feel kind of, you know, it's hard to even count and remember them for the airline of our size. So obviously we cover pretty much a portfolio of the destination. So main pillar of the strategy is continuing to densify the network. So adding frequencies, improving the connectivity of the hub and growing the transfer traffic. And we will be still adding some destination, but the percentage of those new and added destination will be obviously lower than densifying the network. We told that already last two years when we had, let's say, I would say jump behind us, but at the same time, this year we opened five destinations.

13:56So sometimes whenever there is opportunity on the market, even we will deviate a bit from our strategy. But at the moment, for the next year, we are assuming that we will be mostly adding the frequencies. We will have around six new destinations. And definitely, I think this will be more or less a pattern for the years to come. So really strengthening the existing core network you've got for that hub and spoke network. Will we see any new long haul cities? Are you able to give us a sneak preview on any of those? Look, definitely. I think I don't want to be no specific because we will be adding the long haul destination depending when this podcast will be broadcasted.

14:39It might be already known. And yes, there will be one new long haul destination next year. Okay. Thank you for sharing that quick sneak preview with us. And sticking with that theme of the long haul destinations, are you working at the moment on partnerships? I saw some suggestion that you might be looking at Chinese partnerships. Look, we recently, I mean, it takes some time, but we recently launched a co-chair with the China Thousand. and we have, basically we have cooperation with everybody. We are not part of any alliance, so we have very strong partnership, for example, on one hand with the Turkish Airlines, on the other hand with Air France KLM, also from the Middle East, but Middle East is now a bit, let's say, slowed down with their development because of geopolitics.

15:24We are expanding our partnership with the Chinese carriers, but definitely, you know, we have something unique in the Balkan region. We have more than, let's say, 18 points within the former Yugoslavia. So I would say it's our leverage. So we can, let's say, distribute to the wider region. And we are looking for any kind of win-win partnership. At the moment, I'm known that I'm a bit skeptical being the smaller airline towards the alliances. As long as we have the equal treatment like win-win, we are definitely open for any partnership. We are not open for a partnership where the partner is dictating and taking more than what we contribute.

16:06And obviously, from your airline experience, you've worked within several airlines that have been part of all three alliances. So therefore, you've got that alliance history. I'm wondering whether with consolidation within Europe and beyond, whether you see yourselves as a state-owned carrier potentially being a consolidation target from a larger airline, particularly given what you said that you don't want to be controlled or dictated to? I think I will, let's say, repair your vocabulary if the consolidation is not equal to the equity stakes, because unfortunately, consolidation in Europe is not really the same way like in the US, where you merge the airlines, you change the brand, you change everything and you continue as one airline.

16:49While in Europe, like, you know, if you look at some of the big airline groups, how many AOC and consequently complexities they have within the groups, how you will deliver the same customer experience and all these kind of things. So I think the consolidation in Europe with a kind of affinity to the brand from the local communities, it's very strong because we are definitely not doing it the same way like in the US, which in my view, it's a pity because I believe that the true benefits from the consolidation can be only unlocked if you really integrate fully. So, you know, we are here on the market.

17:29We believe we have something unique to offer and we are open for our partnership. It doesn't matter if it's just, you know, informers of the interlines, co-chair, joint ventures, equities, whatever, you know, makes sense for both parties. We are always open to check. And taking that forward-looking perspective, obviously we hosted you here on Windows Eat as our guest speaker back in 2024 as well. Back then, we asked you what you thought Air Serbia would look like in five years' time. You said a fleet of 40 aircraft, that would have put that at around 2029. What's your forward-looking five-year perspective now?

18:05Look, there are two things. A couple of years ago, when we have our 95-year anniversary, I told also that by our 100 years, we will have 100 destinations. Our 100 years is next year. We already have also 100 destinations. 24, you know, I told you about the 40 aircrafts. We already have 40 aircrafts, including our Red Lease. So, you know, on one hand, I'm always telling to our team, we need to aim high if we want to achieve high. On the other hand, also, when we talk about the growth that we are targeting 5%, it might be rather 8%, that it's rather conservative. So we even, we believe that we are quite ambitious.

18:40At the end, the reality proving that all these assumptions were also conservative. So at the end of the day, it's a market who dictate. And the market outside is very healthy and very strong. And we are definitely thankful to all our customers that they're giving us their trust. They continue to fly with us because without them, we will not be able to continue to develop in that speed in which we are developing. So I'm very positive about the future. Well, certainly the strength of that ambition and development and growth has caught our attention as a team on ATW. and I really do look forward to seeing you in person at the ATW Gala Awards and Trophy presentations in Milan on Thursday, the 10th of December.

19:25So thank you so much for joining us today, Hujji. Thank you for innovation and looking forward for the December. And for our listeners, if you want to learn more information about the ATW Airline of the Year Awards, you can find that at the CAPA events site or by emailing karen.walker. that's w-a-l-k-e-r at informa.com i-n-f-o-r-m-a.com before i sign off i'd like to also say thank you to our producers natalia paleo and corrie hits and of course a huge thank you to you our listeners for following window seat make sure you don't miss us each week by subscribing to the window seat podcast on apple podcasts or wherever you listen this is victoria moore's disembarking from window seat

20:19Jiří Marek: We'll be right back.