Recorded on location at the IATA Annual General Meeting in Dubai, Aviation Week's David Casey sits down with Air Serbia CEO Jiri Marek to discuss the carrier's evolution over the last decade and how the airline is positioning itself for its next phase of growth.
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Rush Transcript
David Casey:
Hello, everyone and thank you for joining us for Window Seat, our Aviation Week air transport podcast. I'm David Casey, editor-in-chief of Routes. Welcome aboard for this week's episode. We're recording live from the IATA AGM, which is taking place in Dubai and brings together airline leaders from across the world. And I'm delighted to be joined by Jiri Marek, the CEO of Air Serbia.
Jiri, thank you so much for being our guest on this week's episode. For any of our listeners unfamiliar with Air Serbia, the airline was founded in its current form in October 2013, after emerging from Serbia's former flag carrier Jat Airways. But its history stretches back 97 years to the formation of Aeroput in 1927.
During the first six years of Air Serbia's existence, between 2013 and 2018, it underwent a transformation, backed by Etihad Airways, that included renewing its fleet, expanding its network and enhancing operational efficiencies. A period of growth began in 2019 and, although interrupted by the pandemic, it has resumed in robust fashion.
The carrier handled 4.2 million passengers in 2023, compared with 2.8 million in 2019, and expanded its network with 23 new destinations. It also achieved a record profit and posted revenues of € 628 million, surpassing the € 500 million mark for the first time since its relaunch in 2013.
Jiri, you've been CEO for around two and a half years now and during that time, you've overseen a period of really strong growth. Your capacity is up by about 7% year-on-year, and more than 70% higher than at this time in 2019. So, for any of our listeners that are unfamiliar with Air Serbia, perhaps you could just start off by telling us a little more about the business model and about how the airline has managed to outpace the growth rate of many other European carriers in recent years.
Jiri Marek:
So first of all, thank you for the invitation. I would like just to add to your great summary that we will be celebrating 97 years this month. And basically, we are aiming ourselves to be a hub-and-spoke regional airline in what we call former Yugoslavia region, but we have ambitions even for [the] wider Balkan region, because we believe that with the center of gravity in Belgrade, we can achieve much more in that part of Europe.
So, as I mentioned, we are a hub-and-spoke airline. We serve all the segments, and in [the] last two years, I would just add, because 23 destinations we had only last year, but we had another 20 [the] year before. So, in two years, basically, we almost doubled the year line and expanded the network two times, and that created a critical mass which also unlocked for us opportunity to start to do the transfer via Belgrade, which is our main hub.
And during last year, we grew from 25% share of the transfer, already close to 40%, which is already significant. And that critical mass will allow us to grow also to the destination, where the point-to-point demand is not sufficient and you need to have the network behind in order to open those new destinations.
David Casey:
Although Air Serbia is the leading carrier in Serbia at the minute—I think you have about a 36% capacity share of the market—you have seen increased competition in recent years, particularly from low-cost carriers, easyJet and Wizz. How have you responded to that rising competition and what is Air Serbia doing to differentiate itself from those LCCs?
Jiri Marek:
Look, I would've been corrected, in Belgrade actually, we have a 50% share and the second-strongest competitor, which is Wizz Air, is around 20%. But in this former Yugoslavia market, we are, at the moment, [the] number two carrier. First one is Ryanair, which started massive expansion with going to Croatia last year, and we have the ambitions to stay there or even to be the leading airline in that region.
Let's say from [the] point of view of the competition these days, even if you call yourself regional hub-and-spoke legacy carrier and so on, I don't like these terms, like hybrid, low cost, and so on, because at the end of the day, it is about the customers and what we offer to them, and these days everybody’s offering more or less the same thing.
So we have, say, the fare structure, which we have the branded fares, we have the upsell opportunities, different packages, but we will always try to have a bit of some additional service which our low-cost carriers [are] not now offering. Of course, for that, we would like to charge a premium. And, at the same time, we will try to achieve the cost efficiencies of the low-cost carriers. So with that, doing this basically, that's what is leading towards profitability.
David Casey:
In terms of your network development then, you mentioned that you'd added 23 new routes last year, on top of 20 the year before, which is obviously quite a significant development. I think before the pandemic, though, your network was more centered around VFR traffic, but it seems that you've pivoted towards more leisure routes, particularly in parts of southern Europe. Would that be a fair assessment?
Jiri Marek:
I would say so, and I would say if you take that segment of the diaspora or VFR, whatever we will call it, it's nice to have as a base load, but it's a segment which will not grow in time, rather it [will] be stable or it'll be decreasing. Because third, fourth generation of the diaspora will still travel to the homeland, but less frequent.
So, it's something which you can base your network on, but it will be the stable network which cannot actually grow; you will be stagnating. So major of the expansion which happened in those last two years, those 40 destinations, [the] majority of them was leisure and the rest was still, there was a couple of diaspora ones, and the rest [were] just for improving of the connectivity. And that's basically what is the success over the last two years.
David Casey:
So, what's the focus now then in terms of network development? Are you looking to add even more routes on top of the ones you've already opened in recent years, or is it a case of building more density into the network?
Jiri Marek:
Look, I would leave the long-haul aside, because maybe that's a topic for itself we can discuss. That's still the area where we are heavily developing. In terms of the European short-haul or regional destination, there are a bit different strategies on both. On the regional one, we basically, as I told at the beginning, we are covering already 17 destinations in the former Yugoslavia, with the latest addition, which was Mostar, opening in April.
So, we believe that the coverage there is pretty already identified, and we will be concentrating there on improving the connectivity, adding the frequencies. And that's [the] majority of the routes which we are serving in turboprop fleet, ATR 72-600. And what I mentioned at the beginning that we are looking also, wider Balkan region is basically if you take the geographical position of Belgrade, there is a lot of opportunities for us in Bulgaria and Romania where, at the moment, we’re just serving capitals plus one seaside destination.
So potentially, next destination, even for upcoming winter, most likely will be one of the regional places in Romania, and that will be the region we will be looking for further development. But those are mostly feeding destinations, because there is not enough point-to-point demand and they will be feeding our network.
In terms of the European market, in the past, we were mostly looking into high share of the point-to-point destinations, but there is almost none at the moment. And I think the best example is, that last year, when our biggest competitor, Wizz Air, announced six new destinations from Belgrade, none of them was new—it was just adding the destination already existing from our network.
Which means that if somebody who typically can stimulate the demand is not able to find new destinations with sufficient point-to-point demand which can be stimulated, means that any new destination should come from the hub-and-spoke airline, because you will have the network behind [it].
So, from that point of view, for example, the highest share of point-to-point of the next destination is Dublin and Manchester, but none of them was opened by local carriers, which means that logically, that can be open only if you have the hub behind. I'm not indicating those will be destinations which we will be opening, [but] we are looking on them.
But I think [the] next destination from this short-haul segment will be most likely around the Central Asia-Caucuses region. This area we are definitely looking for, and we already been looking for, and if we will not have the capacity constraint, most likely something will be already open.
David Casey:
Interesting. So, it's likely going to be more feeder traffic using your ATRs, leading to short-haul expansion into Central Asia. We'll talk about some of those capacity constraints that you mentioned, shortly. But before that, I did want to touch on the outlook for the summer season. We heard recently from Ryanair CEO Michael O'Leary, saying there has been a softening of yields in Europe. What is the picture looking like for Air Serbia?
Jiri Marek:
Look, the yields were suffering heavily during the winter period, and I think when now the results coming from multiple airlines, it's seen that the winter was relatively weak in [those] terms, also for us. But we see the strong recovery of the yields basically starting in March. April is already at the same level as last year. And so, we expect that the summer also because of many airlines have the capacity constraint, including us, that the yields will slightly improve year-on-year, and definitely still the main driver as the leisure destinations.
David Casey:
Sounds like it's going to be another strong summer in Europe then. In terms of the long-haul network, Air Serbia began serving New York JFK in 2016, and you added a second destination in late 2022 to Tianjin, in China. And following that, you launched service to Chicago in May 2023. Why did you select those destinations and what's the thinking behind the long-haul strategy at the moment?
Jiri Marek:
So, we opened the JFK [route] in 2016, and it took a pretty long time to make it profitable. And being the size of the smaller regional airline doing the long haul, to make the decision for the next long-haul destination, it's not [an] easy decision to make. Because once you make the decision, you basically put yourself on the route where you will continue to develop the long haul. Because you will not be just adding one or two destinations if you don't have the longer-term strategies that there is a meaningful long-haul business for you.
Always we were looking for the second destination as Chicago, and because of its high seasonality, we were always not sure ,would it be profitable? Would it not be? And because it requires [a] second aircraft, it's not [an] easy decision to make. So, thanks to COVID, I would say in a way, as a collateral benefit, there turn up the opportunity of the China [route]. And when, because China has a bit more flat seasonality, also has nice kick in January, February with the Chinese New Year.
So, when we combine the Tianjin and Chicago business cases together, that was easy to decide for the second aircraft. We opened basically the Tianjin still during COVID, and that sounds for why Tianjin, because there was no other option where you can fly at that moment. And since that flight became profitable from day one, we don't have the need to change it somewhere else at the moment.
And I think we will still touch on further development, because we are this year—we will open another two Chinese destinations. And since Chicago, we opened in May just for that high seasonality, we kept through the winter. Winter was much more softer [than] we expected, but we definitely try. And we will still work on improvement, because we would like to keep it as a year-round destination.
David Casey:
So, the next phase of your long-haul expansion will be to China. I know you have traffic rights for Guangzhou and Shanghai. When do you anticipate either of those routes being launched?
Jiri Marek:
We believe that during June we will finalize all the preparation, what's still missing, because we still need to have the slot confirmation. We are working on it, and we believe that we will be able to announce an open sale still within June, and that one destination will start in October and one destination will start in December. And depending on the slot clarification, we are still deciding which one will go first. But definitely both Shanghai and Guangzhou will start this year.
David Casey:
So, two more long-haul routes this year then. And what are the plans beyond that? Are you focused still on the Chinese and North American markets or are you looking further afield?
Jiri Marek:
Look, it depends. If we talk short-term, midterm, long-term, the US market for us was a key, because it was still based on the diaspora, so it was actually less risky. For the opening on the other end, the diaspora routes always coming with the things like high seasonality and high directionality, which you need to work on and to manage it. We believe that in America—with, actually last year, when we signed the codeshare deal with JetBlue.
We have also enter[ed] an agreement with American Airlines that is helping us to address those reverse directionalities and reverse seasonality. So, we believe that [the] American market, we will still develop maybe one or two destinations. And that, I think, is we don't think that we can grow there beyond that. And it's combining, also, the connectivity and feed from the wider Balkan region. Still, even with all these things you put in place, you will still have the seasonality as everybody has on transatlantic flows.
So, the Chinese [market] for us is countering that effect, because Chinese seasonality is pretty much flat. You have this nice addition of the New Year which is coming in the lowest period of the year. And on top of that, now coming into force from 1st of July, the free trade agreement between Serbia and China. So, it will also unlock new cargo opportunities and definitely even the flow of the segment of the corporate travel.
So, for us, China is nice counterbalance to the North Atlantic. And it's such a big market that we believe that there is opportunity to grow more. Obviously maybe not so much in a destination, rather in densifying the frequencies, because we [are] starting in a low number of the frequencies. Because we don't want to take any risk, we want to stay as a profitable airline. And then beyond that, I think in two, three years’ time, there is obviously Far East, Korea, Japan, those markets.
David Casey:
Obviously, your long-haul growth is going to depend on your fleet, of course. I know you have two A330s at the present time and I think you've got two more on the way that are coming from Belgium. Have you got a timeline of when they will join the fleet?
Jiri Marek:
Look, I don't want to stick exactly to some concrete terms. I will tell you what is currently the latest information, because we had [been] unlucky. We wanted one aircraft to get already last year, and despite LOI, every single sign and aircraft was ready at the end, because of the situation on the market, [the] lessor just decided [to] sell the engine and scrap the frame—12-years-old frame—which our hearts are crying that such young airframe will be scraped.
So this time, we have already also signed the lease agreements. The aircrafts are going to the maintenance. The first aircraft, if everything goes well and there are no issues with the spare parts—and there is still, unfortunately, the landing gear as an issue—but still there is a slot, everything is booked. So, we expect the first aircraft to arrive end of July, beginning of August. Hopefully nothing goes wrong there, and the second aircraft within October.
David Casey:
Okay, and those A330s will allow you to launch the two long-haul Chinese routes that we talked about earlier. Your fleet overall, though, is relatively diverse. You've got A319s, which I know you're phasing out, you've got A320s, but also, you've got nine ATR 72-600s, which we've talked about, providing that regional feed. And you've also just leased your first Embraer aircraft. You've got two E190s and two E195s. What is the thinking with their overall strategy, and why have you taken the decision to lease those Embraer aircraft?
Jiri Marek:
Look, it's usually coming. If you are a hub-and-spoke carrier, which is working on connectivity, you need to have the complexity in the fleet. Unfortunately, because we are not following the path of Air Baltic having the single fleet for the hub-and-spoke model [and] because our region is a bit more diversified, we have different portfolio of destination.
So, our core of the fleet is ATR, which now are on 72-600. We are having currently nine, and the 10th one is joining basically in two, three weeks. And that, we believe, that is a meaningful size for the regional fleet to serving the destinations within this what we call wider Balkan region to feed the Belgrade. Because that's reasonable capacity to rather grow in frequencies and on the seat capacity.
Then 319 is for us pretty good size of the aircraft with 144 seats in full economy. But we also have the combination with movable cabin divider for the business class, but that is the aircraft which already matured within the Airbus portfolio, and there is less and less on the market in some reasonable mid-age, and they are not basically that new Neo version. It's not really the option that's maybe just for some flying within the difficult environment of areas in China.
But that's logical that from 319, we are transitioning everything to the 320. And then it's creating the big gap between 72-seaters and 180-seat, and that's opening the space for some regional fleet. We were looking for a pretty long time what will be the right approach there and we have started to test what will be the right aircraft … at least at the beginning.
Because you want to make the right decision, so you want to have some performance and see how the aircraft perform. And because of the incident which happened in February, we just had to decide faster, and that was a decision that we decided that we go to the E1 already this year.
David Casey:
So, the strategy now is to take more E1s as a replacement for the A319s?
Jiri Marek:
So, Embraer, for us, will be basically replacing the 319s. So, some of the 319s gradually will be upgrading to 320s whenever the lease rate will be ending. But still that size of the fleet, we have ten 319s, that size is very needed for our network so they will be replaced, step by step, by the Embraers as well.
David Casey:
You mentioned earlier about capacity constraints given aircraft delivery delays, coupled with supply chain issues and groundings related to A320neo engines. Seems that more carriers are extending leases to cover seasonal shortages. How challenging is it at the moment to get the capacity that you need?
Jiri Marek:
Look, it is definitely very much challenging, but I think what you mentioned at the beginning—since we are already year to date 70% over 2019—I think that growth, which we make in last two years, was so massive that we decided for this year we go for the year of stability. So, we were not having high ambitions of the growth for this year. Even year-on-year, we are still, year-to-date, around 14% gross, but during summer it will became more flat.
So, for us it was not that big issue, but maybe for somebody else which has the gross ambition for this year higher. So, there is still capacity out there, and what we see also on the market that there is still a lot of, at least, capacity which is not sold. So, the market is much more less demanding. And last year, last year basically, everything was already sold in terms of at least [the] market. So, we see that there are still some changes.
Because, I think in many cases, the demand is not at that the pace as it was previously. And I can give you one example which we are very surprised, and we still don't have the answer for, that typical June with football, let's say, championship in Germany and [the] Summer Olympic Games in Paris—those are the dreams for revenue management or network planning because of the multiplication of the demand, but the demand is not there.
And we still don't know if it will come really last minute, as everything is happening last minute, or if just people will not travel for this even. And that's something we talk recently with [a] couple of airlines here as well, and it's not only us who sees that, which is a bit really strange. It was never happening in the past that on these kind of events the demand is always multiplying.
David Casey:
Interesting. Well there's certainly an appetite for the European football championships from me, and I'm definitely looking forward to the England-Serbia game. Moving on now to talk a little more about airline partnerships. You've mentioned that you have a codeshare in place with JetBlue, and I know you already have similar relationships as well with the likes of Air France and with Turkish Airlines.
And earlier this year you signed a codeshare with Etihad. Now Etihad was, as we said earlier, a backer of Air Serbia during the relaunch phase from 2013. What is the situation with Etihad's ownership now and what does the partnership with the airline bring?
Jiri Marek:
Look, so basically, since November last year, we became 100% state-owned. So, Etihad is not anymore [a] shareholder, and that was also the reason that we can completely reset our relation based on purely commercial terms, and that was the reason why we started the codeshare.
At the moment, it's just codeshare, which is not our main one, because we don't fly to Abu Dhabi, they don't fly to Belgrade, so it's through the European gateways. But, in the long term, we will see how they will develop further. As you mentioned, our main partners now are mostly Air France, Turkish, Qatar, JetBlue in America, and we [are] developing further also [other] relationships.
David Casey:
Do you ever see a time when you might look to want to join an alliance?
Jiri Marek:
Not anything in pipeline at the moment, because still we believe that we have enough room to develop ourselves. And at the moment, as you can see, we have the codeshare partnership across alliances. We don't see any limit doing that, and if we will join the alliances, obviously, we will need to limit ourself in terms of some of the partnership. We are not ruling it out, but nothing is urgently on the table. We don't see any addition we can get at the moment from the alliance that we cannot develop ourselves.
David Casey:
Okay then, so it'll be a focus on codeshares for Air Serbia then at the present. You said that the airline is now 100% state-owned, but we are seeing some consolidation in Europe at the moment, with government selling stakes. It is happening very slowly, but there's Lufthansa's bid to take over ITA, IAG’s move for Air Europa, and Air France/KLM taking a stake in SAS. What is your take on the consolidation moves that are happening in the market at the minute, and do you see a time when Air Serbia might even be part of that story?
Jiri Marek:
Look, I would rather turn that question back. Is it really consolidation? Can you call it consolidation? Because, in Europe, we always do things a bit on the half, because we are actually still keeping the brands, because this affinity to the local brands is so strong. It's not like in America that you merged two airlines and you repaint the one airline to the colors of the other airline. So that's, I think, true consolidation.
Here, in Europe, still there is lot of complexity attached. Because any of those examples you mentioned, still the airline keeps [its] independent brand, independent managements for commercial, for operation, for many other aspects. So, I'm not sure that the true benefit of consolidation is unlocked still in Europe.
Europe is still extremely fragmented. Even in our region, if you look that we still have couple of national airlines, [like] Luxair. We are happy to cooperate with everybody, and if there will be some consolidation, we definitely, as long as our benefit for both sides and there is a win-win scenario, why not?
David Casey:
Where do you see Air Serbia then in five years’ time? How will the airline look compared to how it does today?
Jiri Marek:
Well, this is quite interesting question, because especially now after COVID, and with all these new crises, like supply chain and all these, we’re somehow skipping this midterm, long-term views. Because whatever we are planning, usually in one month [it] is changed. But definitely, we are currently updating our five years plan actually, because there is a big happening in our region that will be Expo '27 in Belgrade, which is basically around the corner, and that will strongly stimulate the demand.
So, we want to be part of that demand, and capture as much as on our side. So, we will continue to develop not only long haul, but we will continue to grow and develop our medium short-haul. Also, the feeding network. We have still plan to grow aggressively, but as I mentioned at the beginning, this year we took a bit more stable path. Because what we realized last year is that, despite the market, [it] is there and we can capture it; with all the outsourcing which happened in aviation, we are at the end of the supply chain.
So, supply chain was not able to grow at the speed as we would like to. So, we started to fix and address all these things. So, for example, last week before I was coming here, we finalized a joint venture with Menzies for the ground handling, to secure that our hub will be proper[ly] served on time. These are partners which are specialized in that activity.
But still, we are the shareholder of that, because we want to keep the strategical decision where that will be developing and not to be fully outsourced. Because some of these full outsourcings in the past didn't run in a way we will wish to. The next address will be definitely MRO, which we already having several discussions with several partners.
And one of the [arrangements] we mentioned also with Turkish Airlines. But with many of the issues, which even Turkish Airlines [has] as via fleet and with the engines, it's keeping us as an airline busy from these strategical projects. But definitely that's on our target list to address.
We want to see, also, improved offering to our passenger catering. We are developing [a] loyalty program, which we would like to launch this year. We announced [a] couple of day[s] ago that we will open a new business launch at Belgrade, which will be double of the size. So there is lot of things we would like to develop.
So, in five years, definitely, I would say we might be the airline of the double size and maybe we can be over 40 aircrafts. All depends—where will be the market? What we prove[d] during COVID that we can quickly react if the market [is] going up or if the market [is] going down. And then that's—we would like to keep that flexibility with us.
David Casey:
Well, Jiri, we are all out of time for this week's episode of Window Seat, but I wanted to thank you for joining us today. It's been fascinating to hear about the evolution of Air Serbia over the last decade and how the carrier is now being positioned for the next phase of its growth. So, thank you, Jiri.
Thank you to our producer Cory Hitt, and thanks to you, our listeners. Remember to follow us on Apple Podcasts or wherever you listen. Until next week, this is David Casey, disembarking from Window Seat.
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