After Bulgaria Air, Romania's Tarom?

By bne IntelliNews November 6, 2006

Nicholas Watson in Prague -

After the sale of Bulgaria Air last week, the next Balkan flag carrier for up for grabs is expected to be Romania's Tarom.

With the Bulgarian government announcing Thursday it has chosen Balkan Hemus Group as the winning bidder in the privatization of the country's flag carrier Bulgaria Air, the next Balkan airline to be put on the block should be Romania's Tarom.

Romania announced September 23 that it will draft a plan to sell the troubled state airline, which, like Hungary's Malev (also in the process of being sold), has been put up for sale before but humiliatingly failed to find a single interested buyer.

Even so, analysts reckon Tarom should be a much easier sell this time around. For one thing, the Romanian government is determined to avoid the same mistakes that it made last time, while Tarom itself is a much better airline than it was six years ago.

Tarom's take-off

The main problem with the 1998 privatisation attempt was the government's reluctance to lift restrictions on foreign investments and its insistence on holding onto a third of the company. This time round all restrictions on foreign investment have been dropped – including those on majority ownership – and the state will waive its right to hang onto 33.4% after the sale.

Although Tarom has remained in state hands this past six years, management have restructured its operations and adopted a modern marketing strategy. The number of staff was slashed and the costs are falling. Most importantly, Tarom has given up on the prestigious long-haul flights that were once the preserve of national carriers, and begun targeting the more mundane, but potentially lucrative, regional flights.

Tarom has applied for new destinations in the Netherlands, Spain and Switzerland, according to reports by the industry information service Air Transport Intelligence (ATI), leaving Air China and Hunan Airlines to fill its shoes on the Beijing-Bucharest route.

The carrier has also replaced its dated, Soviet-made aircraft with a modern fleet of medium-distance aircraft, better suited to the shorter hops of the new strategy. Tarom is currently buying four medium-distance Airbus A318 planes for around €180m, according to ATI, with the aim of upgrading and expanding its fleet ahead of privatisation. The planes will apparently be available this year and next, which suggests what the privatisation timetable could be.

Unfortunately for the government, while this restructuring has put Tarom on a better financial footing and helped it to turn years of losses into a $3m profit last year, the airline industry is a much more competitive and hostile place to do business than before 9/11 and the arrival of budget airlines that now criss-cross the continent.

Crowded skies

The low-cost airline revolution has firmly taken root in the CEE region as visitors arrive from the West and in the opposite direction workers move to the West.

"Due to economic development and migration patterns, Eastern Europe continues to present a growth opportunity for low-cost carriers, especially as their routes in Western Europe reach saturation," says Noel Sweeney, head of the consultancy Tourism & Transport Consult International.

A study in point of the impact of CEE migration on low-cost carrier routes is Poland and Ireland. Since Poland’s entry into the EU, up to an estimated 150,000 Poles have sought work in Ireland. Three years ago there was one service, Warsaw-Dublin, operated by the Polish flag carrier LOT five days per week. This winter, however, there will be 82 flights per week in each direction to seven Polish gateways provided by among others Ryanair, Aer Lingus, Central Wings and Wizz Air.

Several budget airlines have already established operations in Romania even though the country has yet to join the EU and sign a multilateral “Open Sky” agreement to replace the bilateral agreements it currently holds with other countries. In 2003, Volare began operating flights to Italian destinations from Romania – though not yet, the Economist Intelligence Unit notes, the highly-competitive routes to Milan and Rome. And in 2004, Blue Air began operations and now offers flights from Bucharest to such destinations as Rome, Barcelona, Paris, Lyon and Istanbul.

This trend will pick up when Romania signs next year a multilateral Open Sky agreement, meaning passenger demand and market conditions, not government regulation, will determine landing and departure schedules.

"Open Sky agreements are very important – the basis of low-cost carrier growth in Europe has been liberalisation to an open market," says Sweeney. "RyanAir has already publicly stated that it would consider routes to Russia if a new air service agreement were in place."

If history is any guide, the budget airline heavyweights easyJet and Ryanair will land shortly after such an agreement is signed. "RyanAir & easyJet have taken defensive positions in several markets and have the financial capacity and experience to see off much of the competition, especially if it is from local low-cost carriers," says Sweeney.

Even Tarom’s strategy to focus on niche destinations is now facing competition. According to Oxford Business Group, Tarom “started to concentrate on niche destinations, particularly those with high cultural potential, appealing to Romanian communities abroad and groups with historical links to the country.”

However, the consultancy notes that the German airline Lufthansa, which carries large numbers of Romanian expatriate workers, has developed a similar strategy. “Lufthansa will soon be starting flights to Sibiu, which is attracting visitors as it is a historic German settlement and maintains the Germanic culture,” the consultancy says.

Likewise, Polish-Hungarian operator Wizz Air inaugurated in July its first flight from Transylvania Airport in Targu Mures in the north-central region of Romania to the Hungarian capital Budapest. “As the Targu Mures region has a large Hungarian population, this has been seen as another move to develop the ethnic travel niche in Romania,” says Oxford Business Group.

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