ch-aviation interview: Krešimir Kučko, CEO Croatia Airlines

Following the break-up of Yugoslavia and the independence of Croatia, 1989-founded cargo operator “Zagal” was rebranded as Croatia Airlines in 1990. It commenced passenger services one year later with a single MD-82 leased from Adria Airways. Due to the still ongoing war, the newborn national carrier had to suspend its operations for a brief period in 1992, but returned with a fleet of three Boeing 737s that soon would be complemented with an ATR42. The fast-growing carrier acquired its first Airbus A320 series aircraft in 1997, and by 1999 all Boeing aircraft were gone. In 2004, the young airline became a regional member of Star Alliance. The ATR42 was eventually retired in 2008 when the Bombardier Q400 was introduced.

Last year, the state-owned airline carried 1,85 million passengers. It has a fleet of four Airbus A319s, two Airbus A320s and six Bombardier Q400s with an average age of 12.7 years deployed on flights to 35 destinations. ch-aviation´s Max Oldorf had the opportunity to chat with Krešimir Kučko, CEO at Croatia Airlines, about the company´s operations and future plans.

Krešimir Kučko: We are considering the Bombardier CRJ, Superjet SSJ100 and Embraer E-Jet.

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Croatia is a popular leisure destination with many foreign passengers flying there every summer. How did this year‘s summer season go?

It went well and according to plan. We added capacity to our schedule and also a few new destinations, namely Prague, Milan, Lisbon and St. Petersburg. In order to carry out our increased summer schedule, we had to wet-lease a Fokker 100 from fellow Croatian operator, Trade Air. And the new destinations all proved so successful, that we are going to keep them all. In fact, because of this summer’s successs, we are planning to add an even larger number of new destinations next year.

Given the current crisis in Syria coupled with the tight security situation in Turkey, many holidaymakers have begun to avoid certain areas around the Mediterranean. Can Croatia exploit this and boost its leisure market share?

As you may recall, our ability to expand was, until recently, severely curtailed by the European Commission following the Croatian government’s extension of state aid. We, therefore, have only been able to add limited capacity [to our network].
Overall, I would say Croatia’s leisure market, as a whole, had a very good summer. We were able to take advantage of our well-established relations with several tour operators and other companies involved in the business to generate better than expected results.

Departing Croatia Airlines Airbus A319 in Barcelona (Copyright: Tis Meyer – planepics.org)

Which past strategic moves have born the greatest rewards?

We have invested a lot in our maintenance (MRO) unit. They are now able to undertake various tasks including D checks on Airbus A320, Dash-8 and ATR aircraft. Our reputation in the MRO market is growing and as a result, our customer base is growing. It was a huge initial investment but it has certainly begun to pay off.

The Croatian market is very seasonal with high demand during the summer months which tapers off quite considerably during winter. How do you cope with such extremes?

During the year, we have only the third quarter (Q3) to cover the losses the first (Q1) and fourth quarters (Q4) make. The second (Q2) is generally flat.
To help offset this cyclical effect, we’re going to add some 100-seaters on a year-round basis. That, we believe, should help us to reduce our traditional Q1 and Q4 losses.
The aircraft, while being deployed accross out network, will primarliy replace the Airbus jets on some rotations during the winter while upgrading flights currently carried out by our Dash-8 equipment during the summer.
The new aircraft will also allow for better scheduling out of our hub in Zagreb. Due to our relatively small fleet, we use the same aircraft to provide feeder flights from South East European destinations as we do for onward connecting flights to Central Europe. This therefore diminishes our ability to offer a schedule that is convenient for day journeys on many routes.
And in tandem to all this, we also believe the Croatian tourist board and local towns and municipalities should also pull their own weight to help draw in tourists not only in summer, but all year-round. Take a look at Zagreb for example. Christmas 2015 was a phenomenal period and it is because of events like this that I believe we need to get more people to fly in the winter. But this is something that can only be done on a nationwide level. It can’t just be done by the airline alone.

But surely a larger fleet will only exacerbate your winter overcapacity problems?

No. Basically, we want to maintain our current winter flight volumes while offering our surplus summer capacity to the ACMI market. We will offer ACMI/wet-lease capability to wherever there is demand in the world.

Croatia Airlines Airbus A319 in Split (Copyright: Croatia Airlines)

Turning back to the 100-seater aircraft, where are you insofar as the selection process is concerned? To what extent will fleet commonality play a role in your decision?

We are considering the Bombardier CRJ, Superjet SSJ100 and Embraer E-Jet. While you would think the CRJ would be a better fit for the fleet given our existing Bombardier operations, that isn’t the case. Manufacturer commonality isn’t such a huge advantage when you operate turboprops but want to introduce jets. For us, it’s about cost effectiveness. The CRJ and SSJ100 can take a maximum of 100 seats while the Embraer can take more. So, if your other variables are taken care of, the Embraer’s unit cost can actually work out less than Bombardier’s CRJ.
But while the Embraer E-Jet has a slightly better operational performance, its heavier weight means it is more expensive to operate given its higher handling fees and air navigation charges.

Tell us about your ambitious plan to set up bases across the former Yugoslavia. Is this a push towards diversification?

It is indeed. Until now, the European Commission (EC) had barred us from expanding. But, with the lifting of those curbs, we are now able to once more add capacity and grow our network. So, for the next five years, we plan to open more bases across the region but the extent to which we pursue growth will obviously depend on demand. But who knows, maybe this will be the solution to our seasonality problem?

Are you not afraid that these new bases will cannibalize your Zagreb hub traffic?

Of course. On certain routes, like Sarajevo–Zagreb, we expect to see a dip but the overall objective here is to develop hubs in countries that currently lack a national carrier – Bosnia & Herzegovina for example.

Croatia Airlines Dash8-Q400 landing in Zurich (Copyright: Tis Meyer – planepics.org)

Tell us about the trials and tribulations of being a European carrier. What problems present the biggest concerns to you?

I feel competition here is distorted by carriers that originate from outside the EU. In Europe, we have very strong unions and a lot of strikes; a lot of European airlines suffer from frequent strikes – Air France, Lufthansa etc. Foreign carriers are not as badly affected by strikes as we are and their unions, generally speaking, appear more willing to co-operate with management.
Qatar Airways and Turkish Airlines already fly to Zagreb and compete against us. They do not suffer from strikes and are not affected by legacy labour contracts so no, the playing field is not level.
Furthermore, another major problem we face is ETS and EU law governing compensation for passenger delays. We even have to pay for bird strikes now which is completely out of our control. Added to all of that, people are far more aware of their rights nowadays compared to a few years ago.
The latest proposal is that the last carrier a passenger used would have to compensate them in the event of any delays. Should that become a reality, we would have to pay €600 for a three hour delay for any intercontinental connection through Zagreb. In the event this does become reality, well we would then consider forcing passengers to buy separate tickets for each sector.

Latvia’s airBaltic is one of the very few independent smaller airlines that is successful. They have transitioned to a very low-cost business model where all ancilliary services are charged for. What is your view on this type of “hybrid” operation?

The important difference between them and their low-cost rivals is the size of aircraft. With their Dash 8-400s, they can offer flights twice a day instead of just once with a 737 thereby improving the quality of their product.
Currently, it is working out very well for them. I can only congratulate them on having found the right niche and having excellent cost management.
But many airlines have attempted to adopt a hybrid business model and failed. You have to define yourself in one niche instead of doing a bit of everything. Air Berlin is a hybrid carrier and look at the terrible state they are in. Adria, too, tried it but it did not work.
The only real hybrid company in Europe at the moment is Lufthansa Group. They, however, are big enough to allow themselves to operate different models within the same company.
I think that airBaltic’s no-frills product, with so many selections available at an extra fee and even business class, is a bit too complex for such a small number of seats.
Anyway, we will see if it works out for airBaltic in the longrun and I really hope it does for them.

Many people chose to visit/transit through Zagreb by bus despite the fact that fares aren’t cheap. Why aren’t airlines exploiting this?

It is difficult to explain but, in essence, it boils down to the type of product being marketed. For a number of the affected routes, luggage allowance is a key concern and increasing that allowance has worked wonders on many of our formerly unprofitable destinations. For example our Zagreb-Zurich flight turned profitable shortly after we increased luggage allowances. At the same time, many people who use the bus, do so because it is a last-minute decision. They tend to book just prior to the date of departure and therefore cannot take advantage of cheap promotional air fares.

Interior of a Croatia Airlines Dash8-Q400 (Copyright: Croatia Airlines)

Why have low-cost carriers not begun to build a strong presence in Zagreb as yet?

Well low-cost carriers actually account for around 50 percent of all loads into and out of Croatia. But they only go where the money is. In Croatia’s case, that means the coastal areas during summer. Only Germanwings has some non-seasonal routes to Croatia.
We and the LCCs had a great summer season this year – leisure flights especially. And although we were not allowed to grow, overall demand was excellent so there was enough room for us all.
In Zagreb, low-cost carriers don’t have a major presence at the moment. They are often attracted by incentives. Zagreb airport’s previous management granted some generous incentives to a certain Scandinavian LCC which ended up jeopardizing our flights. In the end, the airport didn’t turn a profit on the deal. Fortunately, they have learned their lesson.

What is your stance on incentivized flying?

In order to boost tourism, regional governments in coastal regions subsidize leisure flights to their respective towns. While they are intended to benefit the tourist market, the fact is, they often also carry VFR traffic as well. I would argue that giving out subsidies, in this instance, is a moot point because even without subsidies, both market segments would still visit the region.
Also giving incentives to tour operators does not make a lot of sense in my view. The money should stay in the country and not been given away. It might boost revenues but it narrows profits in the longrun.
From a profit perspective, Croatia is shifting towards the budget segment. A lot of people say some spots here are the most beautiful on Earth so why is there any need to become a budget destination?
We are on the way to becoming a low-cost destination with high revenues and low margins instead of a highly profitable, quality business.

Zagreb Airport is set to open a new terminal in the near future. What are the advantages/disadvantages this will bring Croatia Airlines?

The apron doesn’t have enough parking bays close to the terminal so shuttling passengers to and from the aircraft will take longer.
Being fast is crucial to us as we just have thirty minutes to handle transfer flights during our morning busy spells.
Let me explain. As the slots at Western European airports we have right now have been grandfathered to us, we are unable to get ones that are better suited to our flights. Now add to that, the limitations regional and coastal feeder airports’ operating hours impose and you’ll soon see that even five minutes during morning rush hour can be critical to our operations.
On the other hand, the new terminal will also offer passengers many new amenities and improved comfort.
On the whole, we will have to see how it all works out.

Croatia Airlines Dash8-Q400 departing in Zurich (Copyright: Tis Meyer – planepics.org)

You are officially on the lookout for a new investor. Adria and Air Serbia have already succeeded. Why?

We need an investor in order to grow faster. Though we could sustain our operations using our own funds, expanding is essential and it requires money.
Air Serbia is heavily subsidized by the Serbian goverment so it is not very difficult to build an airline when money isn’t an issue.
While Adria Airways did manage to find an investor, it was sold for a very low price. I hope that they are gonna make it with the present set-up.

Where do you see Croatia Airlines in five years?

Our main goal is to maintain our position as regional leader. According to data at hand, we are still the leading carrier – despite Air Serbia’s claims to the contrary. In the longterm? Well we have the general goal of starting transoceanic flights. Maybe not within the next five years, but we all have dreams!

Thank you very much for your time.

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