ch-aviation interview: Andrew Madar, CEO Cobalt

The Republic of Cyprus has undergone a rapid change in aviation scenery since the demise of state-backed carrier Cyprus Airways in 2015. Since that time, four prospective carriers – Tus Airways, Cobalt, Charlie Airlines (operating under the Cyprus Airways brand), and the nascent Orion Airways – have emerged each of which is vying for a slice of the island’s lucrative summer leisure market.

ch-aviation’s Vice President (News), Ivan Nadalet, visited Larnaca earlier this summer to discuss Cobalt’s business plan, philosophy and operations with its CEO Andrew Madar.

Launched in June 2016, Cobalt is a hybrid carrier that currently operates a dry-leased fleet of two A319-100s and four A320-200s on scheduled passenger flights connecting Larnaca with eighteen destinations in Greece, Lebanon, the United Kingdom, Belgium, France, Israel, Switzerland, Spain, Iran, and Ireland. It also offers ACMI/charter services albeit to a lesser extent.

INTRODUCTION

Ivan: Andrew, would you just like to take a moment to introduce yourself and explain how you got the gig here?

Andrew: I’ve been in the aviation industry since 1985. Before that I earned two degrees in aerospace engineering from the University of Washington in Seattle, and then I started working at Boeing in 1985.  I earned an MBA degree from Rutgers University as I was working for Boeing. I held quite a few different positions at Boeing including technical research and development, airplane design and performance, and airline operations before eventually ending up in a fellowship roll in airlines development in the China market.

In 1997, I moved to China for Boeing on a special assignment to help develop the industry there. I did a lot of consultation for airlines and the government in China to develop their industry. It was a two-year assignment, but I ended up staying there until about 2010, for Boeing. It was a great job and we did a lot of good work. We introduced regulations, efficiency, safety and so forth, and helped quite a few airlines in their start-up preparations. Some of them changed, merged, or folded while new ones also emerged.

Then we also started introducing new technology to China such as RNP (PBN) and ADS-B and so forth. That helped us improve safety and efficiency, sell products and services, sell aircraft, sell new technologies and expand the industry as a whole.

After Boeing, I joined GE Aviation within China to develop their business in PBN – Performance-Based Navigation. There, we did some of the biggest projects in PBN technology in the world. We developed a lot of new airport procedures where they could expand into the west, the Tibetan plateau and so forth.

And then after GE, I joined COMAC for about three years or so to help their marketing and airline support groups on developing and introducing their new products, the ARJ21 and C919. To help them understand how western airlines would use these types of products, what they need to do in terms of selling and certifying them.

About that time, I began to get the idea to start my own airline, because I was helping some other airlines, in the same time frame, in Thailand and in the region.

So, I put a team together and we developed our own business plan to start an airline in Maldives. We were looking for investors, and that’s how I ran into AVIC. AVIC is basically the aerospace wing of the Chinese government. They’ve got about 500,000 employees; I believe they’re the 160th, on the list of the top 500 companies in the world. While they were looking at our business plan, they told me about this project here in Cyprus, and they asked me to come and help. So I joined Cobalt at the beginning of last year, 2016.

CONCEPT

Ivan: How did the whole concept of Cobalt come about? I mean, you are the second CEO, you took over from Andrew Pyne, I believe, after a few months. In terms of the project, did Cobalt come about before or after it was apparent that the original Cyprus Airways was doomed?

Andrew: The original Cyprus Airways had been experiencing issues, both financial and performance-related, for several years previous. And about the same time that its demise appeared imminent, new ideas started to pop up. But to answer your question, the Cobalt idea came up after, right after Cyprus Airways was put to rest. Now, I wasn’t part of that stage of the project but it was basically a small group of people, comprised of Andrew Pyne, a few other foreign investors and one or two Cypriot investors, who decided to pursue a new AOC which they called Cobalt.

Ivan: So why the name Cobalt? The name doesn’t exactly scream ‘aviation’ or ‘Cyprus’.

Andrew: Good point. That’s the name I inherited. I don’t have any problem with it, but that was the name that the original group came up with. I think the colour “cobalt blue” is what they were thinking of as, if you look around, it is a very dominant colour here in Cyprus. I came from China where I could see grey skies all the time. But here, you have the blue seas and blue skies. So that could be where it came from.

Ivan: Any chance of a rebrand in the future?

Andrew: I don’t see that happening as it would effectively dilute our image. But we’ll see. If we expand to other arenas, we may consider it. But once you commit to something, you commit. And anyway, it’s not a bad name.

WHY CYPRUS

Ivan: But why Cyprus? Why not somewhere else with a less seasonal market? Because here I assume it’s just O&D focussed primarily on the leisure segment.

Andrew: One reason for that is the original Cyprus Airways, which was the Cypriot flag carrier, shut down in 2015 leaving not only a significant market gap, but also a sizeable number of highly skilled pilots, engineers, and so forth available for hire. And then there is the fact that Cyprus is a country that needs connectivity to the rest of the world, so a gap opened up in a very good market with a very good niche opportunity.

We then drew up at the business plan and asked what can be done here? In terms of seasonality? Our solution is, number one, connections. Basically connecting, using this place as a hub. And there are other products like cargo and so forth that we’re going to use as well. But using Cyprus as a connection hub forms a big part of our strategy.  Expanding into long haul operations is another big part of our solution as this would enhance our connecting operations.  A good proportion of traffic to the hubs in the Gulf are connecting passengers and we want to win some of that traffic.  A third solution to the seasonality of the Cyprus market is the use of multiple bases.  We will look at additional bases once the initial phases of our start-up are completed and we have caught our breath.

BUSINESS MODEL

Ivan: From the beginning, we always assumed that you were targeting the LCC market, really becoming a hard-core budget carrier. But of course, that seems to have evolved. You now have a premium class and you’ve also got an ACMI operation. Was that a part of the original plan? Or is this an evolution?

Andrew: Yes. The original team that launched Cobalt intended to pursue a strategy based on what they called an Ultra Low-Cost Carrier, ULCC. Their heritage and background was that of a pure ULCC and that is what they thought would be the winning formula here In Cyprus.

But we changed strategy. When I took over in August 2016, I came here as an observer to assist AVIC Joy to monitor their progress. But then, when we saw that things were not gelling well, we made a change to the management, and, on August 1, I took over from Andrew Pyne as the new CEO and revised Cobalt’s business strategy.

One of the things we’ve noted here in Cyprus is that, this market, in this corner of Europe and at periphery of the Middle East, is not an LCC market. People in this region fly LCCs here because they don’t have any other choice. If you look at Ryanair and easyJet, for example, when they came here as a pure LCC, this was not really their flavour. So we started looking at adopting a slight variation of an LCC model – you could call it a “hybrid LCC”. But the bottom line is, we use the most efficient cost structure in terms of maintenance, operations, and commercial services. We use the same overall principles that LCCs use for aircraft selection, sub-contracting, distribution channels for sales, and so forth. Even on-board sales. But when it comes to cabin service and layout, we’re not a pure LCC.

Ivan: So you haven’t pursued ultra-dense configurations then?

Andrew: Exactly. And the business class itself is an interesting story. If you look at the market here, when Cyprus Airways was here, there as a very good opportunity for business, and therefore for real business class. Not Emirates-level business class, but what I call an LCC-esque business class – which is comfortable seats, not these economy-size seats with the metal bars put down, and a decent standard of onboard service. Nothing like a VIP-esque service.

Right now, this past summer, because our system has not yet reached full functionality on the commercial side, and also because our aircraft have different configurations, we’re haven’t been able to offer a business class just yet. We’re going to offer it in two or three months’ time. But meanwhile we’re offering our business class seats, the big ones, as comfort economy – Premium economy. And they are selling out like hotcakes. They’re very popular.

Ivan: Who is buying these seats? Is it tourists or business people coming to Cyprus?

Andrew: Tourists. Yes. We haven’t offered the business service yet. But we are getting tourists that are coming here from London, from Paris, from here to London and so forth, and other destinations – they are calling us ahead of time to make sure they get an economy comfort seat. We’re selling them at the counter right now, and on board. Right now, they’re pretty much full. We’re running out of those seats. So we know that that is a very interesting angle to explore.

Ivan: And then what about your ACMI operations?

Andrew: Again, we just wrapped our first year, and ACMI operation is a good way for us to fill in the revenue bucket for now.

Ivan: Are you talking year-round? Or just for the winter season?

Andrew: Year-round. Well, we’ll see how things go. Basically, we went through this first year beefing up our fleet. When I took over, we had only one dry-leased aircraft. Now we have six. So as we added more aircraft, we had to adjust our revenue source. Because we didn’t have the aircraft coming in in a very regular way, with hiccups in the delivery and so forth, we couldn’t schedule the six-fleet aircraft fully for the summer season. So we had to make last minute adjustments to our game plan. One of the best ways to utilise our aircraft that have been coming in this year is to use ACMI. This summer, by the way, we saw a massive surge in the tourism market all across Europe. Cyprus is benefiting a lot from issues affecting this region so much so that this summer season was the biggest ever in in the island’s history. And the same thing is happening in Greece, and Spain, and Portugal.

Last year we had an 18% increase in tourism. It was an historical summer season last year. This year, we saw another 23% or 24% growth on 2016’s numbers with all hotels in Larnaca and in the islands all fully booked. It’s a very good time.

Ivan: Essentially Cyprus is the island of stability amongst all the chaos in the Eastern Mediterranean and the Middle East?

Andrew: Yes. It’s safe, it’s pleasant and it’s affordable. So yes, this is a massive year. The ACMI market is picking up really well as well. And not just here, but across Europe as well.

Ivan: What’s your current revenue split between ACMI and scheduled pax ops?

Andrew: I would say something like 10% is ACMI.

Ivan: So is this kind of a pet project that will eventually be phased out once you expand big enough?

Andrew: It might be kept at a very low level. For winter, we have six aircraft right now, and when you talk about seasonality, in this first year, because we haven’t really solidified all of our scheduled flight network, we’re going to continue offering ACMI services. So we’ll probably put two aircraft into ACMI operations for the upcoming winter season. It’s good, solid income.

Ivan: Do you actively sell yourselves to the market? Or do people come to you?

Andrew: We haven’t had to market ourselves, because we’re getting a lot of requests. Our track record in terms of safety and efficiency has been very good this year so far. We just got our IOSA certificate. So we’ve got a very good reputation in the market.

Ivan: And how does the Cypriot unit cost-base compare to, say, the Eastern European and Balkan competitors like Small Planet, Smart Lynx, Trade Air etc. Are you cost competitive there?

Andrew: For ACMI? Yes. It’s very good, very competitive. And of course we go with the market price. We’re getting pretty good prices, and our cost structure gives us a nice margin on ACMI operations. But we’re not going to become an Avion Express, we’re not going to become a Small Planet. That’s not part of our game plan. We are a fully functional airline. And just operating as an ACMI carrier would mean we’d leave a lot of money on the table for others to grab.

FLEET

Ivan: I see that your current fleet is all sourced from lessors. Obviously, that gives you the flexibility to return aircraft when there’s surplus capacity. Do you foresee yourself ever placing a full-on order, a dedicated order, like Ryanair or EasyJet?

Andrew: Sure.

Ivan: At what point do you foresee it in the future?

Andrew: I would say in two to three years. Once we stabilise.

Ivan: So at some point you might transition to a completely new type of aircraft?

Andrew: The most likely scenario… You know, because we’re engineers, and we are very much an engineering company now, we constantly optimise. We constantly iterate our plans. But the most likely scenario is the replacement of our old generation aircraft with new generation aircraft in a logical phase-out program, which I foresee happening in a couple of years. Very likely we will just stick with what we have. There are neos coming down the line in 2018 and 2019 and there are big lessors that have these. So, ideally we’d like to start transitioning to something without too much of a different layout. But this will not stop us looking at other manufacturers. We have to keep it open. But this is definitely an Airbus region. Airbus has a foothold here for various reasons, and I’m not trying to change that. Our pilots and our crew are most familiar with Airbus products. So, Airbus has that advantage in terms of spares, support, crew training, and so forth. But we always keep the door open. We are even looking at Bombardier, for example. The C series – the CS300 in particular. Absolutely. I’m an engineer. I know the products. And we don’t just go with reputation and habit.

Ivan: The same manufacturer first and then eventually take the leap?

Andrew: Yeah. And then you would have a much more efficient fleet. The first ones to go out the door, I hope, are the A319s because when I took over last year, we had to grab aircraft as soon as possible and these A319s just so happened to be available at that time. We had only one dry lease. And we were doing ACMIs just to fly our passengers that we had sold tickets to.

We had two A319s already negotiated and lined up, so we just took those in. And then we went on to the ICBC A320s and GECAS A320s. Now we have four A320s and two A319s. It’s a mismatch. In our commercial area, when we sell tickets, the configuration changes. That’s a lack of efficiency in our system

Ivan: Have you taken it to the point where you’ve actually spoken with Bombardier and other manufacturers besides Airbus and Boeing?

Andrew: We have been talking with Bombardier. And I know the C-Series is a good aircraft. It has some interesting angles. One is, it’s brand new. The interior looks great. The design is good. I know all about their systems because I became comfortable with it in China, actually. The range, the size, it’s interesting. If we come up with a decent deal that would transition us, it’s not a bad idea. But we are even looking at Embraer about their EJet-E2s. Embraer have approached us, have talked to us, and they are doing some studies for us as well. The E2 could offer some additional advantages on our short but core routes with higher frequencies.

Ivan: The smallest aircraft in your fleet at present time is the A319. Would the CSeries/E Jet E2s be used to supplement your existing fleet? Or would they be to completely renew your fleet?

Andrew: I’d like to switch us to new technology at some point as it would give us a massive improvement in fuel efficiency. We would have to work with our lessors to see how we can transition to this new technology, basically the MAX or neo or C-series or even E2, at some point. We cannot stay with our current type of fleet and expect to compete with others as they switch to new generation aircraft.

Ivan: But would the C-Series be suitable given their low production rate at the moment? Given the fact that you want to focus on the low-cost hybrid niche, would there be enough production capacity being churned out per month to satisfy your requirements?

Andrew: We’re not looking at a massive fleet here in the next five years. I foresee, if things go steady the way we want them to, we don’t want to grow too rapidly in terms of fleet size. We want to stretch our network with a smaller fleet. Because if we don’t have a solid market developed, having too many aircraft is going to be a problem. Instead of taking on ten, twelve, fifteen, twenty aircraft in the next few years, we’re going to use six to nine short-haul aircraft and stretch our network.

Right now, we’re flying to 18 destinations with just six aircraft. So, it’s a slightly different game plan. It increases our maintenance costs and spares costs and so forth. But it doesn’t commit us to a large fleet in winter season with too muchequipment sitting on the apron.

Ivan: Given that AVIC is one of your shareholders here, have they tried to push the C919 on to you at all?

Andrew: Not yet. It may come at some point but we haven’t really addressed that. It may happen later down the road.

Ivan: Assuming the C919 gets European clearance of course?

Andrew: Sure. So that’s the political angle. We have to wait to see how that settles. It’s not in our core business plan right now to sit down and say, we’re going to take on C919…

Ivan: Have you considered other products such as the SuperJet and the MRJ90?

Andrew: Yes. Mitsubishi has visited us about the MRJ. See, the thing is, it’s a very interesting situation with this location in Cyprus. If we get smaller aircraft and ramp up the frequencies, it has some advantages to what we call our core destinations. We have three classes of destinations. We have core destinations, we have secondary, and we have spot destinations, which is just summer or peak season.

For some of our core destinations, having a smaller aircraft that can give us multiple frequencies on a given day, has many advantages. But it’s all an economic calculation that we have to do. And also, the fact that we would have to have crew for different aircraft types and so forth, that’s something that we would have to factor in as well.

Ivan: At one point you also wanted the A321s. You were also due to take them. What happened there?

Andrew: We did have discussions on A321 back in 2016 when we were in a rush to add capacity.  The A321 would have been an easier one to match with our plans than the A319 in fact.  But the deals we had lined up fell through and so we decided to stick with our core plan to use A320s.

Ivan: Specifically, the A320 at this point in time?

Andrew: Yes. That’s where we are. And that’s what we’d like to keep it for the meantime. We will switch all our A320s to one configuration with business class and economy seats. It will happen at the end of this summer season. We are going to have a uniform configuration. The two A319s will basically supplement the A320 fleet. And once we come up with an arrangement to either use the A319s for ACMI mainly, or phase them out and get the A320s to replace them, we will have a uniform fleet. As we phase aircraft out, we’re going to look at, hopefully, new generation aircraft like neo.

Ivan: Any timeframe for that? When you expect neo to start featuring in Cobalt’s fleet?

Andrew: Actually with the A319’s phase out, we can as soon as we find something that works. One of our lessors is Avalon, which is CIT, that was purchased by Avalon and they have a pretty sizeable Airbus order book.

SHORTHAUL STRATEGY

Ivan: We’ve talked narrowbody fleet strategy, tell us about your shorthaul network plan.

Andrew: Let me tell you about what we call our shorthaul strategy. One of the key things we’re doing here is not looking west only. We’re looking east. Because we are in Europe, but we are in a way in the Middle East. So we are using the advantage of this location that we have in terms of the market. The Middle East, Gulf, Abu Dhabi, Kuwait – we have looked at. We’re looking at Amman in Jordan. And of course Tehran. Tehran is a massive market, and not just Tehran, the whole of Iran.

Ivan: But who comes from Tehran?

Andrew: Tourists. A lot of tourists. And it’s one of those markets that is semi-year-round. It’s not just a summer peak coming for the beach. We’re trying to find pockets of markets that come here in winter, in fall and so forth. Iranians have a New Year in March. Of course, the Chinese have New Year in January and February. We need to fill those pockets of folks who will come here even in the cold seasons. We have no problem finding traffic in the summer time. The snowbirds from the north. There are some 80 airlines coming here in summer. Everyone is full. But our issue to solve is winter. Tourists that will come here in winter, and also connecting traffic. Beirut, for example, to Paris. Beirut to Madrid, Beirut to London. Great connection flight for us.

Ivan: Tehran flights briefly operated earlier this year before being suspended. When do you expect  to resume the route?

Andrew: We plan to resume our Tehran flights in March 2018 with their new year holidays (Nowruz). We had a few difficulties in our first few flights to Tehran mainly with routing and overflight permits.  This is now resolved. The routing to Tehran was an issue since, as a Cypriot airline, we are not allowed to fly over Turkey.  But we solved the issue by routing our flights over Egypt, Jordan and Iraq.

LONGHAUL & WIDEBODY STRATEGY

Ivan: Let’s turn now to your widebody and long-haul expansion plans which have been mentioned in the past. When are you looking to start long-haul ops?

Andrew: If you ask me right now I would say towards the end of next year.

 Ivan: You gave an interview to one of the local newspapers last year, where you mentioned that you were thinking of getting three A340s for your initial long-haul deployment either this year or next year. What’s the game plan there? And, specifically, to China as an initial destination, is that correct? Or has that changed?

Andrew: China is one of the initial destinations in our crosshairs. We are also looking at India. We are also looking at South Africa. China as a destination is very much a key strategy for us for several reasons. One is we have AVIC Joy as one of our shareholders.

Ivan: Are you stimulating demand or are you tapping into an existing market between China and Cyprus?

Andrew: We’re going to create it, yes. The Chinese tourism wave, I’ve been watching it from inside China, goes in different directions depending on the time of year. We are very confident that there will be a very strong demand here. We have looked at Chinese travellers: 40% of the travel from China to Europe is through connecting traffic typically via Dubai or Doha. We think we can get a lion’s share of that. Connect them through Cyprus to the rest of Europe.

Ivan: An intercontinental hub?

Andrew: Yes. That’s one piece of the puzzle. The other piece is the tourism specifically for Cyprus as an end destination. And the Chinese have not really discovered Cyprus yet. They are starting to trickle in. Last year, there were pretty good numbers coming in. This year it’s a little bit more. The Chinese haven’t seen this place yet. They have been going to places like Seychelles and Mauritius and Maldives for beach vacations. They just don’t know about Cyprus but once they do, the fact that it’s a part of Europe and it’s an easy hop from here for the continuation of their tour, I’m certain we’ll see a strong surge in demand.

Ivan: But what are you looking to use then to get you to Beijing et al.? Are you still going the A340 route? Or are you looking at A330s?

Andrew: We’re looking at A330-200 and A340. The A340 attraction is the fact that there are some really good deals out there. Just to kick start the flights. And now the A340, of course, its operating costs are higher along with somewhat higher maintenance costs. But if you don’t commit to an A340 long term, if it’s a short lease that can help us transition to the A330neo, for example, it’s a very good deal. So we’re doing the numbers on that, as well. The A340 prices that we’re seeing for leases are really good.

Ivan: So it would be ideal for you at the beginning, but eventually what would you transition to?

Andrew: It depends on what comes up. We’re looking at the A330neo or just A330-200s, or 787 even. The A350 as well. So we’re looking at all of these and keeping our options open. If you go with the A340, of course, transitioning to A330 would be the easiest in terms of training and so forth.

Ivan: It would be like what you were saying with the A319. You would ease those ones out in favour of the A320neo, and then eventually you would make your leap. So the same sort of principle again, the A340 to the A330 then to whatever will come around in the future?

Andrew: The transition to A340 or A330 to 787 is another possibility as well, if the numbers are right.

Ivan: But would it not make more sense to keep manufacturer commonality across the board?

Andrew: Yes sure. That’s why it’s a very tough call to switch to Boeing. But we aren’t closing the door on them. We haven’t really decided if our first widebody aircraft will be an A340 or an A330-200. And we have even talked to Boeing about their wide body aircraft.

Ivan: What about the terrible teen 787s – the early build 787s. Have you thought about those at all?

Andrew: Not much. We haven’t thought about them much. We’ve had Boeing visit us, they talked about 787s coming available. I’m a Boeing guy, I know the Boeing aircraft. But again, one of our issues is transitioning from Airbus to Boeing. It seems to be a pretty massive cultural change here. I think, at least in Cyprus, Airbus has really ingrained itself very well here. And when I talk to our pilots, they are very happy with the Airbus products. But I was raised with Boeing so it’s kind of a surprise to me to have so much favour for Airbus. But we go with what makes sense, economically. And part of that is the cost of pilots’ transitioning across to a different product and brand.

LONGTERM BUSINESS PLAN

Ivan: And then for the long term, what’s the actual plan? Obviously, we mentioned the intercontinental hub here in Larnaca, but what else lies on the horizon?

Andrew: Basically, the next big step is the long haul. We’re going to keep our short haul operations to east and west. We’re going to have a pretty good-sized network of cities. And fleet size will probably grow with both short and long-haul aircraft in the next five years. And we’ll be serving destinations in Europe, the Middle East, China, India, and the United States via a phased expansion plan. Aside from regional hub operations we’re also looking at the intercontinental aspect of it as well. Connecting from New York to Tel Aviv, for example. Because the Israelis love to connect from here to other places. We already see that connecting from here to European destinations for Israelis. New York to Tel Aviv is one of the most lucrative long-haul routes in the world. It’s massive. And yes, we can connect Tel Aviv traffic from here to New York. And that would be very big. And also the rest of the Middle East, Lebanon, the Gulf, Kuwait and so forth.

Ivan: What’s your split at the moment between O&D traffic and connecting traffic?

Andrew: We’re just starting the connecting traffic. So it’s a very small percentage. But we’re seeing very interesting results. We just started posting Beirut to Paris, London, Madrid, and the rest of Europe, and we’ve seen a very quick reaction to this. So I think this will eventually take over our direct flights to Cyprus, especially in winter.

Ivan: Does your primary hub, Larnaca, have the spare capacity to handle your growth plans?

Andrew: They say they do. They say they have some 15% – 20% extra capacity left. We are testing this connectivity and so far, so good. So we’re working with them to make sure we don’t get any nasty surprises.

TURKEY

Ivan: Let’s talk a little bit about geopolitics. In the beginning, you were saying that Cyprus benefits from the chaos that surrounds it in the region. But as a Cypriot carrier, is it by law or by choice that you do not transit Turkish airspace?

Andrew: Not by our choice.  The Turkish authorities do not allow us to fly over their territory, because we are a Cyprus-registered airline.  Any Cypriot airline using Cyprus-registered aircraft, cannot fly north, to Turkey or through Turkish airspace.

Ivan: How will that affect your planned Chinese routes?

Andrew: Basically, we’ll have to fly using a different flight track. But this won’t hurt us too much on China routes. There are different options. But for Iran, for example, we had to basically reroute our flights. And right now we go south, through Egypt, Jordan, and Iraq. But it’s not too bad. It’s about a three-and-a-half-hour flight.

Ivan: How much extra does it add then?

Andrew: I would say about 25 minutes for routes to Tehran.

Ivan: But on a long-haul service another 40 minutes as well?

Andrew: Long-haul service is not too different. I mean if you look at the tracks from here to China, it depends on where you want to go in China, there are different options. It’s not really a massive change. But of course, if we could overfly Turkey, it would be fantastic.

Ivan: Will that impact your whole concept of developing Larnarca into an intercontinental hub? Given the fact that Istanbul is 1000 kilometres north, how are you going to compete against your Turkish airlines?

Andrew: Istanbul is a hub, but right now it is suffering from political and geo-political problems.  This gives us an opportunity to utilise Larnaca as a good alternative for a hub in the region.

Ivan: But are you anticipating that this will last for much longer?

Andrew: I anticipate that it will last long enough for us to take a strong foothold. And then we will have a very strong position to be able to compete. So in our teething phase, we are catching a break. Which is great. Later, in two years or three years, we will be robust enough to expand beyond Cyprus. We’re going to look at additional bases, as well.

Ivan: Which countries are you looking for bases in? Mainland Europe?

Andrew: Very likely Europe, of course. But the next location we’re going to put more flights out of is Paphos. We’re already flying from Paphos to Athens, and very soon to Moscow. Our next plan is to base one aircraft in Paphos for the coming summer season because Paphos is interesting. The European traffic, the Western European traffic, like France, Germany, UK, to Paphos, doesn’t drop off as much as you see on this side of the island. There are quite a few retirees that live there. There are a lot of people that go there and connect to Egypt and so forth. So we are planning to put one aircraft there, and looking at some new routes out of Paphos to Europe. And also, given the fact that we want to be the national flag carrier of Cyprus, we want to make sure we use both airports and help the population as much as possible.

Ivan: A lot of these retirees you mentioned, a lot of them I’m sure are British and a lot of your routes are actually focused towards the UK market. And earlier this year we heard Ryanair CEO Michael O’Leary saying he was going to take the entire fleet based in the UK and move it to Europe if they a Brexit Open Skies agreement is not reached. What’s your Brexit “Plan B”?

Andrew: A couple of things. One is we are putting a lot of emphasis on the rest of Europe. We are flying to Paris. We’re going to start Germany. We’re looking at Scandinavia. We have Moscow and St Petersburg, for which both city’s traffic rights have been granted. We’re going to fly Russia for sure, and we’re starting it very soon. We’re not just flying to the UK. But UK travel to here, I don’t see that dropping off. Because we’re not dependent on the UK as an economy like, let’s say, easyJet which has offices there, they have a considerable number of employees there. We don’t have that type of problem. They have a different kind of problem to solve. Ours is basically tourism, which I think will continue. The heritage of the UK here in Cyprus is very strong. Many Cypriots live in the UK and commute back and forth. Many of their kids study in the UK – student traffic is huge. And that’s not going to change with Brexit.

Ivan: You’re not worried about the two-month period in 2019 where there may be no air services agreement between the EU and the UK which could lead to a suspension of flights between the two states?

Andrew: I would be surprised if anything big happens. But we have many options, and we’re basically expanding. The other thing is, Europe is part of our destinations, Europe in general. Like I said, we’re putting a lot of emphasis on the east. And that’s where the higher price tickets are. The average ticket price, the average yield on tickets to the east are much higher than those to the west.

Ivan: Largescale operators like Norwegian, IAG, Air France-KLM, and Lufthansa have set about developing budget longhaul products catering to transatlantic operations in particular. Cobalt, however, appears to be looking in the opposite direction. Have you got any plans to go across the Atlantic yourself at all?

Andrew: Yes, eventually we will look at the US as well. But that’s further on in the future. We need to get our ducks in a row with the long haul. We think China and India will feed us very well, and also South Africa. South Africa is interesting because it’s a good market in terms of cargo and passengers. If you want to come to Cyprus from South Africa, it’s a hell of a connection right now. And it’s one of those routes here could put very small capacity just to see how that works.

Ivan: Of those three potential destinations, which is the most imminent for your long-haul services?

Andrew: India is probably the easiest. We have a huge footprint in China in terms of connections. We have AVIC Joy behind us so we can talk to all the authorities, we can get airport slots. Starting with China is not as easy as India but much more attractive. There’s a CCAR-129 you have to get approved for, airport slots, and also we are very well-connected to top travel agencies.

Ivan: Tell us more about your China plans. What about codeshares with Joy Air and OK Airways? Would AVIC be able to facilitate that for you as well?

Andrew: With Joy Air? They can definitely facilitate that. In terms of codeshare within Chinese airlines, there are a few that I have looked at, and we will talk to them in terms of connecting traffic to the bigger cities so that we can bring them here. There are some smaller regional carriers that we can work with. We may even open the door to bigger airlines, but I’m not sure how that’s going to go.

Ivan: Someone with more or less the same mass as Cobalt?

Andrew: Yes. I think in China, we would look at Beijing, Shanghai and Guangzhou. We would also look at some other cities like Xian, Chengdu, and Chongqing. We are getting a massive amount of communication and attention from the Chinese government for this connection between China and Cyprus. Cyprus is on China’s One Belt One Road program and Cobalt is mentioned very frequently in discussions about it. And we have the attention of the highest level of the government authorities in China. So they really care about this airline as a bridge to connect Cyprus to China.

AVIC

Ivan: Tell us about AVIC’s role in Cobalt? Were they there from the onset?

Andrew: No. AVIC wasn’t there. AVIC was not there at the start. The original founding group basically planted the seed of putting a new business plan together and looking for investors. They started in, I believe, early 2015. And they put a business plan together and they started cranking out some of the initial work. In September of 2015, AVIC connected with them through some personal friendships. Some of the folks within that team knew people in AVIC, and AVIC was brought in towards September of 2015. Also, bear in mind this is not AVIC but rather AVIC Joy, which is a Hong Kong subsidiary of AVIC.

So, AVIC Joy Group was basically looking at aviation-based investments in different parts of the world and they found out about this project. They came and looked at it, they did their due diligence, studied the business plan, and eventually decided to join at the end of 2015, beginning of 2016. They’re now a minority 49% shareholder.

Ivan: How is having AVIC in your shareholding? How has that benefited you? Have they given you expertise? Or solely capital and the expectation of a return on their investment?

Andrew: Purely capital and also a good brand. The AVIC Joy name has brought us a lot of attention. We have opened up many doors in discussions with big suppliers worldwide, lessors and so forth because their name gives us credibility. But we don’t really have any technical expertise or technical interaction with AVIC.

Ivan: Do you have access to AVIC’s economies of scale? Do they help you with procurement?

Andrew: No, absolutely not. They have been totally hands off in terms of getting engaged with our daily routines, planning and so forth. They are basically very good shareholders that have supported the company’s investment. They are not the type that would go in and say, “so what’s going on? What’s in the kitchen? How does the soup taste?”

Ivan: Has your experience of living in China played a significant role in your relationship with AVIC?

Andrew: Oh, absolutely. The trust they’ve given me, to send me here. I can speak Chinese for casual chitchat, but I don’t dare use it for professional conversations *Laughs*

 

RYANAIR, AEGEAN COMPETITION

Ivan: What about the attention you’ve been getting from rival carriers here? You’re competing now with Aegean and to a limited extent with Ryanair on certain routes. How have you been received in these markets? Has anybody tried to undercut you? Or is there enough cake for everyone?

Andrew: Well, in the summer time there’s enough cake. We see some reactions from Aegean, for example, which is at a very professional level, pricing and so forth. We’ve seen some slight changes in the game plan on the Aegean side. Not coming really head-to-head against us, but changing their fleet size or frequencies and so forth. Aegean has other issues to worry about other than just Cyprus. They have a much bigger fleet and they have completely different destinations of which Larnaca is just one. But I think we have impacted them a little bit.

Ivan: Not to the extent that any blood bath is expected?

Andrew: No, we haven’t seen any animosity or hard-core fights or anything like that. Ryanair, we haven’t really seen; I think we’re not really in Ryanair’s crosshairs, because Cobalt’s a slightly different flavoured product to what they offer. Ryanair had a lot of emphasis on Paphos, for example. And they recently reduced their flights out of there for Athens. They’re doing Tel Aviv – Paphos flights. So we don’t have real direct head-to-head competition with Ryanair.

The other ones, there are a lot of snowbirds in the summer season, charters and flights that start in the summer and then they go away in the winter. And the market in summer is so massive here that we don’t really see much reaction or competition head-to-head in the summer time.

In the winter, I think our biggest focus is what to do with our fleet of six. This is our first year. And how to establish our scheduled flights so that it works out okay for the first year. We do look at each city pair that we’re connecting, in addition to looking at who else is flying there; their frequency and so forth, so we kind of stay out of each other’s way.

DOMESTIC MARKET & COMPETITORS

Ivan: Let’s talk a little about your Cypriot rivals. We spoke about how the demise of the original Cyprus Airways led to your establishment. But of course, there are also three other carriers that had the same idea; Tus Airways, Charlie Airlines (operating under the Cyprus Airways brand), and now Orion Airways is also looking to come in. Is the market big enough to sustain four of you?

Andrew: No. I don’t think the market is big enough for four airlines, for sure. And definitely there will be some change of plans for the different airlines here. We’ve been lucky to be the first carrier to start operations using large jets, and, with six aircraft at this time, we’ve got by far the biggest fleet here. We’re quickly establishing ourselves in the Cyprus market. We’re getting the lion’s share  of the local domestic to foreign countries market. Tus Airways is actually not a bad complement to what we’re doing. We’re looking at that. Because Tus Air flies turboprops and small jets, we’re looking at the possibility of maybe seeing how we can work things together, maybe offer some island hopping in Greece.

Ivan: Do you mean through codesharing?

Andrew: We’ll see. But we don’t look at Tus as a direct competitor. We recently ACMI-ed their aircraft to fill in some gaps in our schedule. I think a combination of Tus Air and Cobalt would be a good fit for Cyprus.

Charlie Airlines (operating under the Cyprus Airways brand) is Russian but we haven’t really figured out what their game plan is. Right now, they only have one aircraft. As a competitor, we are more focused on handling Aegean, for example, than Charlie Airlines. And on Orion, we haven’t heard much.

Ivan: So you think that having been the second out of the blocks was actually a good thing then?

Andrew: Exactly. Being an early mover has been an advantage that has definitely worked for us. Right now we are out of the gate and we are going full speed but we’re not going crazy in terms of fleet size. Like I said, we are very prudent in our steps. I have seen a lot of airlines fail because they lacked prudence. We’re not going to do that. But we are grabbing traffic rights, frequencies, we’re grabbing airport slots. And we are establishing different routes very rapidly.

STATUS QUO & FUTURE

Ivan: So how would you say you are along in your business plan? Are you pretty much on track and where you expected to be at this point in time?

Andrew: We are doing very well cost-wise. We are on track. We had some hiccups this year in terms of timing of the deliveries. That was one of our big issues. So we’re a little bit behind on establishing some scheduled flights. A little bit behind there. But we’ll catch up very quickly. These are typical hiccups that affect start-ups from time to time.

Ivan: Who are you using for your model then? Are you looking at Wow Air, or Norwegian?

Andrew: I would say a combination. The closest thing I can think of is Norwegian which is a long-haul low-cost operator.

In terms of short haul, I don’t see anything directly similar because we’re a unique hybrid company that combines low cost operations for our back-end and standard full-service operations for our front-end.

Ivan: How do you plan to compete with larger operators in the region – Turkish Airlines and the Middle Eastern carriers in particular?

Andrew: The good thing we have, which I think is our biggest trump card, is our model. We are a low-cost model. Not a low-cost carrier, but a low-cost model. Our CASK is very good and that’s what gives us an advantage in competing with Turkish Airlines and Emirates and Qatar Airways. It’s a checkmate situation. Because once you commit to a certain size, like Alitalia, you can’t come back. And we’re not going there. That’s what we’re controlling. We’re not going to get to a massive size in terms of headcount and fleet, and so forth. Once you go past that hump, it’s very hard to come back. So that’s what we’re watching very carefully.

Ivan: The idea is a small- to medium-sized carrier without massive overheads?

Andrew: Yes. So basically, you control your growth rate and grow as your market grows in a very, very careful way. In a very conservative way. We’re going to stay on the conservative part of the curve. It’s easy to get a big appetite when you start an airline, and in a couple of years take orders and start signing aircraft. It’s very good for the management of the airline, because it looks good. It’s a career move. And the growth looks good. Splashes everywhere.

We’re not going to do that. And as long as we don’t do that, we can compete with Turkish Airlines and all these other big guys.

In all, I think we have a very steady growth curve. We are coming along very well. We have put all our focus in the initial phase on operation efficiency and safety. Fully. And now we’re expanding into the business domain, where we’re putting out more advertisements. We’re not very well known in, say, France or Germany. And that has been because we were controlling our costs and putting all of our focus on the factory itself. Now we’re there.

Ivan: And in terms of your profitability, when do you expect to break even? Given that you’ve only been in the game for a year or so, do you expect it in the near future? Long term? When?

Andrew: Like a typical start-up, I would say, in 2019 if all goes as according to current plans.

CYPRUS GOVERNMENT & REGULATORS

Ivan: Has the government embraced you? Are you a preferred carrier for civil servants?

Andrew: Yes. 100%. The President flies with us. We fly a lot of the ministers. As you know, we fly to Brussels. One of the reasons we put that route together was to cater to government traffic. So they fly with us all the time and they are very supportive. We also receive fantastic support from the DCA [Department for Civil Aviation], the ATLA [Air Transport Licencing Authority], and other government offices including the Foreign Ministry etc.

Ivan: You were talking before about being designated a flag carrier. What does that entail and what are the benefits?

Andrew: It’s more of a psychological factor. There’s no such thing. You hear different countries say this is the flag carrier. There’s really no legal basis behind that, as far as I know. There’s no stamp or license you have to go and achieve. But it is an impression that you give to the country. So here we are the biggest fleet right now. We are the biggest fleet based in Larnaca. We are carrying a lot of passengers. The largest number of domestic passengers.

Ivan: So you don’t get preferences in allocations of route authorities or anything like that?

Andrew: There is nothing official behind it. But the government has helped us, for example, with our discussions for the route to Tehran. They gave us fantastic support to discuss with Jordan. Jordan originally did not permit us overflight rights to Tehran because of the political disagreements between Jordan and Iran. So that delayed that route’s launch. However, the Cypriot government’s intervention helped us quite a bit. We had direct support from different ministries, including the foreign ministry and transportation ministry, and even at the presidential level.

NORTHERN CYPRUS

Ivan: Many people I have met here in Cyprus have expressed skepticism that the Republic of Cyprus will reunite with Northern Cyprus, but as the saying goes, never say never. Do you have some contingency plan that does envisage a united Cyprus, or is this something that you haven’t really considered?

Andrew: We have a very fuzzy plan, if it does happen. And it will get more serious if it gets closer. I’ve thought about this. If we do open up this airspace – and the difference to us would be the airspace to the north would open up – there are a lot of advantages there. But then there’s a lot of competition as well. So there are pluses and minuses.

A massive airline like Turkish Airlines getting access to here – because they cannot come here now – would be tough to handle. So there is the aspect that we would get more competition from Turkey. But at the same time, I think the pluses are bigger. Going to Russia, for example, going to Moscow we would save about 40 minutes. And of course to Iran and other eastern destinations, that would be a big plus for us.

Ivan: Thank you so much for your time.

Andrew: My pleasure.