Overview - SkyEurope Airlines

SkyEurope is the first and largest Central European low-cost airline, now with five bases, in Budapest, Krakow, Warsaw, and Prague, as well as Bratislava. Founded in 2001, it has the advantage of being a low-cost air-carrier based in a relatively low-cost country. Its main base, Bratislava Airport, is only 50km from Vienna, allowing the airline to offer alternative service into one of Eastern Europe’s leading markets, (although the failed privatisation of its home airport in 2006 did not help the airline).

Initially operating a sole 30-seater Embraer 120 Brasilia when it commenced operations on 13 Feb-02, Bratislava-headquartered SkyEurope Airlines has come a long way. It moved progressively into 149-seat B737-300s and 133-seat B737-500s and, more recently, 149-seat B737-700s as it grew. It has been one of the success stories coming out of the addition of the 10 states that joined the European Union on 1 May-04. Its high growth rate has not yet been matched by its profitability, but it is clearly on an upward trajectory.

SkyEurope has had to compete with the attentions of such established LCCs as easyJet and has been sufficiently robust to force WizzAir to cut back services to Slovakia and to have forced local competitor and erstwhile flag carrier, Slovak Airlines, out of the market, despite Austrian Airlines acquiring a 62% stake in Slovak in Jan-05. Slovak Airlines stopped operating in Jan-07 and was declared insolvent the following month, when Austrian refused to continue funding the airline, following a drawn-out dispute with the Slovak government.

Indeed, the airline has been so emboldened by its success that it is to start a new base at Vienna’s Schwechat International airport at the beginning of the summer season on 25 Mar-07, basing two 737-700s there and operating a network of 16 European routes direct from the Austrian capital.

Financing and expansion

SkyEurope was initially backed by the European Bank for Reconstruction and Development (EBRD) and Dutch bank ABN Amro NV and, on 27 Sep-05 became the only publicly listed airline in Central and Eastern Europe, quoted on the Vienna and Warsaw Stock Exchanges.

By then, SkyEurope's two founders owned 17% of the company, a group led by the EBRD held another 43% and Bank Austria-Creditanstalt held 40 percent on behalf of institutional investors. Following the IPO, its parent, SkyEurope Holding, successfully raised EUR78 million (of which EUR60 million went to the company) in 12.98 million shares priced at EUR6 per share, significantly exceeding earlier estimates. This gave the airline a market capitalisation of EUR120 million. It made a further EUR56.3 million capital raising on its first anniversary and now has 39 million shares, but they have only infrequently exceeded the original issue price.

On 31 Mar-04 SkyEurope announced its first major expansion by launching operations from Poland, first in Warsaw, with the former royal capital, Krakow added shortly afterwards, in August. Poland, with a 38.2 million population is the biggest of the new EU countries.

By summer of that year, SkyEurope was operating a fleet of 13 aircraft to 18 destinations in 12 countries. A further round of funding to raise EUR50 million was initiated in Jul-04. First to commit in this new round were existing owners ABN-Amro and EBRD-funded venture capital funds managed by Euroventures and EFM, followed in early 2005 by a EUR10 million investment by funds managed by Stockholm-based East Capital Asset Management AB.

Then, in 2005 SkyEurope placed a USD1.76 billion order for up to 32 B737-700 aircraft (of which 16 were subject to purchase rights), to be delivered between March 2006 and 2009. By Feb-07, the firm commitments were increased to 21, with a further 11 purchase rights. The first 12 aircraft are under operating leases from GECAS. Bank of Scotland Corporate announced in Feb-07 that it had extended a committed pre-delivery payment loan facility for all 9 of the 2007 and 2008 deliveries of new B737-700 aircraft, including the five to be delivered in 2008. These are in addition to the Bank’s on balance sheet term loan financing for the airline the next four aircraft.

Routes into Bulgaria and Romania commenced in December, as the airline spread its wings eastwards. A Prague base was established in Feb-06. Part of the airline’s strategy now includes providing a transit facility over its Bratislava base, connecting Sofia to Paris and Dublin.

However, the growth was not matched by profitability. In the second quarter, to 31 Mar-06, SkyEurope Holding reported that its net loss more than tripled to EUR21.7 million from EUR6.8 million for the previous comparable period (pcp). The half year result was no cause for joy either – a EUR33.8 million loss compared to EUR18.9 million the previous season. Fuel price increases were hurting the LCC; although revenues rose 37.6% to EUR24.7 million, costs jumped 75.2% to EUR45.2 million, driven by a 90% increase in fuel costs.

So the company went back to shareholders to seek approval to "issue new shares to finance the fleet and continued network expansion”. In Aug-06, the company announced that private equity fund, York Global Finance II, was to buy about 30% of the group as part of a major refinancing package, restoring financial stability.

At this time, SkyEurope shares were trading well below EUR2, following another loss, of EUR16.5 million, in the airline’s third quarter ended 30 Jun-06, more than double the pcp loss. Meanwhile however, revenues leapt 62% to EUR44.6 million, passenger numbers grew 46%, the carrier added five 737-700s to its fleet and it opened 22 new routes. For its first full financial year (to 30 Sep-06) as a listed company it recorded a net loss of EUR57.3 million.

As fuel prices subsided in late 2006, SkyEurope’s first-quarter operating loss had narrowed to EUR12.2 million, helped by a 45% increase in passenger numbers and a 10.5% increase in load factor, to 76.4%. But there was a price for the growth: in chasing cash flow, the high growth was largely stimulated by promotional fares for the traditionally weak quarter, with yields reducing by 6.7% compared with the pcp.

The share price recovered, briefly rising above EUR6 in Feb-07, as new buyers bought up substantial minority shareholdings, but the company is now reportedly in the throes of a battle for shareholder supremacy, between private equity group RPR, led by Austrian investor Ronny Pecik, and York Global. RPR doubled its holding to 16.55% in early February.

The business market

SkyEurope has adopted a pragmatic approach to market development, progressively chasing the business traveller, as that sector has clearly emerged as a real opportunity. For example, in announcing the new Vienna gateway, CCO Karim Makhlouf CCO said “the opening of the Vienna base reflects our strategy to focus on key markets with sustainable business potential”. A SkyShuttle bus transfer service allows a seamless connection between both Bratislava and Vienna Airports and the Vienna city centre. Reportedly some 20% of its market is business travellers.

In 2004, targeting major corporates, the airline launched a programme named SkyAbo Flexi, designed for business travellers, where tickets are issued in the company’s name, and can be used to any destination within the airline’s network. By Feb-07, this had evolved into the “SkyCorporate” initiative, offering the possibility of last minute cancellation and refundability, with great flexibility in purchase and naming of travellers.

In Mar-05, advance-bookable lounge access had been provided in 50 European airports through an agreement with Airsavings, although the EUR25 charge meant this was not always an attractive offering.

But, still pursuing the discerning traveller – and notably the businessperson – in Jul-06, SkyEurope became possibly the only LCC in Europe to offer freshly brewed when it concluded a strategic marketing deal with Iacobucci to provide Italian coffee specialties on its new B737-700s, with “authentic Italian Espresso and Cappuccino.”

Ancillary revenues

Ancillary revenues accounted for 18% of operating revenue in the most recent period, up from 13% in the first quarter of fiscal 2006. This was attributable largely to car rental and hotel bookings. In Jan-05 SkyEurope added an on-line hotel offering to its flight booking website in partnership with OctopusTravel, then recently acquired by Cendant. SkyTravel Insurance was also launched in conjunction with Airsavings.

Relationships

In May-04 SkyEurope began using AIMS – a fully integrated and operationally proven Crew Management, Operations Control & Commercial Planning system.

In the same month, to widen its marketing and sales reach, it chose to participate in Amadeus’ global distribution system (GDS), giving it wider market access. While not a typical LCC action, this reflected SkyEurope’s need to broaden its traffic base.

In May-05, SkyEurope contracted with ARINC for three internet-based communications and messaging services: ARINC AviNet MailTM, ARINC MQ-Over-the-InternetTM, and ARINC Avinet ConnectorTM.

Also in May-05, SkyEurope entered into a blocked space agreement with Denmark’s Sterling European – also a B737 operator - allowing cooperation on the Copenhagen-Budapest route. The partnership included “common sales as well as joint marketing activities”, helping the carrier to establish effectively in Copenhagen.
Effective 1 Aug-06, the airline outsourced its Central Reservation call centre to Competence Call Center (CCC), an Austrian based multinational call centre operator.

The Outlook

Frenetic expansion has been matched by skilful financing and an ambitious business plan, allowing SkyEurope to recover from a dangerous period in the second half of 2006.
The airline still has a positive expansion outlook, but the upcoming, recently postponed AGM, will be a critical one for it, in resolving board control and pointing a firm direction for the future.

Reducing unit costs will be a key item, with a targeted reduction of 5% in 2007. The first quarter saw costs trimmed by 4.4% to EURc5.64/ASK, despite increases in marketing expenditure and flight crew and engineering salaries, as the new aircraft economies started to kick in. Its February figures were encouraging too – its load factor increased to 86.2%, carrying 202,851 passengers, a year on year increase of 39.5%.

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