For years, the state subsidies of the company Air Serbia have been discussed in public. These days, however, it turns out that in the past years, since the former JAT was transformed, the business of the national airline has been relatively solid.
The problem of the new company is the loans borrowed in 2015 and the following season from the minority co-owner Air Etihad on desperate conditions, the first of which in the amount of 56.5 million euros is due in early September, and the second from 62 million in June next year.
The basis of everything is the amount of interest, as much as 6.97 percent, although at that time the market was lent with an interest rate of 2.5 percent and lower. With the pandemic, the severe crisis affected the entire world traffic and additionally aggravated the situation in which the national airline found itself.
Better business
But let’s get down to business. Last year, the company recorded a profit of 9.5 million euros. It would be difficult to make money if the state did not subsidize the company in which it is the majority owner with 20 million, while the operational management was left to the minority partner, the well-known company Air Etihad from Abu Dhabi.
In previous seasons, it was even better, the state subsidy of 21 million euros each contributed to last year’s profit being 12.8 million, the season before 15.7 million. Let us remind ourselves of the time of JAT Airways, when, at that time, one hundred percent domestic company, annually made between 25 and 34 million euros in losses, so when concluding a foreign partnership, the state of Serbia had to accept the company’s 380 million euros in debt.
Let us add that the former company made such a loss on an annual income of about 150 million euros, while in recent seasons, the new management has managed to almost double the inflow into the company’s coffers. And without subsidies, it makes a much smaller, insignificant minus.
The importance of sharing
True, during the partnership, Sinisa Mali, the main contractor for the transformation into a new airline, announced over four million passengers a year and revenue of close to 700 million dollars.
During JAT, the number of passengers did not exceed 1.5 million, in recent seasons, Air Serbia transported between 2.55 and 2.83 million customers per season. Although what was promised in the festive atmosphere has not been achieved, it is obvious that the new manager has raised the business parameters to a noticeably higher level.
The increase and improvement of business was done by increasing the number of lines, the number of flights, the fleet. The basis of everything is fitting into the network of Air Etihad lines.
Practically, in the case of transfer from one flight to another, especially when it comes to Air Etihad lines, Air Serbia planes are also counted. The so-called sharing is the basis of business in modern air traffic.
Cash costs
The specific contribution of the new partner cannot be disputed. The problem arose in the way the company from Abu Dhabi entered the former JAT, which transformed the former company into a new legal entity. But how?
Serbia has accepted all 380 million inherited debts, while it has paid 90 million euros of founding capital for 51% of the co-ownership of the new company. On the other hand, Air Etihad brings in only 40 million euros for 49% of co-ownership, as a loan from the parent company of the daughter company.
Flyers from the UAE came to co-ownership only on the basis of business reputation and a promise to improve the functioning of the new company. The thing is that JAT was in doubt, the knowledge of the management was outdated and almost useless for generating earnings in modern air traffic.
It was calculated that the team from the Arab company was much more agile. There is certainly Etihad’s network of lines for sharing a new flyer from the Balkans. Both were highly valued when entering into the partnership.
For the third half of the cake
However, the competition in the world sky is exceptional and fiercer, especially when it comes to companies that base long-haul flights to cities in the Middle East, where it is optimal to make a landing and a break if you want to fly from Western Europe, USA or Africa to Southeast Asia, China, India or Australia. But, there are places for two and a half companies, and three are big rivals.
It seems that in recent seasons, Air Etihad is the third one when only (half) of the cake is left. It got into trouble and now the company is burdened with as many as five billion dollars of losses accumulated lately. Thus, the business position of Air Serbia may come into question.
Directly for Air Serbia, the loans taken from Air Etihad are much worse, and they arrive for payment. Even if we had not been struck by the corona infection, the question is whether Air Serbia could repay the extremely unfavorable arrangements on its own.
It is quite certain that it will not be able to now, so he could go bankrupt. In such cases, the co-owners usually pay the obligation in proportion to the share. However, the Etihad does not have such a plan.
Who repays the loan
Air Serbia asked the creditor, otherwise its minority co-owner, for forgiveness of 82% of the debt, and it was rejected. It seems like a very big request, but, if the obligation of the co-owners were singled out, it is proposed, in fact, that the Government of Serbia pay 21.5 out of 60 million euros of debt.
And that would be a great forgiveness if the situation in air traffic was not dramatically difficult, and it is certain that there will be no improvement in the near future. The fact is that Air Serbia, like all the world’s leading pilots, will almost never be able to repay this debt.
Buyers of Air Etihad bonds, whose money was actually lent to Air Serbia, would agree to postpone the payment, but on the condition that the state of Serbia be the guarantor of the debt. Thus, the obligation of Air Serbia would practically become a part of the public debt of the state of Serbia and the company’s debt would be paid from the budget.
It is not unacceptable, but, nevertheless, there should be a significant write-off of the basic debt, while the amount of co-ownership of Air Etihad would have to be significantly reduced. In any case, negotiations follow and a lot depends on what is achieved in the triangle of the state of Serbia – Air Etihad – bond buyers.
The contribution of the national flyer
However, the real exam for Air Serbia’s management will follow only after a new agreement and a new ownership structure. The current, and somewhat better business results in the future should be achieved with significantly less support from Air Etihad.
It’s not easy. The state subsidy is not too big, after all, the state is not at a loss. From taxes, excises and other levies (not counting the contributions of employees for social and health insurance), Air Serbia annually pays twice more than the amount of subsidies into the state budget.
At the same time, the contribution of the national airline to the successful operation of the “Nikola Tesla” airport (last year it exceeded six million passengers for the first time), Serbian tourism, the reputation of investors, and the ability of the local population to easily and relatively cheaply have access should not be forgotten to a significant number of destinations, especially those most frequently visited. Also, if there was no company with Belgrade as the main starting point, only then would it be seen what the price of tickets from the local destination of other companies would be.
In any case, the subsidy is not what significantly shapes Air Serbia’s business. It is much more important to have a staff that can successfully run a company, and it is difficult to make a profit without, at least partial, reliance on a network of flights of a strong, possibly world-relevant partner.
For the future of the national company, and even the local aviation industry, there are many more important things than the extremely politicized issue of state subsidies, BiF reports.
