ANALYSIS: Etihad tie-up gives Jat more than a new name

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As Jat Airways becomes the latest star in the Etihad strategic alliance constellation, it can look forward - under new name Air Serbia - to a shiny new fleet, expanded network and strategic insight under new management.

Etihad confirmed plans on 1 August to acquire a 49% stake in Jat and a five-year management contract in return for which it will provide - along with the local government - cash injections and funding to the tune of $200 million.

Rebranded as Air Serbia, the Belgrade-based national carrier will enhance its fleet with Airbus A319s on interim lease and later acquire an all-new fleet after an evaluation and competition. The deal will also allow it to expand operations and add new points to its network, one of which will be the home of its partner - Abu Dhabi.

"JAT is certainly in need of investment and a fleet renewal, so there's no doubt the deal with Etihad provides that," says John Strickland of JLS Consulting.

Flightglobal's Ascend Online database shows that Jat currently operates an ageing jet fleet comprising nine Boeing 737s: eight 737-300s and one -200. It also has six ATR 72 turboprops in service and a long-standing order for eight A319s. Deliveries of this 1998 order have been subject to successive deferrals.

The Etihad tie-up allows Jat to retire its 737s from scheduled operations, and acquire leased A319s to replace them. In the longer term, it aims to order 10 new narrowbodies - with the A320neo and Boeing 737 Max among the candidates. What this means for the existing A319 order is unclear, but presumably it gives Airbus some collateral in any future deal.

According to Innovata schedules, Jat currently serves 33 destinations from Belgrade. Its longest sectors are Moscow, Stockholm and Tel Aviv (see map below). As it expands with new metal under the Air Serbia name, 12 new destinations are planned: Banja Luka, Beirut, Bucharest, Budapest, Cairo, Kiev, Ljubljana, Prague, Sofia, Varna and Warsaw, as well as Abu Dhabi.


 Innovata FlightMaps Analytics

There will also be codeshares with Etihad and its German partner Air Berlin. The latter, a member of the Oneworld alliance, does not currently serve Belgrade. However, Jat flies to three German cities - Düsseldorf, Frankfurt and Stuttgart - that Air Berlin also serves.

"While the fleet renewal is a great help, in the short term Jat will also require significant investment of management time to get the company turned around," says Strickland.

This effort is already under way, with the naming of Dane Kondic as chief executive. This dual Australian and Serbian national brings a solid travel and airline background which includes stints at Malaysia Airlines and Qantas.

The most recent published financial information for Jat obtained by Flightglobal was for its 2010 fiscal year, during which it recorded a $32 million net loss on declining revenues of $148 million.

Etihad chief executive James Hogan says that Kondic will have the Gulf carrier's full management support to transform the airline, and that there will need to be "some tough decisions". But he expects the financial investment, along with their joint management expertise, will help create "a sustainable, competitive and profitable airline".

The motivation for Etihad's involvement is less clear than the benefits it provides for Jat. By riding to the rescue of the Serbian airline - as it has done with several other carriers previously - Etihad has added a sixth string to its "equity alliance" bow. And, undeniably, the deal provides additional European access - although with questionable short-term value given the prevailing economic conditions in some of those markets currently.

"It will also provide Etihad with some passenger flow through its Abu Dhabi hub between Serbia and Asia/Australasia, thanks to the widespread expatriate Serbian community, for example in Australia," says Strickland.

Above all else, the tie-up provides important additional scale for the Etihad business as it chases the tails of local rivals Emirates and Qatar Airways. As Hogan often points out, Etihad is "still half the size of our two nearest competitors".