Until 1998, Greece had been virtually untouched by the European liberalisation process. Apart from a partial deregulation in 1991, which permitted new start-up airlines to operate regular charter services, the Greek market remained tightly controlled. Flag carrier Olympic Airways and its regional subsidiary, Olympic Aviation, enjoyed a near monopoly within the country. But with full deregulation, the landscape has changed forever, with new challengers beginning to make their presence felt.
It was an impressive feat that the Greek Government managed to hold back deregulation in the south-eastern Mediterranean for so long. Access restrictions within other European markets were swept away back in 1993 when the European Commission (EC)steered through the Third Package, creating the region's famous single air market. Access to domestic markets followed almost three years ago. Yet Greece managed to convince the EC that its flag carrier needed protection and won itself a five-year exemption from the Third Package. It had argued successfully that Olympic fulfilled a vital social role in providing basic services and communications to the many island communities from the mainland cities of Athens and Thessaloniki, as well as within the islands. Time was needed for an orderly transition, it said.
This anachronistic situation dates back to 1956, when Greek shipping magnate Aristotle Onassis took the ailing national airline TAE off the government's hands and founded Olympic Airways. It was to operate in the public interest and provide essential services to remote island communities. In exchange for his investment, Onassis persuaded the government to give Olympic a 50-year monopoly on all services. When the airline later reverted into state ownership, its monopoly was maintained and attempts by new entrants, such as Aegean Aviation, to operate in Greece were rebuffed.
Competition began to emerge after the European decision in 1987 to deregulate air transport and the Greek Ministry of Transport's subsequent completion of the legal framework for a partial liberalisation - excluding scheduled services - in July 1991.
The first wave
With more enthusiasm than sound business sense, a number of new airlines appeared and disappeared. Those focusing on the tourist market included Cretan Airlines, which was flying holiday charters to Crete with three Airbus A320s; Apollo Airlines with three A300s; Venus Airlines, which eventually flew with three McDonnell Douglas MD-83s, two Boeing 757s and two 727-200s; and Cronus Airlines, with one 737-300.
The only survivors from that early scramble were Air Greece, with a small domestic network flown with two ATR72s since September 1994; Aegean Aviation, now Aegean Airlines, limiting its operations to air taxi and business flying; and Cronus.
The principal reason why those first ventures into air transport in Greece proved such a failure was Olympic's stranglehold over ground handling, says Antonis Simigdalas, general manager of Aegean Airlines. "Even if you were a competitor, you still had to rely on Olympic, whose handling charges were among the highest in Europe," he says. High interest rates, then running at around 30%, and a general disinterest in aviation by the banks, also meant that airlines were undercapitalised.
Venus, Apollo, Cretan and others also failed because the real market in the tourist industry is controlled by the big players in Northern Europe, he says. Greek tour operators linked into these conglomerates were reluctant to support local start-ups. While there was enough business for these airlines in a good year, these were few.
He believes Aegean survived because it focused on the air taxi business with aircraft under 14 seats, which it considered at that time to offer the most promising returns. A capital injection in November 1994 by the Vassilakis Group, one of the largest commercial groups in Greece, specialising in cars and the service industry, enabled the company to acquire Learjets for business flights.
Aegean overcame its reluctance to enter the charter business, with its uncertain revenue streams, only when the EC ground handling directive gave Aegean the chance to participate in the country's first private ground handling company. It was a joint venture, called Goldair Handling, involving Lufthansa's GlobeGround, KLM and Frankfurt Airport. New investments, offering hope of an end to air traffic control problems in Greece, also gave it courage.
"In September 1998," recalls Simigdalas, "the board felt that the time was finally right to enter scheduled services, and this was to be advanced with a possible acquisition of Air Greece. It had several attractions for us - it was an established operator with a base in Crete, a known brand, three ATRs and carrying 300,000-400,000 passengers a year."
In October last year, Aegean and Minoan Lines, majority shareholder in Air Greece, joined forces and agreed to increase Aegean's capital by Dra14 billion (US$45 million). Minoan participated in the new capital structure with a minority stake of 28%. Aegean now owns about 80% of Air Greece, but its partner, the Vassilakis Group, is ultimately the largest shareholder.
Aegean itself then launched four routes in Greece, linking Athens, Thessaloniki, Heraklion and Rhodes, which support around two million passengers annually, nearly half of the Greek domestic market of 4.5 million. In November 1998 it ordered two BAE Avro RJ100s with options on two more, which have since been taken up. The first three were financed by a consortium of banks led by HSBC, and the fourth was converted into a lease.
"Our choice of aircraft was geared to a high-frequency operation on these routes, which support strong business traffic and are not seasonal, as one would expect," Simigdalas says of his fleet plans for Aegean. "We decided to go for 100-seat jets and buy the aircraft to demonstrate our commitment. The RJ100 was the only available type at the time with short delivery, and others were much more expensive."
Doubts about the engines and fuel efficiency proved largely unwarranted, and availability and high utilisation now satisfy the airline. "As a start-up we couldn't afford technical unreliability, so we sat down with BAE and devised a very good support package."
Within three months of start-up in May 1999, Aegean had achieved an 18% domestic market share. In combining capacity and rationalising frequencies with Air Greece, the two airlines offer 10 flights a day between Athens and Thessaloniki, which, says Simigdalas, is more than Olympic. Chania, Corfu, Kavala and Alexandroupoli have since been added to the network, boosting their combined market share to 27%. December schedules have been integrated, and are flown with the four RJ100s, three ATR72-200s and two Fokker 100s. The next stage in the development envisages the disposal of the Fokkers and the addition of up to four new aircraft, more frequencies and a total of 13 routes.
Minoan Lines has now handed over management of Air Greece to Aegean and the next step is likely to be operations under a single name. Aegean's owners looked at other airlines as potential partners, but only Air Greece was a direct competitor with a similar strategy. Aegean is not yet ready to embrace the fragmented international route structure of the others. But Simigdalas adds: "Greece is a small country and in the long term, it is inevitable that we will expand beyond its borders."
Cronus plays European hand
Cronus Airlines initially decided to go for Europe, targeting ethnic traffic between northern Greece and Germany, serving Cologne/Bonn, Düsseldorf, Frankfurt, Munich and Stuttgart with a single 737-300. Cronus was founded in 1994 by construction entrepreneur Ioannis Manetas, and the opening up of the market provided a challenge he could not refuse. He admits that early on it was a matter of trial and error, but, "the company survived because of reliable management and a strong belief in its future success."
Yet its rapid international expansion, with new services added to London, Paris and Rome, and a fleet build-up to four 737-300s and two 737-400s, allied to a high cost structure, are believed to have landed the airline $10 million in debt. The addition of domestic services from Athens to Thessaloniki, Heraklion, Chania and Rhodes, which held out the prospect of better yields, further extended the airline.
The result was a major restructuring and buy-in in December 1998 by the Laskarides family, which owns the largest fleet of refrigerator ships in the world and now has a controlling 55% stake, with Manetas holding the other 45%. An initial public offering is a possibility, Manetas says.
With this new capital injection and the improved business climate, Cronus is projecting passengers carried to exceed one million for 1999, revenues of $75 million and a near break-even result. "Profits will come," insists Manetas, "but first comes safety and a high standard of service." It will continue to expand its international profile, having applied to serve Kiev, and looking to the Balkans, Russia and Central Europe, and will acquire at least two more Boeing aircraft this year.
Manetas believes there is still room for more independents once Olympic Airways gets its house in order. "Once Olympic has to restrict itself to profitable routes and decreases frequencies," he says, "it will create a healthier operating environment for other airlines to flourish in."
Axon Airlines was the last to enter the market and is also backed by powerful interests. The Axon Group, headed by Thomas Liakounakos, is a sales and service organisation, active in defence, publishing, healthcare, property and finance. Capitalised at Dra9 billion, Axon Airlines avoided the domestic business, which it feels is oversupplied, and instead concentrated on Europe, with the aim of putting quality first. It started flying in June with two 149-seat 737-700s from Bavaria Leasing. The small network of scheduled services now provides daily connections between Athens and Brussels, Milan, Paris and Rome, with two services to Brussels flown via Thessaloniki. Load factors achieved so far average 60-65%.
The impending increase of the share capital by $25 million will enable Axon Airlines to implement its fleet investment programme. This includes the addition of one more 737-700 and three 110-seat 717-200s by May this year. Advance payments have also been made for up to four 717s for delivery from 2001. The airline is planning to use them to focus on serving the Balkans, Central Europe and the Middle East.
How does Olympic Airways view the new competition? Rod Lynch, Olympic's chief executive, does not seem worried. "Look at the track record of independents in Europe," he says. "I'm not going to be derogatory about the start-ups, and there is valid place for at least one more domestic specialist. I think that the merger of Air Greece with Aegean is a sensible move, with the power of Minoan behind it, and a combination of Avros and ATR, which are ideal for domestic routes. But if you go out into the market, lease a couple of 737s and fly to Germany Italy, Switzerland and France, frankly this is the stuff of dreams. The only thing they can sell on is price."
He thinks that there will be mergers and withdrawals of the five companies operating in the Greek market. "This will result in perhaps two, maybe three remaining. You could see that at least one may even become an Olympic franchise for a particular part of the market. I wouldn't rule that out." Yet even Lynch admits that the airlines now making their mark have a far better chance to succeed than those in the first wave, which were all undercapitalised and were unexperienced airline management.
Today's independent airlines are backed by powerful local industrial and financial groups, two out of the three by shipping companies, and they have learned from the mistakes and misfortunes of others. But overcapacity on the domestic market and fierce competition from foreign airlines on international routes into and out of Athens must be of concern, and this has forced the Greek Government to put a temporary hold on new licences.
The combined Aegean Airlines/Air Greece operation is well-positioned to provide Olympic with sustained competition on the domestic front, but in the international sector, the situation is less clear cut. It is doubtful that Axon and Cronus can both hope to carve out a sufficiently profitable share of the market. Both have ambitions, but only one might survive.
Greek independent aircraft fleet
Aegean Airlines 4 RJ100 Air Greece 3 ATR72, 2 F100 Axon Airlines (3) 717, 2(1) 737 Cronus Airlines 6 737 Note: Figures in brackets are aircraft on order
Source: Airline Business