Why Gulf airline Etihad is investing in the Balkans

Air Serbia plane at the launch of the new airline Etihad has taken a 49% stake in Air Serbia

The curtain fell and spotlights strafed the freshly painted hull of an aircraft named after tennis player Novak Djokovic.

The plane in question is an Airbus A319 that, at the end of October, became the first jet to bear the colours of Europe's newest carrier: Air Serbia.

As the applause of the guests echoed round the hangar at Nikola Tesla airport in Belgrade, two men looked on in mutual satisfaction - Serbian First Deputy Prime Minister Aleksandar Vucic and James Hogan, chief executive of Etihad Airlines.

This was a rebirth moment - with a new national carrier rising from what was left of the once-proud Yugoslav airline, Jat. And it was also the latest example of how a still-juvenile Gulf carrier (Etihad was only established in 2003) is shaking up the airline industry.

Before the violent break-up of Yugoslavia in the 1990s, Jat had prided itself on being among the most stylish and modern operations in Europe.

Start Quote

We have demonstrated through our different aviation investments that we are creating a global airline - it's about connectivity”

End Quote James Hogan Etihad chief executive

But by this year its elderly fleet of Boeing 737s appealed only to those with a taste for planes with a patina, period typefaces and ashtrays in the armrests.

Service was gruff, and there was no on-board alcohol to soften the blow of the often unpredictable departure times. The airline's finances were correspondingly dire - and with Serbia's public funds in no state to support Jat any further, it seemed the end was nigh.

Etihad's entrance was timed to perfection. It took a 49% stake in Jat in August - and signed a five-year contract to manage the new Air Serbia.

'Different business model'

Mr Vucic is candid about how the Abu Dhabi-based carrier became involved.

"Sheikh Mohammed is my friend and I asked him to help," he told the BBC.

But the relationship between the crown prince of Abu Dhabi and Serbia's most powerful politician does not by itself explain why one of the world's fastest-growing airlines became involved with a "legacy" carrier on its last legs.

Dane Kondic, chief executive of Air Serbia, left, Serbia's deputy Prime Minister Aleksandar Vucic, centre, and Etihad Airways' James Hogan Etihad hopes the deal will allow it to boost its presence in the Balkans

"Etihad's ability to make investments like this is unique," says Douglas McNeill, an aviation expert at Charles Stanley stockbrokers.

"It's a compliment in a way that they've gone for Air Serbia. There's no shortage of weak airlines they could have gone for - like TAP in Portugal or LOT in Poland. There are lots of competing opportunities."

Mr Hogan is not known for a sense of charity towards failing businesses. But he does have a track record of improving the fortunes of airlines. He turned around Gulf Air before joining Etihad in 2006 and overseeing a spectacular rise in both profile and business.

He told the BBC that he saw Air Serbia as a key component in Etihad's further growth.

Start Quote

The risk is that you end up with a collection of minority stakes - and if you don't have control you don't have anything. It's a questionable strategy”

End Quote Douglas McNeill Charles Stanley stockbrokers

"We have a different business model," he says. "We have demonstrated through our different aviation investments that we are creating a global airline - it's about connectivity."

Unusually, Etihad is not making its connections by joining a global airline alliance such as One World or Star Alliance, but by buying stakes in other carriers.

At 49%, the Air Serbia deal is the largest, but Etihad also owns considerable stakes in Air Berlin, Air Seychelles and Virgin Australia, as well as a small proportion of Aer Lingus shares.

Just this week, India's government gave the green light to Etihad snapping up a quarter of the country's largest carrier, Jet Airways.

For Mr Hogan, the attraction of adding Air Serbia to this "equity alliance" was obvious.

"The Balkans as a crossroads of the world has huge opportunity. The tourism business opportunity of the region is considerable - and we're going to be very well positioned to take advantage of that," he says.

Air Serbia plane Air Serbia's planes are far more modern than those of the former Jat carrier

"There are not only the Balkan and European markets, but with Air Berlin we can connect with the US - and with Etihad over Abu Dhabi we connect with not only Australia but the Middle East and South East Asia. We can position Belgrade as the gateway to the Balkans. We're very bullish."

Mr McNeill is rather more cautious about the Etihad approach. "The risk is that you end up with a collection of minority stakes - and if you don't have control you don't have anything. It's a questionable strategy."

Etihad points out that it has been successful in co-ordinating operations and consolidating costs. Air Berlin has ordered the same kind of aircraft as Etihad - right down to the interior fittings and details. And Mr Hogan says that Air Serbia will follow along similar lines, moving many of its operations to Abu Dhabi to avoid duplication.

Increased competition

Balkan airline industry analysts have seen the potential for an Etihad-powered Air Serbia to fill a potentially lucrative gap in the region.

Air Serbia

  • Formerly Jat Airways, it can trace its roots to Aeroput, founded in 1927
  • Operates 15 aircraft
  • Another 10 aircraft to be added
  • Expansion plan involves
  • By June 2014, Air Serbia will serve more than 40 destinations in 30-plus countries, with 73,000 seats on more than 670 flights a week.
  • Before the break-up of Yugoslavia, Jat was ranked the 10th biggest airline in Europe, carrying 5m passengers a year

The recently formed Association of Serbian Aerospace Professionals noted that there was a dearth of heavyweight carriers, which had left Turkish Airlines and the Lufthansa group to mop up on long-haul travel. An Air Serbia-Etihad-Air Berlin combination may provide competition on many popular routes.

Meanwhile, other carriers in the region are still facing the kind of financial struggles that afflicted the post-Yugoslavia Jat. Croatia Airlines is actively looking for a partner, while the national airlines of Bosnia and Montenegro have been in difficulties.

Hungary's national carrier, Malev, went out of business last year. A putative replacement, Solyom, has yet to get off the ground, despite rumours of investment from the Middle East.

So there is clear potential for Air Serbia to take advantage if it can get its act together. And Etihad is confident that with its management team in place, the new carrier will quickly turn a profit, pointing to its previous success with Air Seychelles.

Now the question is: what next for the most acquisitive of the Gulf carriers?

Mr McNeill suggests the next logical step might be to acquire a stake in a mainland African airline. Then Etihad's global equity alliance would cover most of the world - and make it a formidable player in the airline industry.

More on This Story

The BBC is not responsible for the content of external Internet sites

More Business stories


Business Live

    08:13: Watch out

    Technology fans will be watching the Mobile World Congress, which kicks off in Barcelona today, for the latest gadgets. Manufacturers seem determined to get us to buy a smartwatch. Apple and its rivals such as Samsung are trying to make the things prettier and more useful, AFP reports, having interviewed various analysts. Will you be tempted?

    07:59: Trinity Mirror

    Trinity Mirror will start paying a dividend for the first time since 2008 - of 3p a share - as pre-tax profits rose 1% to £102.3m for 2014, the Daily Mirror publisher said. However, print advertising revenue fell 14.1% in the second half of the year as supermarkets cut their spending.

    07:45: Thorntons

    A "mixed performance" from Thorntons, chief executive Jonathan Hart tells investors. International sales rose by 19.9% to £5.4m in the first half of the company's financial year, but UK commercial sales melted away by 12.4% to £54.7m. Sounds more like a pick 'n' mixed bag to us...

    07:32: Nationwide house prices
    For sale sign

    House prices fell by 0.1% in February, according to Nationwide - the first decline in five months, since September. That brought the annual rate of price rises to 5.7% compared with 6.8% in January - a sharper than expected slowdown.

    07:16: Lib Dems Norman Smith Assistant political editor, BBC News
    Lib Dems

    The Liberal Democrats announce the first of many proposed tax rises today as part of their vow to pay off the deficit by 2018 by increasing the tax take rather than cutting spending further. Norman Smith tells Radio 4's Today programme that banks would have all the cuts in corporation tax since 2010 wiped out in a move that would generate about £1bn for the public purse. However, the Lib Dems still need to raise a further £7bn or so to make their sums add up, he adds.

    07:02: Buffett letter

    A quick reminder of what Mr Buffett's company owns. Among other businesses, Berkshire Hathaway owns about half of Heinz, engine oil firm Lubrizol, clothing maker Fruit of the Loom, the pleasingly named Acme Brick company and private plane operator NetJets. He also owns stakes in Mars, Coca Cola and American Express.

    06:50: Bank shares BBC Radio 4

    David Cumming, head of equities at Standard Life, tells presenter Simon Jack on Today there is a "lot of noise" around banking stocks given the regulatory pressure the sector is now under, meaning they have a "higher than average risk profile". He also thinks the FTSE 100 will crack the 7,000 mark in the next few weeks as the economy continues to improve.

    06:37: East Coast trains Radio 5 live

    The East Coast rail route between London and Scotland has returned to private hands after more than five years in the public sector. David Horne of Virgin Trains East Coast is on 5 live. He says Virgin has done a good job with the West Coast line. National Express took over the line during a recession, so starting a franchise now should work better for Virgin, Horne adds.

    06:24: Market update

    China's decision to cut interest rates over the weekend - the second reduction in four months - in a bid to ward off deflation has boosted stock markets in Asia today, with Sydney up 0.5% as mining companies bounced higher, while the Nikkei in Tokyo and the Shanghai Composite were both 0.3% higher.

    06:11: Buffett letter Radio 5 live

    Sue Noffke, fund manager at asset manager Schroders, is 5 live's markets guest. Billionaire investor Warren Buffett sent his annual letter to shareholders on Saturday, summing up his 50 years building one of the planet's biggest companies. Because he behaves more like an owner than an investor, "he has had a longer-term investment horizon" than other investors, says Ms Noffke.

    06:02: Software security Radio 5 live

    Online security firm AVG's chief executive Gary Kovacs is on 5 live speaking from Barcelona's Mobile World Congress tech show about security breaches. The internet has "only been around for 20 years," so securing the place is now a priority, he says. A podcast is now on the website.

    06:01: Chris Johnston Business reporter

    Good morning! Get in touch via email bizlivepage@bbc.co.uk or on Twitter @BBCBusiness

    06:00: Howard Mustoe Business reporter

    Good morning everyone. Welcome to Monday. The UK government has said it will block the sale of 12 North Sea oil and gas fields to Russian billionaire Mikhail Fridman after concerns about the effect of "possible future sanctions". Stay tuned for more of the best business news.



  • A very clever little girlBrain gain

    Why are people getting better at intelligence tests?

  • Don Roberto Placa Quiet Don

    The world's worst interview - with one of the loneliest men on Earth

  • A reveller attends celebrations to mark the 450th anniversary of the city of Rio de Janeiro - 1 March 2015Partying in the streets

    Rio de Janeiro marks 450 years since it was founded

  • BeefaloBeefalo hunt

    The hybrid animal causing havoc in the Grand Canyon

From BBC Capital


  • BatteriesClick Watch

    More power to your phone - the lithium-ion batteries that could last twice as long

Try our new site and tell us what you think. Learn more
Take me there

Copyright © 2015 BBC. The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.