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Aegean/Olympic: Virtual merger now real October 2013 Download PDF

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In mid-2009, the Greek diversified investment company, Marfin Investment Group (MIG), completed its purchase of the intangible assets of the state-owned Olympic Group (ie the airline brand, logo, three Heathrow daily slots, its domestic ground handling concession and its land use rights to two maintenance hangars at Athens for €105m). The deal was unsuccessfully challenged by a last-minute bid from Aegean.

Over a three year period, Olympic is estimated to have accrued a €300m exposure in purchase price, set-up costs, assumed aircraft lease liabilities and operating losses as it attempted to compete with Aegean. Rejecting the opportunity to re-invent itself as an LCC, it reformed the old highly inefficient state-owned model by dropping all long-hauls and other hopeless routes and immediately replacing elderly, fully depreciated, 737s and ATRs with new A320s and Q400s, at a high capital cost. Both Olympic and Aegean employed essentially the same, small-scale, legacy airline model, engaged in a brutal battle for market share, especially in the domestic market, and both lost large amounts of money.

In 2010, both carriers applied for merger approval to the European Commission and the national competition authority. The merger was not allowed, because of dominant position concerns, so the Greek solution was a virtual merger. Routes, fleets and fares were synchronised. Olympic sold its LHR slots to Aegean, withdrew from most trunk European routes and focused on trunk domestic, PSO and Balkan turboprop operations, while Aegean proceeded with a significant European expansion.

While this was a convenient arrangement, it did not translate into profitability. As the extreme Greek economy recession hit, traffic volumes collapsed (total domestic traffic fell from 6m annual passengers in 2008 to 4.1 in 2012), and both carriers were faced with drastic revenue reductions while sustaining legacy-type fixed cost structures. In addition, there was increased domestic trunk route competition from Cyprus Airways (now withdrawn) and a staged UK LCC expansion into Greece. Aegean reacted by slightly divesting its Athens presence and entering the seasonally attractive Athens-bypass leisure market. Olympic retreated further into the domestic and Balkan markets. Finally, Olympic and Aegean divided six domestic trunk routes in September 2013.

In essence, the EC was forced to accept the reality of the existing “virtual” merger and offer a stamp of approval. There had been no fundamental change in the domestic competition scene since the 2010 decision, but the rationale behind the 2013 approval was that Olympic was a failing company. The 2010 disapproval created a virtual domestic monopoly; now there is an actual domestic monopoly.

The Greek stockmarket liked the decision, one of the few pieces of good news in recent years, and Aegean’s share price has rocketed. Yet fundamental problems have not been tackled.

In a corner of Europe eminently suited to LCCs, Aegean is still a very traditional carrier, a sort of British Midland. It is vulnerable to attack from LCCs like Ryanair and easyJet offering direct service from northern European points to island destinations, further undermining the traffic that used to connect at Athens. easyJet might finally be tempted to establish an Athens base and enter the domestic market from there (it flies to Athens from multiple European points, but Ryanair won’t touch Athens because of the very high airport charges).

There is even the possibility of a Greek new entrant. Inevitably, monopolies attract challengers (the net average domestic fare is now at €60 for a typical 45 minute segment), and entering at the bottom of the cycle, encouraged by very low labor costs, to attack a legacy monopoly could be enticing. However, Aegean will probably enjoy a one or two year “honeymoon” before any serious contender can be satisfied on these issues:

  • A more clear path on the Greek economy outlook;
  • Uncertainty over the eventual ownership of Athens airport (and its future charges); and
  • The outcome of the privatisation of some 18 regional airports, now in progress.

Astra Airlines

Based in Thessaloniki, it operates two BAe146-300s and one A320. Though it serves a handful of domestic scheduled routes from Thessaloniki to the islands, by far its largest market is the IT traffic from Russia and other eastern European countries to northern Greece (an estimated 500,000 passengers in this segment in 2013). Note that Russian tourist arrivals in Greece in 2013 are registering a 47% increase year-to-year. Though Aegean is attempting selective inroads into this fast-growing market, Astra is well positioned commercially and enjoys a definite cost advantage. Secondly, Astra is trying to position itself as Thessaloniki’s “home airline”, catering to the local leisure travel demand by offering direct summer connections to the Aegean islands, eliminating the Athens connection necessary with Aegean.

Bluebird Airways Based in Heraklio, Crete, this is a genuine destination-based charter carrier operating three 737 Classics. It also concentrates heavily in the incoming Russian IT traffic, having strong commercial and financial links with St. Petersburg- based tour operator Tes, itself believed to be controlled by Russian airline S7. Bluebird is truly seasonal, virtually shutting down from November to February. Like Astra, they seem well positioned to defend their niche against Aegean. Their secondary focus is the growing Israeli incoming IT market.

Sky Express Founded in 2005 and based in Heraklio, Crete this is a turboprop regional commuter operating two BAe Jetstream41 and one ATR42. Its business model is centered in providing Heraklio (Greece’s fourth largest city) with Athens bypass scheduled services to about 20 domestic destinations, including a sizeable portion of PSO routes. To their credit, they have followed a prudent conservative and consistent strategy, keeping a close eye on costs and capacity.

Aegean and Olympic
Aegean Olympic
Fleet 30 A319/20/21 10 Q400
4 Q200
1 A319
Airline staff 1480 610
Total Passengers 2013e 6.5m 1.9m
Domestic traffic 2.5m 1.6m (0.5 PSO)
International traffic 4.0m 0.3m
Revenues (€ m) 630 170
Aegean Passenger Traffic
Aegean Passenger Traffic Produced by GNUPLOT 4.6 patchlevel 1 0 1 2 3 4 5 6 7 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 millions gnuplot_plot_1 gnuplot_plot_2 International Pax Total Pax
Aegean Financial Data
Aegean Financial Data Produced by GNUPLOT 4.6 patchlevel 1 -40 -20 0 20 40 60 80 100 120 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2013F 200 300 400 500 600 700 800 EURm EURm gnuplot_plot_1 gnuplot_plot_2 gnuplot_plot_3 Revenue EBITDAR Net profit
Aegean Share Price
Aegean Share Price Produced by GNUPLOT 4.6 patchlevel 1 1 2 3 4 5 6 7 Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 2011 Jan 2012 Jul 2012 Jan 2013 Jul 2013 Jan 2014 gnuplot_plot_1

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