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INVESTMENT LEADERS 2005

Interview with Christian Mandl, CEO of SkyEurope Airlines

Christian Mandl is Founder & CEO of SkyEurope Airlines, Central Europe's first low cost low-fare airline. Mandl launched SkyEurope in February 2002 together with Alain Skowronek, a former executive of Brussels-based Virgin Express. SkyEurope operates a network of 20 destinations in 12 countries out of bases in Vienna-Bratislava, Budapest, Krakow and Warsaw, with a fleet of 15 aircraft. SkyEurope is financed by leading financial institutions, such as the EBRD, ABN-Amro, Bank Austria Creditanstalt and East Capital Asset Management AB.
photo: Courtesy of Christian Mandl

The Slovak Spectator (TSS): SkyEurope has been called "the darling of the investment funds" because it raised its share capital in 2004 by €10 million and bought four new planes, increasing its fleet to 15. What have you done differently from other similar-sized investors in Slovakia?

Christian Mandl (CHM): We knew we had to find strong investors able to support our goals and this is why we rely on names like the European Bank for Reconstruction and Development (EBRD), ABN Amro, the European Investment Fund and Bank Austria Creditanstalt.

We felt that there was a great opportunity in Central and Eastern Europe. Looking at the numbers, one can see that GDP growth is about double that of Western Europe and that triggers the demand for air transport.

Currently, the propensity to fly is about six times higher in Western Europe than in Eastern Europe, but with economic conversion there will be a natural increase in air travel in Eastern and Central Europe.

Looking at the region, especially Slovakia, which did not have a proper airline after the split of the Czechoslovak Federation in 1993, or at other national carriers in other central European countries, which are in relatively weak positions, we feel that the low cost airline business model corresponds very well with the needs of the population.

People still live on lower incomes in Central Europe, and they do not really need luxury. What they do need is not to be treated like second-class citizens, and be able to fly and travel just as their neighbours, say the Austrians, do.

What we are offering is a bus with wings. Au-pair girls now can fly to Great Britain instead of having to go by bus. They can fly back to visit their families. What makes me wake up every morning, is not only that SkyEurope is a successful business, but also the feeling that we are able to do something useful for people.

An airline is part of a country's infrastructure. Some governments have lost billions investing in a national carrier: Belgium and Switzerland for example. We have actually given Slovakia an airline, financed from private funds, which has had an impact on the development of tourism and foreign investment.

In the area of tourism, you probably remember that Bratislava used to be virtually dead at the weekends. Now the hotels are packed. That has a multiplying effect on the economy. In terms of foreign investment, we have signed an agreement with Peugeot-Citroen to fly their employees between Paris and Bratislava. The question is: Would a French company have considered Slovakia an investment destination, had there not been a direct flight connection between Paris and Bratislava?

We have also created a bridge between Košice and Bratislava. The roads are still inadequate: poor quality and unsafe. We offer 45-minute flights three-times a day, contributing to the regional cohesion of the country.

It is really gratifying to undertake something that from a business point of view is profitable, but that at the same time helps people.


TSS: You have done all this without any state help. When you look at other foreign investors, like KIA or Hankook Tire, just to cite two examples, do you have mixed feelings about the investment incentives offered to them?

CHM: No, not really. As an investment location Slovakia has to compete with other countries. There are clear European Union rules on incentives for foreign investment, and Slovakia is working within these rules. The question is whether the Slovak government can afford them and how these incentives are allocated.

Incentives are necessary. The question is whether you want to allocate all of them for huge projects, or whether it makes sense to also focus on smaller companies. One should never forget that the small companies of today become the big companies of tomorrow.

SMEs have up to now proven to have more job-generating potential than large companies. To a certain extent, once the country has been able to attract the large automobile suppliers, it also needs to concentrate on smaller suppliers.

Slovakia cannot just be a manufacturing economy, it needs to make the shift towards a knowledge-based economy. That shift will also come from entrepreneurs.


TSS: How much appetite is there amongst investors for Slovakia?

CHM: Slovakia has a good reputation in the investment community. The Slovak legal environment has to a large extent harmonized with the EU. Previously, an investor would have had to pay close attention not only to the company but also to the legal system. Now, investors know they are basically investing in an EU country, and that reduces the legal and, to a certain extent, the political risks.


TSS: Is it inevitable that a low-cost airline would be successful in a relatively low-income country, or is it more complicated than that?

CHM: We registered the company on the commercial register on September 6, 2001, five days before 9/11: not the best time to start an airline. On the top of that, at that time Slovakia's business environment was not entirely investor-friendly and most investors were concentrating on Poland, the Czech Republic and Hungary. At that time it was not certain that a local airline would work in an emerging market.

But in fact, we have proved that a low cost airline can answer the needs of a population on lower incomes and we think we can take a greater share of the market.

Slovaks and the central European countries have been very quick in adapting to new technologies and the same has been happening with local airlines.

We started SkyEurope in Slovakia for three reasons. Firstly, there was no airline in operation that focussed on scheduled flights, and so there was a gap in the market. The second reason was Bratislava's proximity to Vienna. The third factor was that we were a low cost airline operating in a low cost country, and in that sense we took the low cost model one step further.

Our success does not mean that we are responsible for factory closures in France. On the contrary, we have even created new jobs here; for Italians, French and Germans. We have 20 different nationalities working for us. Even pilots who lost their jobs in Western countries have been given the opportunity to work for Sky Europe.

Now it all seems obvious, but at the start we even had to battle to change some laws in Slovakia, which was one of the few countries to charge VAT on importing aircraft. That is one of the reasons why Tatra Air had to stop operations. We explained to the government that it would not be fair if an airline based in Vienna, Austria, an EU country, was exempt from VAT on importing aircraft, while we, based in Bratislava, would have to pay 23 percent VAT, meaning several billions of crowns, which would have made it impossible for us to import modern aircraft into the country. We convinced the Slovak authorities that it made sense to harmonize Slovak legislation with the European Union's, even prior to EU entry. That is why we were able to import our first aircraft at the start of 2002 and start our operation in February 2002.

The market fortunately showed that a passenger in Bratislava thinks exactly the same way as a passenger in London. If the price is right and the service is right there is no reason why we cannot stimulate the market with low fares.

We now offer 21 destinations from Bratislava. Previously, people would not have dreamed of direct flights to Nice, Copenhagen, or Manchester. We can also create new demands. Before, nobody thought that there could be successful flights to Croatia because people used to drive there from here, but now we have flights to Dubrovnik, Split and Zadar.


TSS: How will the impending airport privatization in Slovakia affect your business and air traffic in the country as a whole?

CHM: There are examples in the world of airports that are not privatized but still work properly. Now, it has been decided that the privatization is a priority. Fine, but for us now it is very important that a decision is taken fast. The worst thing that can happen is a period of uncertainty, when nothing progresses. The airport still needs to grow regardless of who owns it. It is important that these decisions are not blocked due to the privatization process. If it has been decided, it should be privatized quickly.

Changing the ownership of the airport is not an answer to our problems. What is actually more important for us than knowing the name of the new owner is knowing who is going to manage the airport. The airport needs to have an effective management, one that is able to take commercial decisions quickly. It is not that difficult to start a new connection but for an airport it takes time to build infrastructure and develop services for the airlines, particularly when the airport infrastructure is always lagging behind the expansion of air traffic.

We would love to have more capacity in Bratislava, but we have to make sure that the airport infrastructure follows. The problem is not the runway system, which is efficient right now, the problem is that the terminal capacity needs to be extended, including for example the capacity of the parking lots.


TSS: What is the future of the MR Stefanik-Schwechat corridor?

CHM: It is relatively simple. Vienna will remain the hub, allowing for people to play the connecting role, just like Heathrow does for London. Bratislava will continue to focus on point-to-point flights, like Stansted for London. Point-to-point flights require simpler infrastructure, you do not need to connect flights and passengers.

There are four segments in which the Bratislava airport can be successful. The first segment is offering low cost flights; the second is offering regional flights for airlines like Lufthansa and Czech Airlines to feed their hubs in Munich and Prague. The third category is charter flights: we could attract some of the charter flights that currently fly out of Vienna.

The fourth category is cargo flights, where Bratislava can benefit from its wonderful location. Within one kilometre you have access to the Danube; you have a railway and you have a motorway. Basically, you have everything you need for a successful cargo business and to create a good logistics centre.

We still need to realize that the growth of the Slovak aviation industry is still very recent and there is a lot to be done. We should try to focus on opening new destinations rather than initiating predatory practices in old destinations. I do not think that having three carriers flying to London three times a day makes much sense.


TSS: What do you think of Austrian Airlines entry into Slovenske aerolinie? How will it affect the airline industry in this country?

CHM: To be honest, I do not think the strategy behind it is very clear. At the moment, the airline is flying with two Boeing and one Fokker aircraft: mostly charter flights and they have two scheduled flights to Moscow and one to Brussels. We certainly cannot consider it a national carrier when the majority of their business is through charter and not scheduled flights. I think we are pragmatic when we say that SkyEurope is de facto the national air carrier of Slovakia.


TSS: Do you feel that there has been enough transparency in this sector as we go forward to the privatization of the airport?

CHM: The answer is clearly "No". We are very happy about the steps that the government has taken to improve the business climate and the results speak for themselves. But unfortunately there are also shortcomings and in the aviation sector there are things that could still be improved. The key function of the state is to play the regulatory role in the sector, but the regulatory function is not always compatible with ownership. I would like to see more regulatory activity.

We, as an airline, in fact would like to see a strong and professional regulatory body. A weak regulatory body is not good for us. We have increased the number of passengers and flights but the civil aviation authority still have the same head-count and for us to grow we also need more inspectors and we need people who are able to license the pilots. You cannot have growth without investment in the sector.

I am not so much in favour of trading when the shares are simply sold and the money just goes to the state budget. It does not help us as an airline. We would prefer to see real investment in the development of airlines. We really need to give this sector a chance, since it is a very young. Effective development also requires transparency. The way Austrian Airlines took a majority stake in Slovenske aerolinie was definitely not an example of transparency.


TSS: What you are suggesting is that there has been neglect of the aviation sector. How can we explain this neglect?

CHM: After the split of the Czechoslovak Federation, Slovakia was left without an airline and everything had to be built from scratch and in order to develop strong civil aviation, you need to have a strong home-based carrier. Obviously, we cannot be held responsible for not having that. We just came onto the market and created an airline with the means we had. We always had ambitious plans, as you need to reach out to the masses if you want to successfully operate in the liberalized European market. We are a Slovak company, but if we had just operated in the Slovak market, we would probably have not had enough aircraft to operate, based on the business model, which requires competition. And the authorities were probably happy that there was a private airline fulfilling this role. We are not asking for subsidies; we are only asking for a proper environment to grow and create more jobs.

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