Published in November 2015 issue

By Jeff Kriendler

Emerging as a corporate hero from the ruins of the modern Greek drama unfolding today, Aegean Airlines (A3) posted a record 2014 profit of €80 million (about US$100 million). This year, despite the engulfing debt crisis, A3 even bolstered its fleet to meet the anticipated demand for the peak 2015 summer season. For the first half of this year, the company reported an increase of 20% in international passengers through June.

The financial crisis began in Greece in 2008, when the country’s debt was estimated to exceed $430 billion. In Athens, people rose up against their government in protest over an austerity plan that slashed pensions and wages, cut jobs, and raised taxes. By 2012, the country had plunged into a humanitarian crisis with unemployment pegged at 25%. Homelessness surged and suicides multiplied; underfunded hospitals fell short of medical supplies. Economists compared the conditions to the Great Depression of the 1930s.

Images of riots at the height of the crisis, in 2012, had a severe impact on international tourism, further straining the fragile economy, as nearly 20% of the country’s GDP is linked to tourism revenues.

Yet, one way or another, Aegean managed to weather those dark days. When travel to Athens fell off because of the widespread television coverage of the violent protests, Aegean responded by altering its route strategy to bypass the capital. Instead, it emphasized nonstop flights to the popular Greek Islands from many points in Western Europe.

Aegean’s strong financial results and confidence in the near-term future affirm what the Greek philosopher Epicurus wrote: “Skillful pilots gain their reputation from storms and tempests.”

THIRD BAILOUT

Earlier this summer, faced with severe capital constraints, the Greek government sought a third bailout, and the people peacefully took to the streets. With banks closed and limitations placed on ATM withdrawals, retirees had to cut back on spending and curtail their holiday travel. But visitors from Europe kept coming, discount prices adding to the allure of the country.

To learn how Aegean tightened its belt, shifted its route strategy, and enhanced its product to remain competitive, Airways traveled to Athens to meet with Dimitris Gerogiannis, the airline’s Managing Director and most fervent cheerleader, who laid out how Aegean circumvented the perils of an economically battered home market.

A native of northeastern Macedonia, Gerogiannis earned an electrical engineering degree at Thessaloniki University and a Ph.D. from Yale University. After eight years at Daimler Benz, he left Germany to return to his homeland, venturing into aviation by accepting an administrative job at the new Eleftherios Venizelos Airport (ATH) project then under construction to accommodate the 2004 Summer Olympic Games.

In 1999, he took a job in finance and administration with the nascent Aegean Airlines, which had just begun operations. Throughout his career, Gerogiannis has followed his father’s sage advice, “Love what you do.” And he clearly enjoys his work and the fine results, as Aegean has now grown to a fleet of 58 aircraft linking Greece with 57 international destinations in 45 countries.

MERGER WITH OLYMPIC

In 2013, Aegean acquired the remnants of Olympic Airways (OA), the once venerable airline founded by the Greek billionaire shipping magnate Aristotle Onassis, who had poured a good deal of his wealth into building and operating a world-class airline. With the absorption of Olympic, renamed as Olympic Air, Aegean added 34 unique destinations to its route network across Europe, North Africa and the Middle East.

Aegean was originally a VIP/business air charter operator specializing in executive air ambulance services. The Vassilakis Group bought the airline in 1994 and adopted the name Aegean Airlines when it started scheduled passenger services in May 1999. Aegean’s chairman, Theodoros Vassilakis, is the largest shareholder in the company, which has investments from other groups, as well as the public at large, through the Athens Stock Exchange. Vassilakis began building his empire by representing Hertz in Greece with a fleet of six rental vehicles. His flotilla of cars, AutoHellas, has grown to over 23,000 vehicles and, besides Greece, it is the Hertz franchise representative in a number of Balkan countries.

Gerogiannis says that Aegean’s merger with Olympic has reaped many benefits. First and foremost, it has kept the OA brand, which has deep emotional meaning to the Greek people, in business. An earlier attempt to merge the two carriers had been blocked in 2011, over anti-competitive concerns, by the European Commission. The Commission had said that the merged company would have controlled more than 90% of the Greek domestic air transport market, a ‘quasi-monopoly’.

The viability of Olympic, deeply questionable because of the financial crisis, led Aegean to make another attempt to acquire it. This time, the European Commission said yes, “due to the ongoing Greek crisis and given Olympic’s own very difficult financial situation, which would have forced it to leave the market soon in any event.” The merger, approved in October 2013, has allowed the two companies to benefit from synergies and develop a formidable international and domestic route network.

Operating 14 turboprop aircraft—a combination of Bombardier Dash 8 Q400s and 100s— Olympic maintains its primary hub at ATH, with a secondary base at Diagoras Airport (RHO) in Rhodes. It operates approximately 30 flights a day covering 18 destinations in Greece, and, as a subsidiary, operates flights on behalf of Aegean both in Greece and the Balkans.

The acquisition of Olympic Air provided numerous opportunities for cooperation. Olympic’s crews became a production unit, and the central functions of commercial activities, finance, technical, and IT were all transferred to Aegean. Systems, organization, and facilities integration have now been merged, gaining network connectivity, increasing buying power, and optimizing costs through the consolidation of management services.

BETTING ON A BOUNTIFUL SUMMER

Even though the global business news made Greece synonymous with financial woes, summer 2015 shaped up to be Aegean’s busiest ever, with 15 million seats placed on the market, an increase of 2 million over 2014.

“We are proceeding with the strong enforcement of our Athens hub and are also supporting regional growth with services to our smaller islands,” Gerogiannis said. Aegean started serving 10 new countries in the summer, he noted: the Netherlands, Malta, Kuwait, Finland, Saudi Arabia, Estonia, Norway, Iran, Armenia, and Croatia. Flights to Riyadh (RUH) and Tehran (IKA) were launched on schedule in late July. The capacity surge this year is somewhat risky and runs contrary to advice Gerogiannis’ father gave him as a boy: “Don’t let your legs hang over the mattress.”

“As an essential pillar and supporter of Greek tourism, it is our objective to expand demand beyond the traditional summer period,” he explained. “We wish to have a more effective spread of tourism beyond the summer months and stimulate travel to some of the smaller islands in the off-peak period.”

Despite the austerity measures imposed on the country, “we have continued to procure all services and supplies required to insure not only the integrity of our operation but also the full quality of service to our customers,” Gerogiannis said. “We were also able to take delivery of four additional Airbus A320s at the end of June and early July.”

He noted that Aegean initially was faced with a significant loss in net bookings both for domestic and international travel in July and onward. The company immediately responded with fare offerings, despite it being in peak season, gambling that a short-term drop in yields would pay off. “Our effective response, albeit costly, combined with the promise of gradual return to normality, have borne fruit.”

A key to Aegean’s success has been its nimble matching of crew resources to the seasonality of demand. During the summer peak, Aegean contracts short-term pilots, many of whom are retirees from Lufthansa (LH), Austrian (OS) and Swiss (LX), among others, and who enjoy the flying—and living—in Greece. Flight attendants are offered leaves in the slower winter months, obviating the need to furlough. The company also takes advantage of the winter period to perform heavy maintenance on its aircraft and to train its employees.

In fact, Gerogiannis said that, even during the height of the crisis, Aegean never cut staffing and only imposed one salary cut of 6%. Nor, he said, did the airline suffer any form of labor strife.

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OPPORTUNITIES IN CYPRUS

Demonstrating its flexibility in re-allocating aircraft and crew resources, Aegean quickly expanded its presence in Cyprus when Cyprus Airways (CY), the Republic’s flag carrier, collapsed in January 2015.

The island of Cyprus is partitioned into two parts. Over the half of its area is under control of the Republic and predominantly Greek, while approximately 35% of the land mass in the north, under Turkish control, calls itself the Turkish Republic of Northern Cyprus, an entity recognized only by Turkey. The island is a major tourist destination in the Mediterranean, popular with tourists even in the winter, where it boasts the highest temperatures in the Mediterranean region. It has a steady economy and a high-income population with a very active air travel activity.

Within days of CY’s shutdown, the Greek carrier announced the creation of an aircraft base in Larnaca (LCA), Cyprus’ main air hub. By the end of March, Aegean assigned four A320s to LCA, offering flights from Cyprus to 14 different points, including routes to Greece and direct connections to five key destinations in Europe: London (LHR), Paris (CDG), Munich (MUC), Rome (FCO), and Milan (MXP). Aegean is actively seeking traffic rights to provide nonstop flights from LCA to Tel Aviv (TLV), Beirut (BEY) and Kiev (IEV).

From its Larnaca base, Aegean also increased flights to ATH and Thessaloniki (SKG) and introduced a new flight from ATH to Paphos (PFO), a secondary airport on Cyprus which is the base for LCC Ryanair (FR). Last summer, the carrier also offered connections between LCA and Heraklion (HER) and Rhodes (RHO), as well as flights to Mykonos (JMK) and Santorini (JTR).

Gerogiannis said that the early results on the Cyprus buildup may be soft, because the tour market requires a nine-month advance selling period. But he is bullish on the market for the longer-term.


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2014 A BANNER YEAR

Gerogiannis sees 2014’s excellent results as a spur to do more. “We’ve won the battle of quality at the European level, contributing to Greece’s image. We must now translate this quality into a steady growth momentum both from Athens and our eight regional bases,” he said. “This is both an opportunity and our responsibility to support Greece’s economy.” The total number of passengers carried on Aegean and Olympic exceeded 10.1 million with a 15% increase in domestic revenue passengers per kilometer (RPK), and international traffic growing by 13%. Gerogiannis said that international traffic from Europe to Greece continued to be quite strong but domestic traffic and outbound international traffic remained weak from the debt crisis.

“Greek consumers are still skittish about spending their reduced disposable income and there remains an overall sense of uncertainty in the marketplace,” he said. “In 2014, we benefited by a 45% drop in fuel prices, yet we gave most of the savings back in terms of currency-exchange losses, as the Euro dropped 22% against the US dollar, where most of our costs are denominated.”

To become more competitive against the Low-Cost Carrier (LCC) market, which has grown to account for 40% of all international seats, Aegean introduced two fare categories that allow passengers to unbundle fares and get price savings on domestic and international flights.

‘GoLight’ offers one piece of hand luggage up to eight kilos for free, frequent flyer program (FFP) mileage accrual, the ability to change a ticket against payment of a fee, and provides savings for checked luggage if purchased from Aegean or Olympic’s website or mobile sites. A second option, ‘Flex’, allows multiple changes on tickets without a rebooking fee. The ticket is refundable in case of cancellation and, in addition to eight kilos of free carry-on baggage and mileage accrual, one bag weighing up to 23 kilos is allowed free of charge. The fare scheme is similar to that offered by its Star Alliance partners Scandinavian Airlines (SK) and Austrian Airlines (OS), and is becoming more commonplace among other European carriers.

ATHENS REBOUNDS

After six successive years of declining demand, in 2014, ATH reported a 21% increase in passengers over the previous year, reaching a total 15.2 million. If ATH achieves a growth rate of 9% this year, it will record its busiest year ever, beating the previous record of 16.5 million, set in 2007. Even with the ups and downs of traffic demand, the split between international and domestic traffic has remained virtually unchanged each year, with 65% coming from the former and 35% from the latter, within the mainland and Greek islands.

Only a few long-haul destinations are served from ATH: Toronto (YYZ) and Montreal (YUL), by Air Canada Rouge (RV) and Air Transat (TC); New York (JFK), by Delta (DL); and Singapore (SIN), by Singapore Airlines (SQ). Service is also provided by the three Gulf Carriers with flights from Abu Dhabi (AUH), Doha (DOH), and Dubai (DXB). A number of long-haul foreign carriers suspended service to ATH because of the crisis, including American Airlines (AA), Thai Airways (TG), Air China (CA), and Japan Airlines (JL).

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TOURISM PILLAR

Aegean contributes significantly to the economic development of Greece through its support of tourism. In fact, Gerogiannis noted, the airline has a number of A320s which carry a visitgreece. com banner on their livery. It also publishes Blue—one of the industry’s finest monthly in-flight magazines—often containing as many as 250 pages, most of them dedicated to Greek tourism.

Most of the visitors to Greece are from Europe, with the UK, Germany and France being the top markets. Despite the crisis, foreign visitors continue to visit the country, but a major shift in the network was made to set up bases in the Greek islands to offer non-stop service that avoids Athens, where most of the unrest has occurred. Gerogiannis said that aircraft had been re-allocated from Athens to operate nonstop flights from seven other Greek bases: Thessaloniki, Heraklion, Rhodes, Kos (KGS), Kalamata (KLX), Corfu (CFU), and Chania (CHQ). Traffic to Athens has recovered strongly, he said, and there are no indications of reluctance on the part of Germans to visit Greece despite their governments’ differences over the crisis.

Although it is a private company, Aegean acts as the unofficial flag carrier of Greece and is intricately entwined in the promotion of tourism. Its nationalism is so steadfast, Gerogiannis said, that Aegean chose the renowned London-based Greek fashion designer Sophia Kokosalaki to design the company’s new uniforms. “Aegean reaffirms its commitment to promote the work of Greeks around the world through all aspects of our operation, as we are inspired by Greece and the characteristics of our people,” he said.

Kokosalaki designed uniforms not only for Flight Attendants but also for Pilots and airport ground handling personnel. “The work is guided by the principles of ancient Greek classicism: the search for balance, economy of line, simplicity and timelessness,” Aegean says of the pieces.

Aegean’s commitment to the promotion of Greece extends beyond banner liveries and uniform designs. The on-board cuisine is Greek, with Greek wines. A new in-flight entertainment channel features videos highlighting the beauty of Greece. The films, branded Enter Greece, give passengers a sample of the beauty, authenticity, and timelessness of the country.

LCCs INVADE GREECE

Full-service carrier Aegean had the highest operating margin among European legacy airlines in 2014 and was fourth overall, only behind Ryanair, Wizz Air (W6) and EasyJet (U2). Revenues increased by 7% last year, although increased competition from the LCC sector caused a decline in yield. In 2014, LCCs represented 40% of international seats to and from Greece, while the domestic LCC share finished at 13%, up from less than 3% in 2013.

While Aegean/Olympic is the domestic leader with 80% of seats, Ryanair has come to play a relevant role in the market. At Aegean’s home base in ATH, the airline has a seat share of about 53%, while Ryanair has 12%. Two years ago, Aegean/ Olympic had a combined 59%, while Ryanair did not serve the market at that time.

As competitive pressures continue to rise, Gerogiannis said that Aegean is seeking further cost reductions by targeting distribution costs, ground handling, and maintenance. For example, last year, Aegean refurbished its interior Economy Class cabins by installing seats by Italian manufacturer AVIO interiors. The installation of the Columbus Two lightweight seats for its A320 fleet, carried out in the spring and summer, provides weight reduction and improved comfort for passengers. Aegean should recoup the investment in just two years.

The airline has said it will issue request for proposals (RFPs) to both Airbus and Boeing as part of its fleet renewal program.

Among the first aircraft to be replaced will be the A320s purchased in 2007. The airline plans to double the size of its fleet to over 70 aircraft by 2023 and to raise total annual passenger volume to over 15 million from 10.1 million. Gerogiannis is currently ruling out long-range operations, planning instead to work with his Star Alliance partners for connection options.

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CLEAR AIR AHEAD?

Ancient Greece provided many contributions to Western civilization in fine arts, sports, medicine, architecture, philosophy, and politics. With beautiful beaches and azure seas surrounding its mainland and islands, Greece is an extraordinary destination, whether it remains in the Euro Zone or follows Grexit. Its culture, history and scenic beauty will be remembered long after headlines of the debt crisis fade from memory.

“We have constantly grown,” Gerogiannis said, “even in these very tough times, and we are now enjoying the fruits of the hard work and personal sacrifices of our 2,400 employees.”

As Epicurus said, “The greater the difficulty, the more glory in surmounting it.”