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Group ProjectMSc in Air Transport Management, 2010/11

May 2011

Project Manager: Jelte RonnerHediye Akyuz Karri Kauppi

Aurlien Andr Rob Lee

Andreu Carbonell Afeef Louis

Durvasa Dusoruth Viktoria Nestlinger

Flora Huang Nikolay Stoychev

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EXECUTIVE SUMMARY

SofiAirwill be a Bulgaria-based airline, connecting the region from its hub in Sofia.

At SofiAirour mission is to provide a safe and pleasant service, with a twist of freshness, and the

trademark sincere Balkan hospitality. The customer is central to all that we do, and they will be

offered complete freedom of choice to build the product that suits them, for each and every trip.

From Bulgarias capital of Sofia, we aim to make the Balkans smaller, through having an extensive

regional network. At the same time, we will bring Western Europe and the rest of the world closer

to the Balkans, offering westbound services including routes to major hubs, to allow connections

to be made to any place in the world. The regional network and the Western European routes will

cross-feed each other, and so increase the connectivity of the region via our Sofia base.

Travelling to, from, and within the Balkan region should be a pleasant experience for everyone no

matter the purpose of travel. SofiAirs vision is to become the leading airline of the region, for each

market segment. Offering la carte service will bring freedom of choice to the customer, and so

provide a tailor-made service for the traveller, making SofiAirthe natural choice for air travel from

the region, to any place in the world, in co-operation with carefully selected network carriers.

Operating from one of the fastest growing areas of Europe, in economic terms, air travel demand in

the Balkans is expected to continue to grow strongly in the years to come. This will ensure that

SofiAirsees strong demand for the services we will offer.

During the companys first five years, the focus will be on routes without heavy competition, in

order to grow the airline in a relatively quiet environment. The following destinations will be served

from Sofia, with a fleet consisting of ATR 42s, and Embraer 170s: Amsterdam, Geneva, Berlin,Bologna, Bucharest, Istanbul, Athens, Bourgas, Belgrade, and Tirana. During the first two years,

two ATR 42s and one Embraer 170 will be leased, switching to one ATR 42 and two Embraer 170s

from the third year onwards. Keeping only two aircraft types in the fleet will keep costs down.

Looking at our expected financial performance, SofiAirwill prove a strong company to invest in, and

an excellent opportunity to become part of the rapidly growing air transport industry in Eastern

Europe. To be able to start this new, fresh airline, an initial investment of 10.5 million is needed.

One-third will come from equity, and two-thirds from a long-term loan. We promise high

accumulated return on investment at the end of the five-year period, combined with attractive and

stable profit margins, and feasible exit points for our investors in both 2014 and 2017.

SofiAir, a fresher way to fly the Balkans


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TABLE OF CONTENTS

Executive Summary .......................................................................................................................... 1

Table of Contents.............................................................................................................................. 2

List of Figures.................................................................................................................................... 4

List of Tables ..................................................................................................................................... 6

List of Airport Codes ......................................................................................................................... 8

1 Corporate Strategy................................................................................................................... 11

1.1 The Environment .............................................................................................................. 11

1.2 Strategic Capabilities ....................................................................................................... 19

1.3 Strategic Purpose ............................................................................................................ 19

2 Regulatory Situation ............................................................................................................... 23

2.1 Regulation of Start-Ups ................................................................................................... 23

2.2 Traffic Rights ................................................................................................................... 25

2.3 Fares ................................................................................................................................ 27

2.4 Aircraft ............................................................................................................................ 27

3 Markets and Forecast .............................................................................................................. 29

3.1 Market Analysis ............................................................................................................... 29

3.2 Route Demand Forecast .................................................................................................. 36

3.3 Market Share Forecast ..................................................................................................... 38

3.4 Connecting Traffic Potential ............................................................................................ 39

3.5 SofiAirDemand Forecast ................................................................................................. 41

4 Fleet Selection......................................................................................................................... 43

4.1 Selection Process ............................................................................................................. 43

4.2 Coarse-cut Candidates ..................................................................................................... 44

4.3 Detailed Analysis ............................................................................................................. 45

4.4 Conclusion and Recommendations .................................................................................. 50

5 Marketing ................................................................................................................................ 53

5.1 Market Segmentation...................................................................................................... 53

5.2 The four Ps ..................................................................................................................... 53

5.3 Marketing Costs............................................................................................................... 62

6 Operational ............................................................................................................................. 65

6.1 Flight Operations ............................................................................................................. 65

6.2 Maintenance & Technical Support .................................................................................... 71


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6.3 Safety Management ........................................................................................................ 76

7 Human Resource Management and Organisation .................................................................... 77

7.1 Organisational Structure .................................................................................................. 77

7.2 HR Policies ....................................................................................................................... 79

8 Environmental Policies ............................................................................................................ 81

8.1 EU ETS............................................................................................................................. 81

8.2 Noise ............................................................................................................................... 83

8.3 Operational Measures...................................................................................................... 83

8.4 Corporate Social Responsibility ....................................................................................... 85

9 Finance .................................................................................................................................... 89

9.1 Basic assumptions ........................................................................................................... 89

9.2 Financial Sources ............................................................................................................. 91

9.3 Leases.............................................................................................................................. 91

9.4 Depreciation .................................................................................................................... 92

9.5 Profit And Loss Statement............................................................................................... 93

9.6 Balance Sheet .................................................................................................................. 96

9.7 Cash Flow ........................................................................................................................ 98

9.8 EU Start-Up Requirements ............................................................................................ 100

9.9 Sensitivity Analysis and Risk Assessment ...................................................................... 100

9.10 Financial Performance and Investors Information......................................................... 104

9.11 Milestones ...................................................................................................................... 107

Appendix 1: Markets and Forecast ................................................................................................ 109

Appendix 2: Fleet Selection............................................................................................................ 121

Appendix 3: Marketing .................................................................................................................. 126

Appendix 4: Operations ................................................................................................................ 129

Appendix 5: Human Resources .......................................................................................................136Appendix 6: Environment .............................................................................................................. 138

Appendix 7: Finance .......................................................................................................................139


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LIST OF FIGURES

Figure 1.1: The layers ofSofiAirs business environment.................................................................. 11

Figure 1.2: Growth in Bulgarian GDP, against Western and Eastern Europe averages .....................13

Figure 1.3: Porters Five Forces Model .............................................................................................15

Figure 1.4: Bulgaria Airs Network, from Sofia (Source: OAG, May 2011)......................................... 17

Figure 1.5: All scheduled routes from Sofia Airport (Source: OAG, May 2011) ................................. 17

Figure 1.6: Positioning of competitors, based on strategy .............................................................. 18

Figure 1.7: SofiAirs core values....................................................................................................... 20

Figure 3.1: Only O&D demand was taken into account for the forecast .......................................... 36

Figure 3.2: Historic demand and forecast, Western European routes............................................... 37

Figure 3.3: Historic demand and forecast, regional routes ............................................................... 37

Figure 3.4: O&D demand on the SOF-North America market (showing routing) ............................ 39

Figure 3.5: O&D demand on the SOF-DXB market (showing routing) ............................................ 40

Figure 3.6: O&D demand on the SOF-Asia-Pacific Market (showing routing) ................................. 40

Figure 4.1: Proposed turboprops capacity versus range ............................................................... 44

Figure 4.2: Proposed regional jets capacity versus range ............................................................. 45

Figure 4.3: Payload-range diagram for turboprops ......................................................................... 46

Figure 4.4: Unit cost comparison, turboprops ................................................................................. 47

Figure 4.5: Annual cost breakdown, turboprops ............................................................................. 47

Figure 4.6: Payload-range diagram for CRJ700 and E170 ................................................................ 48

Figure 4.7: Unit cost comparison, regional jets ............................................................................... 49

Figure 4.8: Annual cost breakdown, regional jets (700nm) ............................................................. 49

Figure 4.9: Aircraft cabin comparison, regional jets ........................................................................ 50

Figure 4.10: proposed ATR 42-500 cabin configuration ...................................................................51

Figure 4.11: Proposed EMB170 cabin configuration .........................................................................51

Figure 5.1: Promotion: Advertising decision process ...................................................................... 61

Figure 6.1: Departure time schedule of SOF (Source: OAG) ........................................................... 66

Figure 6.2: Arrival time schedule of SOF (Source: OAG) ................................................................. 66

Figure 7.1: SofiAirs organisational chart.......................................................................................... 77

Figure 8.1: Fuel burn and emissions ................................................................................................ 82

Figure 8.2: Effects of aircraft noise ................................................................................................. 83

Figure 8.3: SofiAir's CSR model ....................................................................................................... 86

Figure 9.1: USD/EUR exchange rates, historical data (source: oanda)........................................... 102


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Figure 9.2: Fuel forecast with different scenarios (source: eia) ...................................................... 103

Figure 9.3: Route profitability evolution (compiled by the author)................................................ 106

Figure 9.4: Return on invested capital (roic) (compiled by the author) .......................................... 106


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LIST OF TABLES

Table 1.1: SWOT analysis ............................................................................................................... 19

Table 3.1: Competition on the ATH route ....................................................................................... 30

Table 3.2: Competition on the IST route ..........................................................................................31

Table 3.3: Competition on the OTP route ....................................................................................... 32

Table 3.4: Competition on the BOJ route.........................................................................................33

Table 3.5: Competition on the BER route........................................................................................ 34

Table 3.6: Competition on the AMS route ...................................................................................... 35

Table 3.7: Forecast market share, for SofiAir, per route .................................................................. 38

Table 3.8: SofiAirdemand forecast ................................................................................................. 41

Table 5.1: Product: service overview ............................................................................................... 55

Table 5.2: Product: Airport lounges on the SofiAirnetwork ............................................................ 56

Table 5.3: SofiAirs fare grid .............................................................................................................57

Table 5.4: SofiAirexpected yield, first year of operations.................................................................57

Table 5.5:Distribution channels used by SofiAir............................................................................. 58

Table 5.6: Promotion: Facebook penetration ................................................................................. 62

Table 5.7: Marketing costs .............................................................................................................. 62

Table 6.1: SofiAirs planned weekly frequencies .............................................................................. 67

Table 6.2: Aircraft utilisation per aircraft type ................................................................................ 68

Table 6.3: Fleet composition .......................................................................................................... 68

Table 6.4: Fleet ops. performance analysis ..................................................................................... 68

Table 6.5: Scheduled duty hours and crew, for each aircraft type ................................................... 69

Table 6.6: Subpart Q regulations for crew scheduling .................................................................... 70

Table 6.6: Line maintenance providers and regulatory certification ............................................... 72

Table 6.7: Heavy maintenance providers and regulatory certification ............................................ 72

Table 6.8: Engine maintenance providers and regulatory certification ............................................ 73

Table 6.9: Maintenance intervals, SofiAirfleet................................................................................ 74

Table 6.10: Fleet annual downtime, for A-checks and C-checks ..................................................... 74

Table 6.11: Fleet maintenance cost analysis ....................................................................................75

Table 8.1: Emission monitoring and trading Activities .................................................................... 82

Table 8.2: Estimated carbon purchase costs (inflation adjusted) .................................................... 82

Table 8.3: Noise criteria .................................................................................................................. 83

Table 9.1: Bulgarian inflation data, yoy (Source: IMF, 11/05/2011) .................................................. 89


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Table 9.2: Exchange rates (Source: oanda, 11/05/2011)................................................................... 89

Table 9.3: Interest rates (Source: ECB, BNB, 11/05/2011) ................................................................ 90

Table 9.4: Trading periods used (compiled by the author) .............................................................. 90

Table 9.5: Start-up costs (compiled by the author) ......................................................................... 91

Table 9.6: Fleet leasing conditions (compiled by the author) .......................................................... 92

Table 9.7: Annual leasing payments (compiled by the author)........................................................ 92

Table 9.8: IT investment and depreciation (compiled by the author) .............................................. 93

Table 9.9 Forecast fuel prices (Source: U.S. EIA) ............................................................................ 95

Table 9.10: EU start-up requirements ( ompiled by the author) .................................................... 100

Table 9.11: Sensitivity breakdown (compiled by the author) ......................................................... 103

Table 9.12: SofiAirs financial performance (compiled by the author)........................................... 104

Table 9.13: Route profitability for 2013 network (compiled by the author) ....................................105

Table 9.14: Route profitability for 2017 network (compiled by the author) ....................................105


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LIST OF AIRPORT CODES

- AMS : Amsterdam, The Netherlands

- ATH : Athens, Greece

- BEG : Belgrade, Serbia

- BER : Berlin, Germany

- BLQ : Bologna, Italy

- BOJ : Bourgas, Bulgaria

- GVA : Geneva, Switzerland

- IST: Istanbul, Turkey

- OTP : Bucharest, Romania

- SOF : Sofia, Bulgaria

- TIA : Tirana, Albania


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1 CORPORATE STRATEGY

Both Bulgaria, and the Balkan region in general, suffer from a lack of reliable transport connections

on a regional, and also inter-regional, basis. At the same time, the regions economies are

showing strong growth, and personal wealth is increasing rapidly. This combination of continuouslyincreasing demand, and poor existing connections, forms the foundation of SofiAirs strategy; to

start an airline in the heart of the Balkans.

To be able to form a detailed corporate strategy, more insight is needed with regard to the

environment in which SofiAirwill be operating (section 1.1), and what the strategic capabilities are

(section 1.2). Based on the analysis found in these two sections, SofiAirs strategy has been set out

in section 1.3.

1.1 THE ENVIRONMENT

In order to fully understand the environment in which SofiAirwill be operating, the different layers

around the business have been analysed. The three layers are summarised in Figure 1.1:

FIGURE 1.1:THE LAYERS OF SOFIAIRS BUSINESS ENVIRONMENT

The macro-environment layer consists of the broad environmental factors influencing most

companies operating in the same area and the PESTEL framework was used to analyse this layer,

in section 1.1.1. The Airline Industry layer refers to all the organisations operating within this

specific industry and, using the framework ofPorters Five Forces, this layer was further analysed

in section 1.1.2. The layer closest to SofiAirconsists of the competitors the company will face and

a competitor analysis was performed in section 1.1.3, to understand the opportunities and threats

related to SofiAirs competitors.

1.1.1 THE MACRO-ENVIRONMENT

The PESTEL framework helps to analyse the macro-environment, by categorising the influences

that it exerts into six types: Political, Economic, Social, Technological, Environmental and Legal.

These six categories are discussed below:

SofiAir

Competitors

AirlineIndustry

The Macro-

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1.1.1.1 POLITICAL

Since the collapse of communist rule in the late 1980s, Bulgaria took a strong leap towards the

market economy and democracy. Despite the difficult transition period, the country has proved

able to secure steady improvement in both its economic and social situation, with a major turning

point coming in early 2000 when former king Simeon II, as prime minister, steered the countrytowards the European Union. Economic reforms meant that the unemployment rate fell

significantly, and this economic and social development culminated in Bulgarias NATO

membership, from 2004, and the countrys signing of the EU accession treaty in April 2005 (now,

and since January 2007, Bulgaria has been a full member of the EU). The beginning of a new era in

Bulgarian history, though, has not been as successful as hoped and concerns about organised

crime and corruption halted EU funding, in 2008. Similar concerns over corruption and organised

crime have also stalled negotiations over Bulgarias membership of the Schengen area (although

this delay was primarily due to concerns over border control on the countrys Turkish border), which

was due to commence in March 2011 and, as negotiations continue, the new date for the vote on

Schengen membership is now set for June 2011. Indeed, the latest evaluations of the possibility of

Bulgaria joining Schengen express confidence that the country will join. Additionally, the party

currently ruling the Bulgarian parliament is the Europhile Citizens for European Development of

Bulgaria, who have identified the fight against corruption and organised crime as one of their main

priorities, to ensure that Bulgaria cements its position as a prominent new member of the European

Union. So far, this fight has seen some success, with a good proportion of the formerly-frozen EU

funds being unfrozen, and now available for the countrys use. The current government has strong

public support with regard to its economic policies, which lay a sound foundation for the economic

growth and stability of the country despite the financial troubles elsewhere in Europe.

1.1.1.2 ECONOMIC

The successful economic reforms of the early 2000 s injected rapid growth into Bulgarias economy.

For successive years, between 2004 and 2008, Bulgaria was able to maintain over 6% annual growth

in GDP, and is expected to see 4% annual growth until at least 2020 outperforming by far the

growth seen in Western Europe (see Figure 1.2). At the same time, the unemployment rate in the

country dropped dramatically, and is currently (at 6.8%) well below the EU average. Successive

governments have laid a solid foundation for economic reforms, and maintained responsible fiscal

policies, and so Bulgaria is in good stead with regards to meet ing the EUs standards on joining the

monetary union. The current government has set a goal of reducing the countrys deficit to 0.5% of

GDP, without making any changes to corporate or personal income tax and what makes the

steady growth of the Bulgarian economy even more impressive and promising, is that it has proved

able to maintain this growth despite being on the receiving end of the EU sanctions mentioned

previously. Finally, if Bulgaria is able to meet the demands of EU monetary policy, by reducing its

deficit to 3% of GDP in order to be accepted to ERM II, a two- year waiting list would apply, with

the country expected to become a full member of the Eurozone in 2013.


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FIGURE 1.2:GROWTH IN BULGARIAN GDP, AGAINST WESTERN AND EASTERN EUROPE AVERAGES

1.1.1.3 SOCIAL

Bulgaria has over 7 million inhabitants, of which over 72% live in urban areas. The biggest city is thecapital, Sofia, with a population of nearly 2 million. However, living conditions in Bulgaria are

generally considered to be below the average for the EU25, with societys concerns especially

concentrated on the poor transport infrastructure, and inadequate social services. In part, the high

rate of corruption is behind this situation, impacting on peoples opinion towards public services,

and leading to the freezing of the countrys EU funding. Also, despite the decrease in the overall

unemployment rate, there are serious issues when it comes to tackling long-term unemployment

especially youth unemployment. It remains clear, though, that as the countrys economic situation

improves, these social issues will decline in significance and thus the social wellbeing of Bulgarians

is likely to improve dramatically, within the near future.

1.1.1.4 TECHNOLOGICAL

Internet usage in Bulgaria is only a little below the EU average, and has grown significantly within

the past decade. On top of this, the country sees a higher rate of mobile phone uptake than the

Union average. So, both are clear indications that the IT infrastructure in Bulgaria is up to EU

standards, if not above. In addition, the country has a (developing) motorway network but, while

the major highways connecting Varna and Bourgas to Sofia are under construction, no date for their

completion has been released and so there is a clear need for alternative transport between the

countrys three biggest cities. While the Bulgarian domestic train network is extensive, no high-

speed trains are currently operative and there is a distinct lack of rail infrastructure when it comesto surrounding countries; such as Turkey, Serbia, and Romania. Travelling to nearby capitals, such

as Bucharest or Belgrade, can only be achieved by overnight train and so there seems to be a clear

gap when it comes to transportation links within the Balkan region.

1.1.1.5 ENVIRONMENTAL

Bulgarias mountains (Rila and Pirin) are landmarks for the country, during the winter season. In the

summer, meanwhile, people flock to the blue waters along the Black Sea coast. The countrys

forests are home to rich flora and fauna, among which are now some internationally protected

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species1. However the countrys lack of rigid environmental policies has, in the past, caused serious

air, soil, and water pollution and large-scale deforestation, and problems of acid rain, have also

tarnished Bulgarias green identity. The absence of environmental incentives, such as tax rebates

and subsidies, means that research into greener technologies is not specifically encouraged.

Before joining the EU in 2007, Bulgaria received funding under the ISPA program2 to supportwastewater treatment projects for areas near the Black Sea basin, which also partly financed the

extension of Sofia airport. The SAPARD program3 helped agricultural development, forestry, and

rural expansion. Now, as an EU member, Bulgaria still receives significant EU funding to develop

modern water supply networks, and sewage treatment systems, as part of the Operational

Programme: Environment (20072013)4. The country is now party to many agreements to help

restore its ecosystem, among them the Aalborg Commitment on local sustainability, and the Kyoto

Protocol. Also in progress are programs to educate people about energy efficiency, and the

replacement of ageing buses with newer fleets, to improve local air quality.

At present, Sofia airport does not have any noise surcharge which proves a good incentive forSofiAirto plan a base there. There is, however, a night surcharge of 25% (in addition to the landing

charge), to discourage night operations. A 25% surcharge also applies to landings on weekends,

and on public holidays. Additionally, Chapter 2 aircraft have been banned from operating at the

airport since April 2002. Since then, the airport has embarked on a number of noise mitigation

programs, to lessen the impact of aviation noise on the population. Amongst these was the

replacement of wooden windows with aluminium, and the installation of a noise monitoring and

flight tracking system (in 2005) with the maximum noise level for aircraft flying above any

territory being 85 dB(A)5. Usual noise indicators during the day are 65 dB(A), dropping to 55 dB(A)

between 11pm and 7am. Whilst many EU airports have started implementing continuous descent

approach procedures, such measures are not yet in place at Sofia.

1.1.1.6 LEGAL

The air transport industry has historically suffered from a high degree of regulation, constraining

the routes that airlines were able to fly, the capacity they were permitted to offer on those routes,

and laying down strict rules about the ownership and control of airlines. However, as Bulgaria is a

member of the EU, then carriers based there are able to benefit from a rather more liberalised

operating environment with the measures laid out in Regulation 1008/20086applying to Bulgaria,

as well as the rest of the EU. So, for flights operating within the area in which 1008/2008 applies,

any air carrier with a European operating licence (a Community air carrier) may operate any route

within the Community; meaning that the formerly complex web of restrictive bilateral Air Services

Agreements no longer applies, at least within the EU. Furthermore, the European Common

Aviation Area (ECAA) initiative looks to expand 1008/2008, and the whole body of related EU

aviation law, to a further group of countries Albania, Bosnia and Herzegovina, Croatia, Macedonia,

Montenegro, Serbia, Kosovo, Norway, and Iceland. So, any Community air carrier would be able to,

1http://www.bulgariannationalparks.org/en/bnparks.phtml?context=category&ctg_id=25

2European Commission

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Bulgarian Ministry of Environment and Water5 Decree No 6 of Bulgarian Law6

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once the ECAA has been established, operate any route within this extended group of countries

without having to comply with the often-onerous restrictions laid out in Air Services Agreements.

A further issue to consider is that of airport congestion and slot restrictions. However, as Sofia

airport is only Level 2 (schedules facilitated), and not Level 3 (slot co-ordinated), there is no

mandatory allocation of slots to those carriers wishing to operate at Sofia. Instead, to cope withpeak-time congestion, carriers operating there may have to be willing to accept minor schedule

changes, to allow the airport to efficiently operate.

1.1.2 THE AIRLINE INDUSTRY FIVE FORCES ANALYSIS

The competitive environment of Bulgarias aviation sector was analysed using Porters five forces

model (see Figure 1.3). This seeks to help identify the attractiveness of the local airline industry, in

terms of five different competitive forces: the threat of entry, the threat of substitutes, the power of

buyers, the power of suppliers and the extent of rivalry between competitors.

1.1.2.1 POTENTIAL ENTRANTS

As Bulgaria is a member of the EU, there are no legal or regulatory barriers that can bar the start up

of an airline there, unless the carrier is looking to operate routes outside the ECAA. As mentioned in

the PESTEL analysis, Bulgaria is a technologically developed country, and so there are no reasons to

assume any difficulties in terms of the distribution of airline tickets especially if the main

distribution channel is internet sales. Perhaps the most salient barriers to entry in the Bulgarian

market, then, are the possible brand loyalty towards local carriers, and the availability of capacity at

Sofia airport.

FIGURE 1.3:PORTERS FIVE FORCES MODEL

1.1.2.2 SUPPLIERS

In Bulgaria, the power of supplier is no different to elsewhere around the world. There is a limited

number of aircraft suppliers, which suggests that the bargaining power of the main aircraft suppliersis significant. A similar situation exists within the aircraft leasing market, where the global demand

CompetitiveRivalry

Potential

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of certain aircraft types directly influences lease rates. Naturally, in both cases whether buying or

leasing the bargaining power of the supplier is highly dependent on the current market situation.

So, generally, during a downturn, the bargaining power of the supplier is diminished and during a

period of high growth, the opposite applies.

1.1.2.3 BUYERS

The reality of air travel is that the majority of it is not a necessity and so this naturally enhances

the position of the buyer. The transparency brought by internet distribution has further enhanced

the customers position, as they are now able to easily compare fares, and evaluate their options.

On domestic routes, as well as on a majority of the routes to Western Europe, a customer wishing to

travel to or from Sofia often has more than one option and again, as there are switching costs, the

customer holds the power. On the other hand, though, routes that currently have no direct

connection will exhibit different characteristics. On these routes, a customer has to make a decision

on whether to spend more time travelling (and so fly via another hub), or to fly directly and so savetime. In this form of scenario, the customer loses their bargaining power especially if there is, for

instance, a need for business travel on these routes.

1.1.2.4 SUBSTITUTES

Especially on regional routes, the main substitute for air travel is a rail service. From Sofia, the main

rail connections to nearby capitals are to Belgrade, and to Istanbul. On both routes, the rail travel

time is considerably longer than the air travel time, due to the lack of efficient rail infrastructure,

and tighter border controls as a result of travelling outside the EU.

On a smaller scale, for regional and domestic routes, travelling by car could arguably be named as apotential substitute for air travel. However, this mode of transport faces similar problems to rail,

especially for routes leaving the EU.

So, it could be argued that the bargaining power of the substitutes in Bulgaria is rather low and

that this is merely due to the fact that the regions infrastructure is not as developed as that in some

ofBulgarias western neighbours.

1.1.2.5 COMPETITIVE RIVALRY

In Bulgaria there is no noticeable rivalry between the firms, the main reason being that the country

has not seen a major carrier other than the national carrier (Bulgaria Air). The other carriers in the

market are charter airlines, who concentrate mainly on Black Sea tourism. For Bulgaria Air,

arguably the main competing carriers are the national carriers from nearby Romania, Hungary, and

Greece, as well as the main network carriers of Western Europe, who offer connections to their

home bases and beyond, for passengers departing from Sofia. A recent addition to the Bulgarian

market, though, is the low-cost carrier Wizz Air who have arguably had a dramatic impact on the

market, and have jeopardised the nearly monopolistic position of Bulgaria Air. Interestingly, Wizz

Air only offer routes to Western Europe, and overlook the regional potential thus leaving Bulgaria

Air the main operator on many of their regional routes.


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1.1.3 COMPETITOR ANALYSIS

The biggest airline in the Bulgarian market is the national carrier, Bulgaria Air, which serves 15

destinations in Western Europe from its Sofia hub. Bulgaria Air operates an array of aircraft types,

ranging from the ATR42 and BAe 146, to the Airbus A319 and A320, as well as Boeing 737-300.

Bulgaria Airs network is concentrated around various destinations in Western Europe, as well as a

number of medium-range routes to the east, such as Moscow and Tel Aviv (see Figure 1.4).

FIGURE 1.4:BULGARIA AIRS NETWORK, FROM SOFIA (SOURCE:OAG,MAY 2011)

Other than Bulgaria Air, the major carriers operating to and from Sofia are the large network

carriers from elsewhere in Europe. Additionally, the Bulgarian aviation market has a significant

charter element, with the main carriers being BH Air, Bulgarian Air Charter and Air Via. BH Air andAir Via operate fleets of Airbus A320 aircraft, while Bulgarian Air charter operates with an all-MD-82

fleet. Their main operations are concentrated around connecting charter traffic, from Western

Europe, to the region around the Black Sea coast. The most recent entrant in the Bulgarian market

has been the Hungarian low-cost carrier Wizz Air, which operates from Sofia to 15 different

destinations in Western Europe.

FIGURE 1.5:ALL SCHEDULED ROUTES FROM SOFIA AIRPORT (SOURCE:OAG,MAY 2011)


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In terms of domestic routes, only two cities are currently served from Sofia Varna and Bourgas.

The main carrier on these routes is Bulgaria Air, but there is some seasonal variation, as a number of

ad hoc charter operations occur between the capital and the Black Sea coast, especially during the

peak tourist season.

On regional routes, competition is concentrated around the large regional hubs of Athens, Istanbul,Bucharest, and Budapest. These destinations are currently served by at least one national carrier:

either Bulgaria Air, a local carrier, or both. Other than the frequently-operated destinations, there

is also a number of regional centres that currently do not have any air connection to Sofia

especially the former Yugoslavian countries (such as Serbia, Macedonia, Albania, and Croatia),

which are currently particularly underserved. The main competitor in these markets is the train, but

due to the tight border controls and inadequate rail infrastructure, rail travel within the Balkans

proves rather time consuming.

The majority of air services from Bulgaria are to Western Europe. In particular, the charter carriers

concentrate on operations to the UK and Germany from the Black Sea coast. On the routes to theWest, other than Bulgaria Air, it is Western European carriers such as Air France, British Airways,

and Lufthansa who are the main operators to Sofia. The latest addition to the market is the

Hungarian low-cost carrier Wizz Air, who connect Sofia with a number of destinations in Western

Europe. Figure 1.5 shows all the routes from Sofia currently served by a scheduled carrier, and in

Figure 1.6, all the competitors are positioned in a framework, based on their strategy.

FIGURE 1.6:POSITIONING OF COMPETITORS, BASED ON STRATEGY

As Figure 1.6 shows, the majority of competitors in operation in the Bulgarian market offer no

particularly attractive value proposition to the customer; primarily consisting of inefficient legacycarriers (such as Olympic Air and TAROM), or highcost local carriers (such as Bulgaria Air) offering


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poor service. For those passengers choosing their airline purely on price, Wizz Air is likely to prove

popular and Turkish Airlines are perhaps one of the most distinctive airlines operating in the

Bulgarian market; following a strategy of differentiation. What Figure 1.6 shows most clearly,

though, is the lack of any hybrid carrier so, one able to cater to both the leisure and business

markets, and so satisfy passengers parallel demands for low fares, but also high service levels. It is

this niche which SofiAirshould seek to satisfy.

1.2 STRATEGIC CAPABILITIES

The key issues arising from the analysis of the business environment performed above may be

summarised in the SWOT framework, which seeks to examine the strengths, weaknesses,

opportunities and threats likely to impact the development of a strategy. These factors are

summarised in Table 1.1 , below.

Strengths Weaknesses

Freedom to select optimal fleet New entrant, no brand value

Slim organisational structure Lack of choice of MRO supplier

No legacy costs (i.e. pension schemes, debt) No pre-existing rights to slots

As EU carrier, free to operate within ECAA

Relatively low labour costs

Opportunities Threats

Operate underserved or non-existent routes Competition may start operating same routes

Underdeveloped air transport market in the Balkans Uncertainty about Bulgarias economic recovery

No current alternative to the train on regional routes Increasing fuel prices

National carrier known as expensive and inefficient Organised crime and corruption in Bulgaria

Connect Sofia to the world via major hubs Unavailability of required aircraft

Customer-oriented service not always present Uncertainty about Bulgarias entry to the Eurozone

TABLE 1.1:SWOT ANALYSIS

1.3 STRATEGIC PURPOSE

Based on the analysis ofSofiAirs environment, and its strategic capabilities, the corporate strategy

has been defined and summarised in a corporate mission, vision and values.

1.3.1 MISSION

At SofiAirour mission is to provide a safe and pleasant service, with a twist of freshness, and the

trademark sincere Balkan hospitality. The customer is central to all that we do, and they will beoffered complete freedom of choice to build the product that suits them, for each and every trip.


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From Bulgarias capital Sofia, we aim to make the Balkans smaller, through having an extensive

regional network. At the same time, we will bring Western Europe and the rest of the world closer

to the Balkans, offering westbound services including routes to major hubs, to allow connections

to be made to any place in the world. The regional network and the Western European routes will

cross-feed each other, and so increase the connectivity of the region via our Sofia base.

1.3.2 VISION

Travelling to, from, and within the Balkan region should be a pleasant experience for everyone no

matter the purpose of travel. SofiAirs vision is to become the leading airline of the region, for each

market segment. Offering la carte service will bring freedom of choice to the customer, and so

provide a tailor-made service for traveller.

SofiAirwill be the natural choice for air travel, from the region to any place in the world through

linking the Balkans to major hub airports, and co-operating with carefully selected network carriers.

1.3.3 CORE VALUES

SofiAir operates based on a number of core values. These values are the underlying and core

principles of the airlines strategy, and represent the very essence of what makes SofiAir in good

and bad times, whatever happens.

1.3.3.1 SAFETY

In our operations safety is the number one priority; we accept no compromises.

1.3.3.2 OUR PEOPLE

We believe that our people are our greatest asset, and that every single member of our company

has to be able to enjoy coming to work every day. So, if we are having fun, then so is the customer.

1.3.3.3 FREEDOM OF CHOICE

For too long, the people of Bulgaria have been afflicted by bad service and high fares. This lack of

appreciation of peoples freedom of choice must come to an end and we want to bring out a fresh,

new approach to flying, where people can make their own decisions, and maximise their own

comfort.

1.3.3.4 CONNECTIVITY

Connectivity within the region, to Western Europe, and to the world. This is what SofiAir will

bring to the marketplace, and to the people of the Balkans.

SofiAir Core Values

Safety Our PeopleFreedom of

ChoiceConnectivity

FIGURE 1.7:SOFIAIRS CORE VALUES


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1.3.4 OBJECTIVES

To challenge ourselves and have specific targets to be achieved, the following objectives have been

set, to provide guidance and focus regarding what actions should be taken, in order to meet all

objectives within the time limits specified:

- To fully comply with all relevant EU financial fitness regulations

- To be profitable over the full five year period

- To increase passenger numbers year-on-year

- To expand the fleet within the five year period

- To, before expanding the fleet, reach at least break-even point

- To show a decreasing trend debt to equity ratio, reaching zero before 2017

- To keep the current and quick ratios above 1.0


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2 REGULATORY SITUATION

As the air transport industry has historically been highly regulated a relic of the fading era of state-

owned flag carriers understanding the maze of relevant regulation proves essential for any

company considering entering the market. This section seeks to examine the relevant Europeanand national regulation which SofiAir must follow, in order to gain the approvals needed to start

operations.

2.1 REGULATION OF START-UPS

When looking to establish a new air transport undertaking, numerous regulations must be followed

laying down aspects such as the level of capital required, the submission of business plans,

insurance requirements, etc. Those regulations which pertain to SofiAir are explained below,

whether European- or national-level.

2.1.1 EUROPEAN

At the European level, it is Regulation 1008/20087 which sets out the majority of restrictions that

SofiAir must comply with prior to start-up. Firstly, before being permitted to undertake any

commercial operations, the company must obtain an operating licence from the competent

licensing authority (the Bulgarian CAA, in SofiAirs case). However, in order to be granted an

operating licence, then it is necessary to already hold an Air Operators Certificate (AOC), granted

by the same authority that grants the operating licence. Other requirements that must be

demonstrated to the competent licensing authority, prior to the granting of an operating licence,

include the undertaking having its principal place of business in a member state (in this case,

Bulgaria), and having one or more aircraft at its disposal - either through ownership or a dry lease

agreement (so, all aircraft may not be wet leased). These aircraft should be nationally registered

(so, on the Bulgarian register), or registered within the Community at the option of the competent

licensing authority. Additionally, the undertakings main occupation must be the operation of air

services, and the company structure must allow implementation of the necessary provisions.

Ownership and control restrictions also exist, whereby (on top of the company having its principal

place of business in a member state) member states, or nationals of member states, must own over

50% of the undertaking, and effectively control it. In this instance, effective controlmust represent

the exercising of a decisive influence, and may be either direct or indirect (so, through one or more

intermediate undertakings). These ownership and control restrictions mean, effectively, that themajority of investment in SofiAir must come from within the Community. Financial fitness

requirements are also present, and these prove especially challenging, as it is necessary for first

time applicants (such as SofiAir) to be able to meet, at any time, any actual and potential obligations

for the first 24-months of operation, under realistic assumptions. On top of this, any fixed and

operational costs must be able to be met, without operational income, for the first three months of

operation, according to the submitted business plan and realistic assumptions. Also, a business

plan must be submitted to the competent licensing authority, for a minimum period of three years.

The carrier must be insured to cover liability in the case of accidents, and it must be proved that the

7Regulation (EC) No 1008/2008, on common rules for the operation of air services in the Community


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persons who will manage the undertakings operations are of good repute, and have not been

declared bankrupt.

If all such requirements are met, then the granting of an operating licence is an entitlement, thus

allowing the licensed undertaking to perform carriage, by air, of passengers, mail, and cargo, for

remuneration or hire. This licence remains valid indefinitely, as long as the carrier is able todemonstrate continued compliance to the competent licensing authority. As part of this, the

carriers financial performance may be assessed at any time, with the licence suspended if financial

obligations cannot be met over a 12-month period. The competent licensing authority must also be

notified in advance of any substantial modification of activities (such as a new service to a

previously unserved region), with a revised business plan having to be submitted if the modification

is deemed to have potentially significant financial consequences.

2.1.2 BULGARIAN

Some national regulations also exist, in addition to the European regulations from 1008/2008.These regulations are stated in Bulgarias Civil Aviation Act8, and would also impact the process of a

start-up airline gaining regulatory approval. The Act states that all applications for operating

licenses submitted to the CAA will be reviewed within 30 days, with where the necessary

requirements have been met a licence being issued within a further 10 days. Requirements in

addition to those stated in 1008/2008 include that the undertaking applying for a licence must

already be registered as a business in Bulgaria, with air transportation as its main activity, and that

any licensed carrier must have at their disposal, at all times, an amount of capital not less than

160,000BGN. This licence then remains valid until either the company no longer complies with the

necessary requirements, it transpires that the licence was issued on the basis of false documents,

there is a violation of the law, the companys owner(s) declare (s) that they no longer wish to hold

the licence, or the entity ceases performing the licensed activities. In terms of insurance, the Act

states that licensed undertakings must insure their aviation staff against accidents, and insure their

responsibility towards passengers in the event of an accident, as well as insuring against cases of

missing or damaged luggage, cargo, or mail, and insuring their responsibility towards third parties.

8Civil Aviation Act, available at: http://www.caa.bg/page.php?category=13


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2.2 TRAFFIC RIGHTS

As laid down in 1944s Chicago Convention9, states retain sovereignty over the airspace above their

territory, and so any scheduled international air service operating over or into the territory of that

state must have received, from the state, special permission or other authorisation. In effect, this

means that international air transport has come to be increasingly governed by a complex web of

bilateral agreements, which lay down the routes that may be operated between states, which

carriers may operate these routes, how much capacity may be provided, and so forth. So, a start-up

carrier may have seen rather limited success in gaining the necessary authorisation to operate its

desired routes. In recent years, though, some liberalisation has occurred, especially on routes

within Europe, as is explained below.

2.2.1 INTRA-COMMUNITY

Set out in Regulation 1008/2008 is the principle that any Community air carrier shall be entitled to

operate any intra-Community air service. So, as long as a carrier holds a European operatinglicence, that carrier may operate any route within the Community, with the individual member

states able to require no further permit or authorisation. This liberalisation means that, for routes

within the Community, the complex issues of bilateral agreements and the granting of traffic rights

are now no longer. However, there still remain some restrictions that may be implemented by

member states. For instance, traffic rights may still be restricted on the basis of European, national,

regional, or local regulations on safety, security, the environment, or slot allocation and, perhaps

because of problems of congestion, member states may regulate the distribution of traffic between

different airports serving the same city or conurbation. The open-skies principles set out in

1008/2008 apply throughout the current 27 EU member states (so, including Bulgaria), plus the

three states which are members of the EEA, but not EU members; Iceland, Liechtenstein, and

Norway. Switzerland maintains a bilateral relationship with the EU, although this agreement offers

similar terms to those laid out in 1008/2008. So, ifSofiAirwere able to obtain a European operating

licence, then the carrier would be able to operate any route it wished within, and between, these 31

states. Additionally, the right of Community air carriers to combine air services, and enter into

codeshare agreements, is recognised.

2.2.2 EXTRA-COMMUNITY

Outside the Community, though, the situation remains rather confused. Extra-Community

destinations that SofiAir is considering operating to are Geneva (in Switzerland, although this is

governed by the liberal EU-Switzerland bilateral agreement), Istanbul (in Turkey), Belgrade (in

Serbia), and Tirana (in Albania). The latter two countries, Serbia and Albania, are signatories to the

ECAA (European Common Aviation Area) agreement, which was signed in December 2005, and

which looks to bring the full application of EU aviation law to ECAA signatories10. Thus, ECAA

carriers would be provided with the status of Community air carriers, having full, open access to the

European single aviation market, and Community air carriers would be granted full, open access to

the newly-unified ECAA aviation market. Nine non-EU members would form the ECAA: Albania,

9

Convention on International Civil Aviation Signed at Chicago on 7

th

December, 194410 International Aviation ECAA, available at:

http://ec.europa.eu/transport/air/international_aviation/country_index/ecaa_en.htm


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Bosnia and Herzegovina, Croatia, Macedonia, Montenegro, Serbia, Kosovo, Norway, and Iceland

(with the latter two states already being EEA members). However, the implementation of the

agreement has been held up by slow ratification by member states, with the initially-expected date

of implementation (2010) having passed. However, SofiAirassume that, by the start of operations

in 2013, the ECAA will be in force, and so bilateral agreements between Bulgaria/the EU and

Serbia/Albania need not be considered. Additionally, Turkey is in talks to become part of the ECAA,

and so may have joined by 2013. If Turkey does not join the Area before SofiAirs operations start,

though, then traffic rights will remain governed by the existing Bulgaria/EUTurkey bilateral

agreement. Details of this agreement could not be found and, in the event that the agreement only

allows single designation and so only one Bulgarian carrier is able to operate on the route (none

currently operate) then the Bulgarian Civil Aviation Act states that, where bilateral agreements

state single designation, a competition will occur if more than one carrier applies to serve that

route. So, if a competing Bulgarian airline were to also apply to serve the Sofia-Istanbul route, then

SofiAir would hope to achieve the necessary traffic rights through the resulting competition or

indeed by default, if no other carriers apply to serve the route (as is currently the case).

2.2.3 AIRPORT/SLOT RESTRICTIONS

Even if a carrier is able to secure the desired traffic rights for a route (either through bilateral

agreements, or due to the implementation of an open skies arrangement such as the ECAA), then

the issue of airport congestion, and slot restrictions, remains. The capacity of airports may be

dictated by any number of factors, such as a maximum number of runway movements permitted

per hour, the number of aircraft parking stands available, the terminals maximum passenger

throughput, the number of gates available, noise restrictions, or curfews. If such restrictions are in

place at a popular airport, then that airport may become so congested that it proves necessary tostrictly allocate capacity by slots, with only a finite number of slots made available, and airlines

applying for those slots with the possession of a pair of slots (for both arrival and departure)

necessary before operations to that airport are permitted. This is the case at level 3 slot co-

ordinatedairports, where slot allocation is mandatory for airlines wishing to operate there. SofiAiris

looking to fly to four such airports; Amsterdam, Geneva, Berlin, and Istanbul. These airports are all

level 3 co-ordinated11 (although it is not yet clear whether the new Berlin Brandenburg Airport, to

which SofiAir would operate, will be slot co-ordinated like its predecessor is currently, but this

seems likely and has been assumed to be the case), and so it has been assumed that SofiAirwill be

able to secure slots at the desired times (as information on slot allocation is notoriously

unavailable). However, the slot situation has been considered when creating schedules as, forinstance, flights to Istanbul are planned to increase not in frequency (which would require further

slots), but in terms of aircraft size. Additional airport restrictions considered include the minimum

ground time, between flights, mandated at Sofia airport which is 30 minutes for low-cost

companies12 and so this has been incorporated into the SofiAirschedules.

11European Airport Coordinators Association, available at: http://www.euaca.org/FTableList.aspx?list=6

12Sofia Airport Slot Coordination, available at: http://www.sofia-airport.bg/slotcoord/


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2.3 FARES

Regulation 1008/2008 states that fares must be freely set, with the published price to include the

fare, and all taxes, charges, surcharges and fees which are unavoidable and foreseeable at the time

of publication. The details of all price components must be given (so, a price break-down to show

fare, taxes, airport charges, handling fees etc), and there is to be no discrimination in access to fares

on the basis of place of residence, or nationality, within the Community.

2.4 AIRCRAFT

In certain instances, further regulation controls the operation of aircraft, as explained below:

2.4.1 EUROPEAN

If considering the lease of aircraft, then Regulation 1008/2008 lays down a number of further

conditions which must be followed. Dry- or wet-leased aircraft registered within the Communitymay be freely operated, subject to prior approval however, if wet-leasing aircraft registered

outside the Community, then there are numerous restrictions; with the carrier obliged to

demonstrate that safety standards are equivalent to those in force inside the Community, and that

there is either:

- An exceptional need (with a maximum term of 7 months)

- Seasonal capacity demand (not reasonably satisfied from within the Community, term

renewable)

- Operational difficulties (if impossible, or unreasonable, to take aircraft from within theCommunity, with a limited duration).

However, Regulation 3922/9113 states that, at least in terms of day-to-day operations with

Community-registered aircraft, the common technical requirements and administrative procedures

for all aircraft used by Community operators means that any aircraft authorised to operate by a

member state may operate identically throughout the Community.

2.4.2 BULGARIAN

Further national-level requirements are stated in the Bulgarian Civil Aviation Act, which declares

that the CAA must be notified within 30 days of a Bulgarian carrier acquiring an aircraft, with an

aircraft registration application being lodged within that period. Additionally, theActstates that if

a Bulgarian carrier is leasing in, or out, an aircraft for over 30 days, then the lease must be registered

in the Civil Aircraft Register of Bulgaria. Also, the CAA may only approve wet leases for periods not

exceeding six months.

13Council Regulation (EEC) No 3922/91, on the harmonization of technical requirements and administrative

procedures in the field of civil aviation


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3 MARKETS AND FORECAST

Routes to be served, from Sofia, were selected on the basis of the following four criteria:

1) Corporate StrategyAs SofiAir is planning to become the major carrier within the Balkan region, as well as the primary

airline for traffic to and from the region, any selected route should fit into this corporate strategy.

2) Qualitative PotentialHere, the qualitative indicators for potential demand on a route were evaluated for instance, the

level of bilateral trade, investment potential, foreign population and tourism.

3) Quantitative PotentialRoute potential was also analysed in a quantitative manner; through using the PaxIS database theO&D demand on any route from Sofia could be identified, along with whether that city pair is

already (directly) served or not. Only those routes showing significant demand were selected.

4) Level of CompetitionThis last criterion examines the level of competition on the route. Routes with a high level of

competition (so, more than one full service carrier, or any low-cost carrier) were excluded from

further analysis the rationale being that the yield will be lower on routes with competition, there

would be an increased risk of a surplus of supply, and last but not least, the fact that a new entrant

to the market will see difficulties in gaining market share.

3.1 MARKET ANALYSIS

Those routes that matched best with all four of the above criteria were selected as possible

destinations for the SofiAir network (although the initial selection, of course, included far more

destinations which were all analysed), and so only the routes that SofiAir plan to eventually

operate are discussed below:

3.1.1 ATHENS,GREECE (ATH)

Greece is Bulgarias major investment partner. Its capital, Athens, is home to over three millioninhabitants, and around 9% of Bulgarias exports go to Greece, with 6% of imports (into Bulgaria)

originating from Greece. Despite the countrys current economic crisis in, Greek President

Papoulias has stated that the recession has not led to any disturbances in the trade between the

two countries. Indeed, bilateral trade hit 1.8 billion in 2009, with over 1,500 Greek companies

operating in Bulgaria, amounting to a total investment of 2.8 billion14.

The GDP of Greece is forecast to start growing continually after the year 201215, and this will

provide SofiAirwith the potential to enter a growing market, and act as market stimulator. Greece

14Hellenic Business Council in Bulgaria

15Euromonitor


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is home to around 50,000 Bulgarians, which will provide ethnic traffic beyond just tourism and

business16. Besides that, the Greek populations income has been growing steadily despite the

crisis and so this presents an opportunity for tourism, as Bulgaria offers high-class ski resorts in

winter (which are close to Sofia airport). Furthermore, Greece is one of Bulgarians favourite

holiday destinations, offering a wide variety of experiences ranging from the cultural and historical,

to beach holidays. Athens also proves a popular weekend trip destination, and so would hopefully

provide SofiAirwith high load factors all days of the week.

Being a route within the European Union, there will be no regulatory restrictions on air services

however, it is this Athens route where we will be competing with the largest number of competitors

(being Bulgaria Air, Olympic Air, and Air Malta). Air Malta, being neither a Greek nor Bulgarian

carrier, and operating only 4 flights per week, is not expected to achieve a large market share in the

long-term as national pride plays a large role in Southern Europe, in terms of airline choice.

Bulgaria Air and Olympic Air, on the other hand, are legacy carriers both well known for their

unsatisfactory levels of service, and flight times that suit neither the business nor leisure traveller.

So, as a fresh, new, friendly airline, SofiAir has the chance to capture significant market share on

this route.

Days of Ops Departure time Aircraft type

Bulgaria Air -2345-7 11:20 BAe 146

Olympic Air 123456- 09:45 Dash 8-400 / A319

Air Malta 12-45-- 10:50 A320

SofiAir 1234567

TABLE 3.1:COMPETITION ON THE ATH ROUTE

3.1.2 ISTANBUL,TURKEY (IST)

Turkey is currently one of the few countries around the world experiencing something of an

economic boom and has historically always been an important business partner of Bulgaria. 7.33%

of Bulgarias exports go to Turkey, and 5.48% of imports into Bulgaria originate from Turkey.

Economists forecast that Turkeys growth rate will continue to either match or exceed that of most

other countries (except India and China). As a result of this high growth, Turkey has embarked on a

policy of zero-problem politics with its neighbours. This policy intends to make Turkey

economically attractive, and safe, for foreign direct investment. A new political direction, along

with foreign investment, has led to both GDP and annual disposable income more than tripling in

recent years17, and these figures (from 2010) are forecast to double by 2017. Such high growth

offers Bulgaria the chance to invest in Turkey, and vice versa.

Istanbul, a city of around 12 million inhabitants, has a large Bulgarian population. Turkey, as a

whole, has a foreign population of around 712%18, of which a major proportion are from the

Balkans (being formerly part of the Ottoman Empire). Turks are the largest minority group in

Bulgaria, numbering around 750,000, and constituting 9.4% of the total population. Besides that,

Turkey offers extensive holiday opportunities in Istanbul and elsewhere, and so offers Bulgarians

16

Greek National Institutions for Language17 The Economist, 201018

CIA, 2011


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the opportunity to take a holiday by the sea, or have an exploratory weekend trip to Istanbul. The

close proximity of Istanbul (to Sofia) will particularly interest those looking for weekend trips, and so

this will provide constant load factors throughout the week and the close links between Turkey

and Bulgaria mean that ethnic, leisure, and business traffic will all be seen.

Turkish Airlines is the only competitor on this route. However, even though Turkish proves a strongcompetitor, with good service levels, they only offer 7 flights per week (3 in the morning, and 4 in

the evening). This does not provide enough flexibility for the business passenger and so SofiAir

plans to enter the market with double-daily flights, offering services that arrive at the right time to

connect to flights from Istanbul to Asia, Africa and the Middle East. However, Istanbul airport is slot

constrained but SofiAir hopes that the fact that both the airport and Turkish Airlines are partly

government owned, combined with SofiAirs plan to (after an initial start-up period) co-operate to

provide transfer passengers for Turkish Airlines connecting flights, might be of help to secure the

necessary slot times.


Turkish Airlines 1234567 10:45 / 19:15 A320 / B737

SofiAir 1234567

TABLE 3.2:COMPETITION ON THE IST ROUTE

3.1.3 BUCHAREST,ROMANIA (OTP)

Romania is one of Bulgarias major trading partners, with 8.52% of Bulgarias exports going to

Romania, and 5.65% of imports into Bulgaria originating from Romania. Romania was negatively

impacted by the economic crisis of 2008, but has since been growing rapidly and is projected to

have one of the largest growth rates in Eastern Europe19

. Both Bulgaria and Romania are part of theEUsDanube Strategy a European Commission project looking to develop the region around the

River Danube (signed in March 2011), and which will create additional business opportunities

between both countries20. Additionally, both energy and energy-efficiency projects are being

developed between the two countries21 - although investment between the two states already

accounts for over 1.1 billion22. Also, Romania proves a popular holiday destination for Bulgarians,

as it offers a diverse culture, numerous sights, and the potential for holidays on the Black Sea.

Bucharest is Romanias capital city, and is home to approximately 2.2 million people. Currently, the

Sofia-Bucharest route is served only by TAROM (the national carrier of Romania), who provide 13

flights per week (with no morning flight on Saturday). SofiAirs advantage lies in not being aninefficient, aging, state-owned legacy carrier instead appealing to the younger generations of

business travellers, as well as holidaymakers. This differentiated market appeal proves crucial,

especially as the younger generations form a large proportion of both nations inhabitants.

Additionally, there are almost 400,000 Bulgarians living in Romania, and more than 350,000

Romanians living in Bulgaria and these communities will provide VFR traffic.

19IMF

20

European Commission21 Novinite22

Bulgarian National Statistics Institute


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between Sofia and Tirana is insufficient, with there being no highways, and so travelling by ground

transportation may take up to one day especially as two borders must be crossed.

3.1.6 BOURGAS,BULGARIA (BOJ)

Bourgas is the only domestic route that SofiAirplan to offer. It is Bulgarias second largest city (byarea), and fourth largest (by population). Additionally, Bourgas is an important industrial centre,

being home to Bulgarias only duty free trade zone which was established to attract foreign

investment. The surrounding region is one of the most developed regions of Bulgaria, contributing

highly to Bulgarian GDP, and having one of the lowest unemployment rates of the Balkan region.

On top of this, the city hosts Eastern Europes largest oil refinery, and the largest manufacturing

plant in the Balkans.

Bourgas does not only present business opportunities, but is also Bulgarias prime holiday

destination and is already well-known to European tourists as such. Serving Bourgas will give

SofiAirthe opportunity to serve the industrialised business centre of the city, alongside serving thewhole regions tourism destinations.

Competition on the Sofia-Bourgas route comes from Bulgaria Air, who operate the routes in the

morning and evening, 5 times per week, and who offer daily flights at night. As Bourgas is not

connected to Sofia by a highway, the travel time by ground transportation is more than 5 hours.


Bulgaria Air 1234567 9:45 / 17:30 / 23:20 BAe 146

SofiAir 1234567

TABLE 3.4:COMPETITION ON THE BOJ ROUTE

3.1.7 GENEVA,SWITZERLAND (GVA)

Switzerland is investing heavily into Bulgarias energy sector especially in terms of wind energy.

The incentives for this investment come from both the Bulgarian government, and the European

CommissionsDirective 2009/28/EC, on promoting renewable energy. Thus, Bulgaria is required to

achieve a 16% share of renewable energy (in terms of total internal energy consumption) by 2020.

In order to achieve this binding target, new renewable capacity must be installed in Bulgaria, and so

there is the potential that further investment from Switzerland will be attracted by this opportunity.

Furthermore, Geneva itself is home to a number of high-profile international institutions, such as

the World Economic Forum, World Trade Organization and World Health Organization (to name a

few). These institutions would be likely to prove key customers on the Sofia-Geneva route, as there

is currently no direct service on this city-pair and, additionally, SofiAir would be able to provide

connections to a number of underserved Balkan destinations.

The tourism aspect also proves important. Switzerland offers beautiful landscapes, sporting

facilities, and cultural opportunities. For the Swiss population, Bulgaria offers attractive holiday

opportunities on both the Black Sea coast, and in the mountains. Even though there are not a

significant number of each countrys nationals living in the other state, Switzerland is home to a

large population of Albanians, numbering 250,000 which forms 2.5% of the Swiss population.

Connecting Geneva to the Balkans would create the opportunity for VFR traffic to transfer onto the

Tirana route.


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PaxIS data shows that there is a great demand for air services between Sofia and Geneva, with

connections between the two countries currently only offered via Zurich.

3.1.8 BERLIN,GERMANY (BER)

Germany is Bulgarias second largest investment partner, with investments worth over 1.35 billion,as of 200826. 11.21% of Bulgarias exports go to Germany, and 12.23% of imports into Bulgaria

originate from Germany. The German-Bulgarian Chamber of Industry and Commerce has drawn up

a plan for doubling the bilateral trade, and German investments in Bulgaria, by 2015.

Berlin provides potential for tourism, in both directions, as well as VFR traffic. Many Bulgarian

students make use of Germanys top universities (located in Berlin), and so the route offers a

potential for educational exchange in both directions.

The Sofia-Berlin route is already served by Bulgaria Air, who operate 6 flights per week either in

the morning or late afternoon. SofiAirbelieve that competition against Bulgaria Air, who have an

inefficient cost structure, and thus very high fares on this route, will prove successful. A further

reason for choosing Berlin was that SofiAir prefer to concentrate on niche markets, rather than

finance centres such as Frankfurt, where competition against strong carriers such as Lufthansa, and

Star Alliance, would prove challenging. Additionally, the forthcoming opening of Berlin

Brandenburg International Airport will provide SofiAir with the opportunity to use the brand new

airport facilities, while profiting from lower landing fees.


Bulgaria Air 1-34567 07:45 / 16:45 BAe 146 / B733

SofiAir1234567

TABLE 3.5:COMPETITION ON THE BER ROUTE

3.1.9 BOLOGNA,ITALY (BLQ)

Italy is the fourth largest investment partner of Bulgaria, with trade totalling more than 2.3 billion,

in 200827. Additionally, the country is Bulgaria's third largest trading partner (after Germany and

Greece), with 9.24% of Bulgarias exports going to Italy, and 7.78% of imports into Bulgaria

originating from Italy28. Bologna and its surroundings, located in Italys prosperous North, are

potential investment partners for Bulgaria. There are currently more than 800 Italian businesses

operating in Bulgaria and this number is predicted to soon reach 1000 or more. This development

has been triggered by firms from Northern Italy, which started outsourcing their operations.

Additionally, Albania and Serbia see around 300 active Italian businesses each providing potential

connecting traffic for SofiAirs flights to those countries.

Bologna also proves a persuasive choice in terms of tourism, being home to the worlds oldest

university, and ranking highly in terms of quality of life with an extensive tourism potential for

those interested in history, art and culture. Additionally, the city is home to many migrants from

the Balkan region, who would be likely to choose SofiAirto fly to their home region.

26

Bulgarian National Statistics Institute27 Bulgarian National Statistics Institute28

Confindustria Bulgaria


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The Sofia-Bologna city pair is currently not served by any airline, being served until 2008 by the

Italian low-cost carrier MyAir(who entered bankruptcy in 2009). Thus, SofiAirwill see a monopoly

on the route and PaxIS data show that there is significant

group 1 - sofiair - report

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