GROWTH MODE

Wizz Air and Sky Europe are emerging as Central and Eastern Europe's fastest-growing low-fare carriers, but doubts remain whether both can survive independently in the longer term.

Both airlines have been taking advantage of the European Union's eastward expansion that added 10 countries to the EU common aviation market. Growth rates are impressive in the largely uncharted territory, but profit appears a long way off, particularly for Sky Europe.

Wizz Air and Sky Europe are the business model's largest proponents in Central and Eastern Europe, followed by LOT Polish Airlines subsidiary Centralwings. But Eastern Europe has also been a key target for Ryanair and Germanwings, in particular. According to data collected by GCW Consulting's Executive Vice President Anita Mosner, low-fare carriers combined achieve a 41% market share in Poland, 24% in Hungary and 14% in the Czech Republic. This compares to negligible exposure in the three countries three years ago.

In key Central and Eastern European markets, "capacity has skyrocketed," Mosner says. Slovakia's Bratislava Airport, the main base for Sky Europe, has seen seat capacity grow by 424% in three years. Budapest capacity is up 72%; Prague, 62%; Vienna, 35%; and Warsaw, 75%. But growth at regional airports that have had little air service in the past is even outstripping the impressive growth rates at the region's major airports.

Set up in 2001, Sky Europe was the first new entrant to the market. Its Bratislava Airport base is only about 40 mi. from Austria's capital, Vienna, offering travellers from the neighboring country cheap flight alternatives. Founded by CEO Christian Mandl and Chairman Alain Skowronek, the carrier started operations in early 2002 on a single domestic route using an Embraer 120 turboprop. Sky Europe now has a fleet of 16 aircraft, four Boeing 737-700s, seven 737-500s and five 737-300s. And 16 more -700s are on firm order, 12 of which are due to arrive between now and May 2007.

In 2005, the airline carried 1.85 million passengers, up from 955,000 a year earlier. Sky Europe has built up a network of 70 routes in 19 European countries. But so far, profitability has been lagging. In the first six months of 2006, the company's revenues totalled 51 million euros ($65 million) and the operating loss was 34 million euros. The operating margin worsened to a negative 67% from a negative 59.8% a year earlier.

The airline continues to underperform in key operating indicators: Its load factor at 68.4% is low even at legacy-carrier standards, and the average daily aircraft utilization at 8.08 hr. leaves much room for higher productivity. At least some productivity gains are to be expected when the airline replaces its seven 133-seat 737-500s with 140-seat -700s.

Sky Europe last month was forced to postpone publication of its third-quarter earnings for nine days because auditing took longer than planned. Audits are needed for a possible capital increase that the airline wants to push through to finance even stronger growth. The financing needs are emerging at a particularly bad time for the company, as its stock has lost 67% since the beginning of the year. But last week shares gained 21% when it announced a 38.8-million-euro investment by York Global Finance.

Edin Karabeg, an analyst at Bank Austria's investment banking arm, CA IB, based in Vienna, says that the growth "can mid-term only be financed by a capital increase; long-term, we see Sky better off with a partner. The best fit, in our view, would be another low-cost carrier already active in the region, rather than one of the big guys in the LCC business."