Guest post: The demise of Cyprus Airways

Cyprus Airways Larnaca

By Bernard Musyk

Cyprus Airways disappeared in mid January; the EU deemed a €102m state aid package received by the company as illegal, forcing the airline to return €65M. Unable to do so, the company was declared unviable and had its flying licence revoked.

During the last few weeks of Cyprus Airways’ long life, I was surprised to hear from the Cypriot Finance Minister that ‘the era of thoughtlessly throwing money at the carrier has passed’ followed by a statement from the President of the Republic himself who said ‘that we must factor in the cost to taxpayer of keeping a loss-making entity operational’. These courageous and unprecedented statements came at the eleventh hour and are now irrelevant. Cyprus Airways has joined the ranks of bankrupted state carriers like Olympic Airways, SABENA, or Malev and there is nothing one can or should do about it. The world still hosts many such state carriers subsidised and protected by their respective governments, but in Europe this is becoming more of a rarity since the freedom of the skies became a reality.

A few weeks before Cyprus Airways was closed down, the government of Cyprus purchased the name and logo of the ailing airline in the hope to find private investors willing to re-launch a Cyprus-based airline and possibly employ some the 500 or so employees that were going to loose their job. After the eventual collapse of the airline, the cabinet even allocated funds to hire consultants to prepare the grounds for this process of “privatisation of the defunct airline”. This academic exercise was mainly intended for internal consumption, to give the chance to a populist government to “show that they cared” about those extremely well paid airline (government) employees who had just lost their jobs.

Before that, the government had been in talks with Ryanair, Aegean and several other airlines to discuss the sale of the national carrier. Here too, the idea was to score some political points by showing that the government was committed to a “national airline“ that was going to “serve the interests of the country”. Thus, the public at large was led led to believe that a strategic investor would want to pay money to purchase a grossly overstaffed and inefficient airline (facing an imminent closure by European authorities) because of the supposed value of a few bilateral agreements in the Middle East and a name and logo containing the word “Cyprus”.

Would a new Cyprus-based airline not be able to thrive as ‘Aphrodite Airways’? For all intense and purpose, Aegean managed to grow without being called ‘Greece Airways’ and in the end, it even absorbed Olympic Air!

In the immediate aftermath of the closure, while some politicians were still lamenting themselves about the loss of the state carrier, Aegean decided to expand its operational base in Larnaca and took the lion’s share of the Cyprus Airways flights (Heathrow, Paris, Munich, Milan, Rome, Beirut, Tel Aviv, Kiev), Blue Air entered the popular Greek routes of Athens and Thessaloniki, and Transavia took over the Amsterdam line. The gaps left by Cyprus Airways were filled in no time and as time passes, talks of a new national airline become irrelevant.

Before EU competition policy ruled our skies, commercial airlines were regulated by bilateral agreements that gave monopoly powers to government owned airlines. In those days, fares were calculated by adding costs and a profit margin divided by the anticipated number of passengers and in case of losses public finances were called in. The deregulation of European skies was going to change all that; any airline registered in the EU was now able to fly anywhere within the bloc and this newly created large market helped the phenomenal growth of low cost airlines. Many flag carriers such as British Airways, Lufthansa or KLM managed to turn themselves into efficient privately owned legacy airlines; others were caught up with too many staff on the books, inefficient practices established during the monopoly years and the unconstructive participation of politicians and irresponsible unions. Many EU governments tried to hold on (for much too long) to these antiquated structures, wasting millions of taxpayer’s money to avoid the political cost of letting their national airline go. Cyprus is a case in point, and the Maltese have been following suit.

Air Malta is now in its fourth year of a massive European Commission restructuring plan allowing state aid to the tune of €230 million aiming at reducing losses and employment to ensure the long term viability of the airline. It is the airline’s last chance for long-term survival and profitability has to be restored by 2016. Times are hard for the airline, and amidst increasing competition in Europe the carrier has been strongly impacted by the closure of its Libyan route, Air Malta’s most profitable route protected by a bilateral agreement between the two states.

Like Cyprus Airways, Air Malta suffered considerable interference by successive governments over the years; politicians shamelessly used it as a job centre for their clients, and governments have always been weak, ceding to excessive demands by the unions to maintain industrial peace. Back in the early 1990s the airline invested in new British designed Avro RJ70’s aircrafts against better technical advise (Malta was lobbying the British government for support for its EU accession bid in 1992), it created the subsidiary airline Azzurrair, and when it was realised that the adventure of turning the tiny island into a hub had failed, this ‘Avro Liners debacle’ left Air Malta with losses of €150 million (Cyprus also had its own Hellas Jet debacle in the 1990s). Controlling costs has also been an impossible mission; like in Cyprus, Maltese pilots were enjoying employment conditions above industry standards, flying on average 600 hours per year compared to 900 hours for Ryanair (which is close to the EU limit). Today, whilst in in the middle of a restructuring plan, it has been reported that some 300 or so individuals have been hired by Air Malta.

In Malta and in Cyprus, clueless political appointees on the board of the airlines have pushed the national carrier to pose as a legacy airline, a low cost airline, a national airline and a tour operator all at once. This haphazard reaction to the terrifying competition faced by the national carriers led to significant losses in market share; when after accession the gates were open to low cost carriers (LCCs), the latter gained substantial market shares both in Cyprus and Malta. In Malta, the LCCs market share is now over 35% while in Cyprus Easyjet and Ryanair hold 8.5% and 7.9% of the market respectively. In fact, in Cyprus, the market is now dominated by Russian-based Transaero that holds a 10.9% market share compared to 10% for the defunct Cyprus Airways.

The Cypriot authorities and the airline top brass (including the pilots) had been naïve to believe that the flag carrier could survive the deregulation with its antiquated state company structure. Back in 2004, just before accession, at a time when Cyprus Airways was still at its best, politicians should have had the courage to privatise. Faced with newly opened skies, Cyprus Airways could have survived like any other restructured ex-monopoly carrier. Such policy would have benefited the budget but more importantly, it would have boosted the island’s tourism industry substantially. Instead, those in charge preferred to continue wasting taxpayers’ money to support a company that was condemned to disappear because it was ill equipped to face the fierce competition in the European skies. Surprisingly, successive Cypriot governments managed to play cat and mouse with the European Commission for a decade, finding all sorts of excuses (like subsidising fuel to fly around Turkish airspace) to pour money into the ailing carrier.

The Cyprus Airways debacle is a reflection of the Cypriot society and its partisan political system; weak politicians only know how to implement populist and ineffective measures that are shouldered by the taxpayer. Like for the collapse of its entire banking system, they always act too late when all has become irrelevant.

Bernard Musyck teaches Economics at Frederick University in Nicosia.