The Problems of Cyprus Airways During the Recent Years - Case Study Example

The problems of Cyprus Airways during the recent years Introduction: Cyprus Airways has completed nearly just over six decades of service. During its more than five decades history it reflected a picture of a fairly successful airline. In the recent times Cyprus Airways is no longer presents a picture of a successful business venture. Studying the issues that have led to the problems of Cyprus Airways gives in sight into the manner in which a business enterprise can take a slide downhill, when there is considerable change in the environment that it operates in. Background: Cyprus Airways is based in Nicosia and is the national airline of Cyprus. It flies to many destinations in Europe, the Middle East and the Gulf region through its scheduled operations. Its main operational base was the Nicosia International Airport, which had to be abandoned in 1974 subsequent to the Turkish invasion of the Turkish areas of Cyprus. It now uses the Larnaca International Airport as its main hub and also has a hub at Paphos International Airport. It was on September 24, 1947 that Cyprus Airways came into being as a joint business venture consisting of the Cypriot government, British European Airways and private investors. Commercial operations started on April 18, 1948 through a Douglas DC – 3 aircraft flying on regional routes out of Nicosia, the capital of Cyprus. On the basis of a charter agreement use of British European Vickers Viscount airliners commenced five years later on April 18, 1953. Another five years down the line British European Airways took over the operational aspects of all Cyprus Airways services from January 26, 1958. Expansions to the business activities of Cyprus Airways took place through the establishment of a wholly-owned charter subsidiary in 1992, as a means to tap the growing IT charter market in and out of Cyprus. A decade down the line it founded Hellas Jet in Athens, Greece, in 2002 with a seventy-five percent share in the carrier. These were the days of prosperity for Cyprus Airways. The current ownership of the Cyprus is more than sixty-nine percent with the Government of Cyprus and the rest with private shareholders making it a more of a public sector undertaking. It has tried to incorporate quality as strategy in its business model with its Business class and Economy class offering upgraded in-flight service that goes well in comparison with the quality conscious international airlines. (1). In May 2004, Cyprus joined the European Union and by August 2004, Cyprus Airways was fighting for its survival (2). In 2004 Cyprus Airways reported a net loss of CYP 39.4 million, which continued into 2005 though with signs of improvement, with the reported un-audited loss of Cyprus Airways dropping to CYP 23.2 million in 2005. (3). The Advantage for Cyprus Airways till 2004: The Government of Cyprus is the dominant partner of Cyprus Airways. This provided advantages to Cyprus Air in that the influence of Cyprus Government would work in favor of Cyprus Air. An example of this is in the favouritism shown to Cyprus Air during the Olympics in Greece in 2004. The Cyprus Government is closely aligned to the Greek Government and this resulted in Cyprus Airways given preference of British Airways as the official carrier for the Olympic Games, 2004. (4). The commercial airline industry was under the regulation of the Government of Cyprus till 2004. This allowed Cyprus Air to dominate the regional airspace of Cyprus, as the Government of Cyprus was the dominant partner in Cyprus Airlines. For example foreign airlines could only land at Larnaca International Airport and fly out. They did not have permission to land at any of the other regional airports of Cyprus, whereas Cyprus Airlines could land and fly out of any regional airport in Cyprus limiting the competition that Cyprus Airways faced. Liberalization or deregulation causes the industry to be free from any control of the state over prices, entry and exit. Liberalization of the airline industry has the import that airlines have the freedom on exit and entry (can fly into and out of any airport), freedom on capacity (free to use large aircraft) and freedom in their operations (any number of flights). In essence liberalization brigs with it the essence of strong competition, as any competitor is free to enter the market at terms and conditions set by it. (5) This is exactly what happened to the Cyprus airline industry, when Cyprus joined the European in May 2004. The dominant role that Cyprus Airways could play riding on the support of the Cyprus Government just vanished and Cyprus Airways faced competition from other players in the European airline industry. It would have to compete or face being pushed out of its market. (5). Liberalization of the European Airline Industry: Evaluation of the liberalisation of the European Airline industry shows that it took place in a phased manner. In the first phase in 1987 capacity restrictions were removed, the single designation provision was removed and flexible terms were set with regard to fares. The second phase took place in June 1990, wherein multi-designation of airlines on specific routes were allowed and also operations under the Third and Fourth Freedom of air into intercontinental flights. The final phase was full liberalization, which took place in 1997, which made the skies in the European Union open for the commercial airline industry. Freedom for entry and exit at any capacity, at any route, at any rate determined was bestowed on the European commercial airline industry. (5). The Problems of Cyprus Airways: The problems for Cyprus Airways began with Cyprus joining the European in May 2004, which meant it had to liberalize the commercial airline industry in keeping with requirements of European Union membership. Cyprus Airways lost the preferential treatment that it had through the erstwhile control of the commercial airline industry exercised by the government. There was also another damaging factor, cushioned as a public sector undertaking Cyprus Air had forgotten how to compete, while its competitors were battle hardened veterans of the battles for commercial airline supremacy in the liberalized skies of Europe since seven years. (6). State-owned companies exposed to competition for the first time have to overcome a lot of challenges that have been inherent in their functioning. These challenges consist of an erstwhile position of monopoly; a focus that consisted of the national market; interference in management from civil servants; used by the government for boosting employment; high costs in labour; bureaucratic organizational structure and willingness to tolerate high debt and losses. Such companies have had no reason to change and hence demonstrate minimal motivation for innovative product development or creation of new markets. This causes the company to demonstrate unresponsiveness to change and remain saddled with debt. In smaller countries like Cyprus there is the added aspect of such companies not having had to face economies of scale and the ability of their larger competitors having the advantage of being able to fall back on the cost advantages of a larger home market. This is a fit description of Cyprus Air forced to face change in the changed environment of liberalization. (6). Studies had predicted that the liberalization would bring with it competition to Cyprus Air from other European airlines with lower airlines. In a bid to retain its market Cyprus Air cut fares on one side and increased its services on the other side prior to it having to face competition due to liberalization (7). These steps did not prove successful for Cyprus Air and restructuring of the company was called for, which included plans to cut-costs and reverse the losses that the new competition from liberalization of the airline industry in Cyprus brought with it. This restructuring included the sale of two aircraft, closing of its Greek subsidiary Hellas Jet and laying of some of its staff recruited in 2000. (8). Laying off staff is seldom easy particularly in an organization with public sector culture. Nevertheless unions have accepted the lay-offs and also salary increase measures that were to come into place in 2005 have been deferred till better times. The unions have also agreed to changes in work practices as a cost-cutting measure. There are however, fears that these measures alone my not be able to help Cyprus Air survive the pressures of change and competition. (9). Solutions for the Problems of Cyprus Air: There are several steps that Cyprus Air needs to take to come out of the difficult situation that it finds itself in. These steps are: Employing consultants to audit the company for change requirements; devise the change strategies and restructuring plans and help in implementing the required change. Managers need to be chosen based on their ability to manage the change and not their ability to come up with ambitious and risky expansion plans. While the European Union does not encourage governments to continuously provide financial support for the public sector undertakings, under some circumstances, like the Cyprus Airways situation the European Union does permit to take on a part of the debt and thereby reduce debt stock. The cash situation in Cyprus Airways is inadequate and this can be addressed by sale and leaseback operations, disposing off of real estate and non-core business activities and if needed renegotiate loans with the banks. Product innovation that helps to develop higher value added products and services and the creation of new distribution channels is a requirement. These efforts help in the creation of a customer driven culture in the company, which also means that customer satisfaction being accorded the required priority. This will also help to create a new and better image of the company The human asset needs to be taken care of through increased training and development, remuneration based on effort, professional recruiting and slowly eradicating the system of life-time contracts through discussions with the unions. To increase capital extend an invitation to the private and public sectors to join in as partners. Works Cited 1. “Cyprus Airways”. May 4 2008. . 2. “Cyprus Airways submits survival and restructuring plan”. 2004. European industrial relations observatory online. May 4 2008. . 3. “Cyprus Airways reports un-audited net loss for 2005”. 2006. Airline Industry Information. May 4 2008. . 4. “BA dumped for Cyprus Airways”. Travel Trade Gazette UK & Ireland 2590 (2003): 7. 5. “Air transport liberalization and its impact on the aviation and tourism industries: a case study of Cyprus”. ICRAT 2004. Americanos College. May 4 2008. . 6. “What Cyprus Airways can learn from Belgium”. Financial Mirror. 2005. May 4 2008. . 7. Liston, Kathryn. “Cyprus Airways cuts fares and increases services”. Travel Trade Gazette UK & Ireland 2545 (2003): 26. 8. “Cyprus Airways signals big cuts”. Travel Trade Gazette UK & Ireland 2628 (2004): 19. 9. Endres, Gunter. “Unions back Cyprus Airways survival plan”. Airline Business 21.2 (2005): 20. Read More