Tarom: winging its way to blue skies

At the controls of state-owned airline Tarom for more than one and a half years now is young general manager Ruxandra Brutaru, who opens up to Business Review about the carrier’s strategy during the recession. Tarom has just launched its first ever promotional campaign in an attempt to project a modern image in the minds of passengers.

Otilia Haraga

Do you have a background in aviation? If not, what was your career path?

I was appointed GM of Tarom on December 28, 2008. But I have been working for the airline since October 2007, when I started as deputy GM. I could talk endlessly about the reasons why I’m in this industry. Aviation is a drug and only those who love this domain passionately and respect its discipline can withstand a lifetime in an extremely competitive environment.

I am the daughter of a pilot and this certainly made its mark on me from a very early age. I wanted to be both a flight attendant and a pilot, but my father guided me towards a profession on the ground. As a mother, I must admit that it is difficult to reconcile work and home as it is; I think it would have been much more complicated working at a height.

What have been your biggest challenges so far as GM of Tarom?

There are many difficulties. Unfortunately most have been due to prejudice. The fact that I am a young woman is definitely something people in our society find hard to accept. The real problems I have been confronted with were related to my lack of experience in the public sector, as even now I have not learned the necessary patience for this slow system. There are many frustrating moments when you see the competition and the market going in a specific direction at a fast rate and you find it impossible to act. There is no clear company culture, and although the employees are remunerated at a level that is acceptable on the Romanian market, there are few who love the airline and identify with it; for most it is just a workplace. This saddens me, because this is how the airline could be rehabilitated.

What turnover do you estimate Tarom will have this year?

When I became GM, Tarom was already in dire straits. Its market share had declined to 19.5 percent, and the occupancy rate in Q1, 2009, was just 45 percent. This was at a time when five aircraft had entered our fleet and the economic crisis was worsening. 2009 was a difficult year both for Tarom and the whole aviation industry. This is why Tarom mainly focused on increasing market share, number of passengers and occupancy. We estimate we will end 2010 with a growth in the above-mentioned indicators. We foresee average occupancy of 62 percent (in July-September it was on average 70 percent), approximately 2.1 million passengers and a market share of 23 percent.

Unfortunately, not all news is good news. Though overall revenues will surpass revenues in 2009, the market is still in a difficult position, which is being felt generally as a result of the decline in purchasing power. In this context, Tarom estimates a turnover of approximately USD 390 million.

What caused the losses the company posted last year?

The RON 238 million (approximately USD 81 million, calculated at the average USD value in 2009) of losses were due to the economic situation in the market. The beginning of the year was critical because the number of passengers plummeted. I took over the company in December 2008 and in the first three months of 2009 we saw a sharp decrease in the number of passengers.

This also overlapped with a disappearance of passengers in business class; many corporations changed their strategy. While Tarom had a generous share of business passengers, in a very short time they chose to change or renegotiate contracts and transferred clients from business to economy class. Tariffs in economy class were renegotiated and also went down. Our main focus last year was to recover after this shock.

In 2008, Tarom purchased and rented aircraft. We rented three planes, two of which came at the end of 2008 and one at the beginning of 2009. Another two Airbus A310 aircraft were put back into use. In 2003 when the airline had huge losses they had been taken out of circulation, and this helped to re-balance the company’s situation. Now they were re-introduced for technical reasons at an inauspicious time.

While in 2006 and 2007 there was unprecedented economic growth in Romania and the number of airline passengers surged by 20-30 percent – which is atypical in this industry, we grow 5 percent a year and consider ourselves lucky – we suddenly had a great deal of capacity and few passengers. Not only were they few, but they wanted to pay less and less.

It was a shock at the level of the market in terms of the average revenues posted by airlines. Also, last year was the most painful for the modern aviation industry internationally. This year, we intend to regain balance in the expenditure sector – which I think we managed to do. Unfortunately, we have faced external risks – the price of oil just kept on growing and our bill is getting higher and higher – in the first seven months alone we paid in excess of USD 20 million more than last year. The oil bill represents a third of the total expenses.

What are the other main expenses of an airline?

They are split into personnel, fuel and operational expenses. This year we have focused on re-gaining a balance since we have seen the market is not willing to pay and it is not a good policy to sell expensive tickets when passengers do not have money. So we chose to cut expenses as much as possible: we cut the cost per passenger by 12 percent, which is a very good target. Unfortunately, passengers are still in a difficult financial situation and we have not managed to fulfill what we were aiming for.

We hope we will close the year better than last year. We continue to be exposed to the price of oil and currency exchange rate. We cash in EUR because our tickets sell in EUR, but we pay the bills in USD. The oil, the insurance of the aircraft, the installments, everything is in USD so that’s the influence of the currency exchange rate. With the exception of the Middle East market (where tariffs are in USD), which still represents a small part of Tarom’s revenues, the rest of the money we cash is in EUR.

Do you expect losses this year?

It is hard to say since the currency exchange rate and the price of petrol have oscillated significantly. We hope the losses this year are lower than last year. We are putting pressure on increasing revenues. We are trying to see how we ended the summer; so far we only have the report for the first seven months. I think we will have a better image at the end of October. We have cut all expenses as much we could. Next year we will try to budget these risks better and buy products that will help us have more control so that we will not be so volatile.

We have renegotiated very many contracts and opened public auctions for products in the technical area. With some technical contracts, we’ve had 40 percent decreases. For example we will organize a new public auction for the maintenance of engines where we hope we will also get a discount.

We have renegotiated the pool contract – it is a contract for spare parts at international level – where we obtained an important difference of more than 20 percent. We have renegotiated with catering suppliers and modified the catering concept. So we’ve tried to get the best prices in each area, which is very complicated as there are a great number of contracts. We have focused on the priorities.

There are also sectors where we cannot do anything. For instance, a major part of our bill is represented by air space. These flight taxes are very high and they are established at the level of the European Commission, so I cannot intervene and negotiate. I was looking at some IATA reports for last year, which proved that, although losses at the level of the entire industry were huge, in total the bill of airlines for air space, take-off and landing services, etc, increased by 16 percent.

Airlines are at the end of the chain, but our negotiation margin with our suppliers is rather slim, because in nearly all cases there is a monopoly. There are few destinations in which you can afford to choose between airport A and B. We are struggling to obtain access to the airport in most cases, not to mention arguing with the EC for discounts. It is an industry which has reached maturity and certain processes need to be re-invented in order to cut more expenses.

Have you considered opening a low-cost division with more affordable fares?

We did analyze this. But we are a very small company in comparison with international ones. As small as we are, we are competing against giants which have hundreds of planes. We only have 26 aircraft and we are competing shoulder to shoulder with British Airways, Air France, Lufthansa… If these players find it very hard to open a low-cost division – by all accounts, more than 95 percent of them have failed, with huge losses – it is even harder for a small state-owned firm which is more rigid than a private company to do so.

How are revenues split across the markets where Tarom has activities?

Our activity is split in several areas. First is the European market, which represents the bulk of our revenues from external markets. It is followed by the Middle East and the regional emerging market. Revenues from the domestic market represent approximately 20- 25 percent, while the rest come from the external market. Nearly 58-60 percent of our passengers travel for business purposes, while the rest travel for leisure and VFR (visiting friends and relatives).

How much of its fleet does Tarom own, and how much is rented?

The Tarom fleet is divided among ATR, Airbus and Boeing planes. Tarom owns all the equipment, with the exception of three Boeing 738-800 New Generations, which are rented from specialized companies, banks and airlines. There is a specialized market for such things. One of them comes from Babcock&Brown. The other two are rented from an airline, Air Berlin, but the initial owner was a bank, the Royal Bank of Scotland.

How much does the company pay to rent an aircraft?

The rent depends on the year of production, as with cars. The aircraft we rented were brand new; they had just been released from the plant. What I can tell you is that the average value of an aircraft that is two-three years old should be somewhere between USD 320,000- 340,000 a month.

How many employees work for Tarom now?

We have 2,329 employees. There are in excess of 600 people working in the flight operations sector, around 700 working in the technical sector, more than 200 in ground operations. The remaining staff works in the marketing, financial and other auxiliary sectors.

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