Halfway through his speech to announce Etihad Airways’ plan to acquire 49 percent of Serbian carrier JAT Airways, the Abu Dhabi airline’s CEO James Hogan points to a pretty, dark haired young woman sitting in the front row.
Standing up to face international media, she is revealed as Tamara Maksimovic, a 25-year old graphic design student from the little known city of Novi Sad.
As she is blinded in a storm of camera flashes, Hogan reveals that at the end of her course, Maksimovic was required to develop a portfolio of branding designs for an organisation of her choice.
Maksimovic opted to reinvigorate the tired branding of JAT Airways. When her work was discovered on a graphic design website, she was chosen to lead the rebranding of the carrier as Air Serbia. “This is very exciting,” she says, modestly, as Hogan and Serbian deputy prime minister Aleksandar Vucic unveil her designs to the world.
Just as Etihad’s team plucked Maksimovic from obscurity, Abu Dhabi Crown Prince Sheikh Mohammed Bin Zayed Bin Sultan Al Nahyan has taken the Balkan country to heart. Etihad’s acquisition and plan to transform Air Serbia into a profitable carrier within one year will be just the first of many multi-million dollar deals signed between the UAE and Serbia.
Speaking after the deal was signed, Vucic reveals the idea for the Etihad tie-up was first mooted on 10 January when he hosted Sheikh Mohammed at his Belgrade home. “I was honoured to have His Highness at my home… Only five months passed and we had a deal,” he recalls.
“My friend Sheikh Mohammed, whose vision and desire it is that Serbia is stronger and more successful… His idea helped us to implement this important project… The wings of Serbia will take off soon.”
As part of the “groundbreaking deal” announced on 1 August, Etihad has been awarded a five-year management contract, which Hogan describes as the start of “exciting new opportunities for Serbia”.
The details of the redevelopment plan reveal the UAE national carrier will provide a $40m loan to Air Serbia, which will be converted into equity on 1 January 2014, subject to regulatory approval. Further down the line, Etihad has agreed to provide an additional $60m in the form of shareholder loans and other funding mechanisms.
This investment will be matched by the Belgrade government, giving the new airline a total cash injection of up to $200m.
“We are delighted to welcome Air Serbia to our equity alliance and look forward to working constructively with them and their stakeholders to build a sustainable, competitive, and profitable airline,” Hogan says.
In addition to the rebranding and capital injection, the agreement will see Air Serbia’s route network increase from 33 destinations to 45, thanks to a codesharing arrangement with Etihad Airways and its equity partner airberlin.
The airline’s fleet of ten Boeing 737-300 aircraft, which operated under the JAT name, will be retired and replaced in the short term with leased narrow body aircraft. In the long run, officials confirmed ten new aircraft will be ordered to help boost the expanding Air Serbia fleet.
While Hogan admits there will be some “tough decisions to make”, he says he is confident “the financial investment by Etihad Airways and the government of Serbia, together with the positive impact of our joint management expertise and experience, will help ensure this airline, with its proud history, now has an even brighter future”.
As part of the overhaul of the loss-making legacy carrier, the workforce of 1,300 will be reduced, but Serbian transportation minister Milutin Mrkonjic told reporters in Belgrade in March that the airline could be back in the black this year due to the government agreeing to take over $220m in liabilities.
“We believe JAT will be able to break even this year without the debt burden… The debt will be assumed by the state,” he said.
As part of Etihad’s five-year management deal, current JAT Airways CEO Velibor Vukašinović has been replaced with the newly-appointed Dane Kondic. As well as a new-look boss, Air Serbia also comes with a new logo, aircraft exteriors and redesigned cabin crew uniforms, as well as a new advertising and marketing campaign.
The investment by Etihad is part of wider strategy for the European country by the UAE. Earlier this year, the Gulf state made the largest investment in Serbia in more than 30 years, aimed at helping to lift the Balkan state out of a deep recession. Targeted sectors have included agriculture and defence.
Serbia’s economy, which has struggled to recover from economic sanctions and damage to its infrastructure during the 1990s Yugoslav wars, has been in desperate need of foreign investment, particularly since the global financial crisis sent it into recession in 2009.
It is aiming to offload loss-making state businesses, such as drugs company Galenika and the Zelezara Smederevo steel mill, to keep its 2013 budget deficit at about 4.7 percent of output and secure growth of up to three percent.
Relations between Serbia and Abu Dhabi had soured in the early part of the decade after the UAE formally recognised Kosovo as an independent state. With that situation now resolved, relations with the Arab state have warmed considerably.
Evidence of this is reinforced by the news the two countries are to solidify diplomatic relations by setting up embassies in each other’s capital cities.
“We know who the ambassador is going to be here in Belgrade and who the ambassador will be in Abu Dhabi,” Vucic says. “It is going to be a big embassy for us, we will bring fifteen people, it is very important for us. We have a building and your people have a building, we are finishing everything.”
During a meeting in Abu Dhabi with officials, Vucic said the emirate’s investment vehicle Mubadala Development may also put “about $4bn” into Serbia in the future, with investments in the missile industry, agro-business and a new hotel on the site of a former military headquarters in Belgrade that was bombed by NATO in 1999.
Among the Abu Dhabi delegation at the Etihad signing was Mubadala chief operating officer Waleed Al Mokarrab Al Muhairi, who was in Belgrade for talks with Vucic.
At present, trade between the two countries amounted to ¤23.3m ($30.9m) in 2012, three times what it was in 2011, but politicians have plans for this to hit the billions of dollars within the next few years.
“I am absolutely sure it will increase 50 times,” says Vucic. “I talked to Sheikh Mohammed and I hope we will be able to host him here soon and the whole community of Abu Dhabi in our country and they will find a lot of opportunities — and that is important to us.”
Sitting next to Vucic, Serbian prime minister Ivica Dacic goes one further and states trade will go even further and increase “then again by 100 times”.
Vucic says the Mubadala talks will focus on semiconductors, energy renewables, property, aerospace and telecommunications and could be as high as $4bn when complete.
A number of deals have, however, been finalised already. Abu Dhabi’s Al Dahra Agriculture is to invest $800m in Serbian agriculture through a $400m loan from the UAE Development Fund, while a $400m deal has also been inked to buy eight Serbian farming companies to grow and process food for export.
Under the agreement, Al Dahra will use a third of its investment to purchase eight bankrupt agricultural firms, mainly in Serbia’s fertile north, with the remainder to be invested in irrigation and the development of at least five fodder plants.
“Also the Royal Bank of the Gulf, owned by Sheikh Hamed Bin Zayed, is approaching the [Serbian] central bank and will be the first Emirati bank in this part of Europe,” finance minister Mladjan Dinkic reveals. “The name of the bank here will be different but the owner will not be different. They have already appointed a CEO and are applying the papers for the licence. This is good as this bank will support companies coming to Serbia.”
Serbia certainly needs these deals with the UAE as Vucic is under pressure to meet some stringent financial plans. At a press conference with Serbian media after the Etihad announcement, he revealed that Belgrade only had the funds to cover government expenses, such as public wages, pensions and other budget liabilities, until the end of September. After that he declined to say.
Behind the scenes, trouble was also brewing just hours before the Etihad deal was struck, as media reports confirmed Vucic had averted an early election when the largest party in the coalition government agreed to the sacking of the finance minister, who was said to have raised concerns about austerity measures.
Prime minister Dacic proposed the government drop finance minister Dinkic and his United Regions of Serbia party, a junior partner in the ruling coalition. Vucic, who also heads the dominant Serbian Progressive Party, accepted Dacic’s proposal at a meeting on 31 July, just 24 hours before the Etihad deal was signed.
“Elections are not the best solution for Serbia. Facing a myriad of important contracts, stability is important,” Vucic says. Dinkic, a former central bank governor before being appointed finance minister, led an unpopular budget reform process this year. Analysts say he would have taken a harder line in cutting public sector wages and pensions, but was reined in by Dacic’s socialists.
As Dinkic sits beside Vucic and Dacic to outline the investment talks planned with the UAE, there is no indication of behind-the-scene drama. Vucic is quick to dismiss any potential instability when the issue is raised by Arabian Business on the sidelines of the press conference.
“There is not going to be an election… Don’t worry, we will guarantee stability,” he says with a firm smile, before adding that the Etihad deal will not be the last high profile announcement.
“We are expecting [Sheikh Mohammed] to return to Serbia soon and we will have more of these projects and it will be good for his country,” he says. “Abu Dhabi is a true friend of Serbia, but Abu Dhabi companies have to make profit here.”
This is backed by Hogan, who states categorically that he was under no political pressure to sign the deal: “The relationship between the governments is very strong but the guidance I get from my board is ‘yes, have a look at these but unless you can make it work don’t do it.’ If it can’t be worked commercially we won’t do it and I have not been under any pressure to do this deal.”
“We have taken great strides in building the industry’s first ‘equity alliance’, with our investments in airberlin, Air Seychelles, Virgin Australia and Aer Lingus, which are contributing significant value to our business,” Hogan has said previously. With Serbia’s JAT and India’s Jet Airways added to the list, he points to Air Seychelles as evidence of what it can achieve with these partnerships.
“Last year all these airlines we invested in were profitable and probably the best example is Air Seychelles. A small airline where we stepped in, worked with the management, lost money for many years — we lost $25m in 2011 — and moved to profitability in 2012 and will be profitable in 2013. That was a clear vision in how to restructure and move forward.”
Some of the tough decisions the new Etihad management at Air Serbia will have to make are job cuts, which will be inevitable as part of restructuring. But for every few hundred workers they have to trim from the balance sheet they will be hoping they can find a few more Tamara Maksimovics to join the team.
“Next week we will have an ad in the paper for the first young Serbians to come and join our graduate recruitment programme,” says Hogan.
It seems we may all have to start learning to say ‘Dobrodošli’ and ‘Čestitam’ — Serbian for welcome and congratulations — as the mutual love between Abu Dhabi and Serbia seems to be only just getting started.
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