Why Gulf airline Etihad is investing in the Balkans

Etihad has taken a 49% stake in Air Serbia

The curtain fell and spotlights strafed the freshly painted hull of an aircraft named after tennis player Novak Djokovic.

The plane in question is an Airbus A319 that, at the end of October, became the first jet to bear the colours of Europe's newest carrier: Air Serbia.

As the applause of the guests echoed round the hangar at Nikola Tesla airport in Belgrade, two men looked on in mutual satisfaction - Serbian First Deputy Prime Minister Aleksandar Vucic and James Hogan, chief executive of Etihad Airlines.

This was a rebirth moment - with a new national carrier rising from what was left of the once-proud Yugoslav airline, Jat. And it was also the latest example of how a still-juvenile Gulf carrier (Etihad was only established in 2003) is shaking up the airline industry.

Before the violent break-up of Yugoslavia in the 1990s, Jat had prided itself on being among the most stylish and modern operations in Europe.

But by this year its elderly fleet of Boeing 737s appealed only to those with a taste for planes with a patina, period typefaces and ashtrays in the armrests.

Service was gruff, and there was no on-board alcohol to soften the blow of the often unpredictable departure times. The airline's finances were correspondingly dire - and with Serbia's public funds in no state to support Jat any further, it seemed the end was nigh.

Etihad's entrance was timed to perfection. It took a 49% stake in Jat in August - and signed a five-year contract to manage the new Air Serbia.

'Different business model'

Mr Vucic is candid about how the Abu Dhabi-based carrier became involved.

"Sheikh Mohammed is my friend and I asked him to help," he told the BBC.

But the relationship between the crown prince of Abu Dhabi and Serbia's most powerful politician does not by itself explain why one of the world's fastest-growing airlines became involved with a "legacy" carrier on its last legs.

Etihad hopes the deal will allow it to boost its presence in the Balkans

"Etihad's ability to make investments like this is unique," says Douglas McNeill, an aviation expert at Charles Stanley stockbrokers.

"It's a compliment in a way that they've gone for Air Serbia. There's no shortage of weak airlines they could have gone for - like TAP in Portugal or LOT in Poland. There are lots of competing opportunities."

Mr Hogan is not known for a sense of charity towards failing businesses. But he does have a track record of improving the fortunes of airlines. He turned around Gulf Air before joining Etihad in 2006 and overseeing a spectacular rise in both profile and business.

He told the BBC that he saw Air Serbia as a key component in Etihad's further growth.

"We have a different business model," he says. "We have demonstrated through our different aviation investments that we are creating a global airline - it's about connectivity."

Unusually, Etihad is not making its connections by joining a global airline alliance such as One World or Star Alliance, but by buying stakes in other carriers.

At 49%, the Air Serbia deal is the largest, but Etihad also owns considerable stakes in Air Berlin, Air Seychelles and Virgin Australia, as well as a small proportion of Aer Lingus shares.

Just this week, India's government gave the green light to Etihad snapping up a quarter of the country's largest carrier, Jet Airways.

For Mr Hogan, the attraction of adding Air Serbia to this "equity alliance" was obvious.

"The Balkans as a crossroads of the world has huge opportunity. The tourism business opportunity of the region is considerable - and we're going to be very well positioned to take advantage of that," he says.

Air Serbia's planes are far more modern than those of the former Jat carrier

"There are not only the Balkan and European markets, but with Air Berlin we can connect with the US - and with Etihad over Abu Dhabi we connect with not only Australia but the Middle East and South East Asia. We can position Belgrade as the gateway to the Balkans. We're very bullish."

Mr McNeill is rather more cautious about the Etihad approach. "The risk is that you end up with a collection of minority stakes - and if you don't have control you don't have anything. It's a questionable strategy."

Etihad points out that it has been successful in co-ordinating operations and consolidating costs. Air Berlin has ordered the same kind of aircraft as Etihad - right down to the interior fittings and details. And Mr Hogan says that Air Serbia will follow along similar lines, moving many of its operations to Abu Dhabi to avoid duplication.

Increased competition

Balkan airline industry analysts have seen the potential for an Etihad-powered Air Serbia to fill a potentially lucrative gap in the region.

The recently formed Association of Serbian Aerospace Professionals noted that there was a dearth of heavyweight carriers, which had left Turkish Airlines and the Lufthansa group to mop up on long-haul travel. An Air Serbia-Etihad-Air Berlin combination may provide competition on many popular routes.

Meanwhile, other carriers in the region are still facing the kind of financial struggles that afflicted the post-Yugoslavia Jat. Croatia Airlines is actively looking for a partner, while the national airlines of Bosnia and Montenegro have been in difficulties.

Hungary's national carrier, Malev, went out of business last year. A putative replacement, Solyom, has yet to get off the ground, despite rumours of investment from the Middle East.

So there is clear potential for Air Serbia to take advantage if it can get its act together. And Etihad is confident that with its management team in place, the new carrier will quickly turn a profit, pointing to its previous success with Air Seychelles.

Now the question is: what next for the most acquisitive of the Gulf carriers?

Mr McNeill suggests the next logical step might be to acquire a stake in a mainland African airline. Then Etihad's global equity alliance would cover most of the world - and make it a formidable player in the airline industry.