FLUG REVUE December 2002: European regional airlines under pressure

ERA: EVOLUTION RATHER THAN REVOLUTION

By Patrick Hoeveler

Low-cost carriers – a "pain in the ass”, and hence a challenge, for the regionals? At this year's general assembly of the European Regions Airline (ERA) Association, FlyBE. managing director Jim French compared the new no-frills airlines with uncomfortably tight underpants. The times have changed, he said. In fact, consumers now have a direct influence on their flight bookinks through the internet. The new airlines are profiting from this and are increasingly becoming rivals of the regionals.

On the other hand ERA members carried 6.3% more passengers in the first six months of 2002 than in the same period in the previous year. Despite this, many airlines achieved a smaller profit or even made a loss as a result of price-cutting caused by the new competitive situation. Yet there were exceptions such as the Spanish airline, Air Nostrum, which won the ERA's Airline-of-the-Year award. Second place went to Widerøe, which actually reported its best results ever, followed by Air Dolomiti in third place.

It would seem, therefore, that the growth of the rival low-cost carriers is not yet such a threat. Karl-Friedrich Müller, SVP Network Management at Eurowings, believes that overlaps with the new competitors are confined to a few point-to-point connections, as many routes simply are not profitable with larger planes.

Generally speaking, the low-cost carriers appear only of limited use to business travellers, the primary target group of most regional airlines, as usually their tickets are non-transferable or else the airports used are too far out of town. Hence, in Jim French's view, the sector needs, rather, to fight against the public perception of the new air travel segment and the associated expectation of low prices. As far as he is concerned, Ryanair and the others are more a case of evolution than revolution. The airlines should orient themselves not to prices but to their business model. His FlyBE., successor to British European, combines low cost operations with service elements from the regular airlines like Jet Blue does in the US.

The extremely cost-conscious management is, however, facing another problem. The airline wants to break with its previous dependence on CRJs, as a 50-seat jet is simply too expensive to operate. Michael Magnusson, President and CEO of Saab Aircraft Leasing, was not the only one to argue that turboprops are still the most cost-effective solution on short routes. The large airlines are reviewing every route closely and are relinquishing the unprofitable ones to smaller carriers. Even so, the jet is still gaining ground. Thus, European Air Express CEO Ulrich Sigmann can even envisage using jets in the future at his airline.

Eurowings CEO Friedrich-Wilhelm Weitholz too has chosen a new business model with the foundation of Germanwings. The main market it is targeting is customers who would otherwise not fly. This policy would hardly attract passengers from the likes of Lufthansa or from his own regional operation, he argues.

Yet, according to ERA director general Mike Ambrose, the competition from the no-frills carriers is not the only challenge facing the regionals. "Governments are running away from their responsibility on security costs and insurance charges.” Precisely in the area of security the pressure had risen thanks to politics and the media, but this must not be allowed to result in compromises over flight safety. It also has to be borne in mind that the costs do not end with the installation of new doors. According to Ambrose, "discrimination” by the EU amongst others in the slot allocation process and in emission-dependent taxes is also impeding the growth of air travel.

These challenges combined with the recession in aviation add up to rather pessimistic mood. In the opinion of Karl-Friedrich Müller, niches present the only prospects for survival for small regional airlines, "otherwise things will get difficult”. "In Germany there will only be one regional centre in the future,” forecast another industry insider. Sub-charter operations were the only way for the regionals to survive, as the small airlines could not compete with the cost structures of the large ones.

The manufacturers also face challenges. Hence the tough competition to win the order for the 728 successor from the Lufthansa Group. Here Müller views the 717 and A318 as too large for cost reasons, although "the A318 would be attractive, given that the A319 is already in service with us.” With the CRJ there remains the problem of a gap for an Avro successor. In the view of GE Aircraft Engines, the cancellation of the 728/928 is at present having only a minimal effect on the engine manufacturer as the Embraer 170 is taking its place, as was already visible from campaign to campaign.

Bombardier has other worries. Due to the decline in orders, especially with the business jets, the Canadians are stopping production of the Q turboprop and the Global Express for six to eight weeks and cutting 1980 jobs. The order backlog for the Dash 8 stood at only 27 aircraft in all versions as of the end of August. An order for four Q400s from All Nippon Airways has therefore come just at the right time. Marketing director Barry MacKinnon is optimistic. "Our product line can keep up with low-cost carriers through low operating costs.”

Bombardier's Brazilian rival is copingwith a further delay to Embraer's new 170 flagship. As a result of software integration problems, certification has slipped to June 2003, as Frederico Fleury Curado, EVP Airline Market, told FLUG REVUE in Salzburg. "At present we are negotiating with Swiss about their delivery dates.” Despite this setback, they are still hoping to deliver around 20 Embraer 170's next year. The accident sustained by the third prototype, which veered off a wet runway during tests, is apparently not a factor in the delay. Curado is expecting a decision about the Lufthansa order at the end of the year. Yet, he does not foresee any easing up of market conditions until 2004.

On the other hand, manufacturer Boeing, which took a 717 belonging to Aerolineas Baleares to Salzburg, is optimistic. Programme manager James Phillips believes the market for the 100-seater, which is "perfect for top-end of regional carriers”, is improving. "When the regional airlines are buying again, they will go for the product that is most economical to operate,” added Terrence McGaughan, 717 sales manager.

When exactly that will be remains unclear. Even prize winner Air Nostrum refrained from effusive celebrations. "The market has become more difficult,” said President Carlos Bertomeu. The paramount problem is not the cost structures but the uncertainty faced by the industry. "We don't know whether we are at the beginning, in the middle or at the end of the crisis.”

From page 22 of FLUG REVUE 12/2002

Last updated 4 November 2002

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