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REGIONAL AIRLINES EXPERIENCE GROWTH

Regional air traffic shows very high growth rates. Yet few regional airlines can operate profitably being independent of larger airlines. Lufthansa and the Deutsche Bahn AG (German railway system) have been planning to work together for a long time. LH CEO Jürgen Weber would love to have short haul flights covered by the high-speed rail network. This would, on the one hand, free capacities at the home hub Frankfurt and would also make it possible to finally cancel uneconomic routes becuase increasing competition makes it especially hard for regional air traffic to be profitable.

Olaf Dlugi, Manager at Augsburg Airways, explains the situation as follows: "If one looks closely at airport fees, competition is still contorted. Small aircraft are definitely disadvantaged. There are always airports which will use charges as an instrument to cast away small aircraft when capacity is at a limit". Another problem which regional airlines have to tackle is, according to Dlugi, a drying up of the job market. This applies to the cockpit as well as to the technical side. Reasons are the founding of charter airlines like FlyFTI (Frosch Touristik) or Hamburg International as well as expansion of existing companies as Air Berlin or growing national carriers like Lufthansa or Swissair. The market seems to be saturated with airlines. The Augsburg Airways Boss describes the consequences as follows: "Things have become so bad that personnel managers ring up captains of regional airlines, which includes ours, at home and offer up to twice their current salary". According to Dlugi the existing fleet structure, on average 44 seats per aircraft (made up of a mixture of 37- and 50seaters) makes this possible. Even if a pilot's salary is doubled, he is still cheaper for an operator who "buys" him to fly 150seater aircraft, than for a regional airline, which only has aircraft with a third of the above seat capacity. Regional carriers are hit hardest by staffing problems. " We have more or less become "instantaneous water heaters" ", claims Olaf Dlugi indignantly. "We do not only have difficulty in getting staff, the real problem is to keep the employees. People leave us very quickly after we have trained them. This is a dilemma in regional air traffic which might be impossible to overcome".

Costs are a tremendous burden for regional carriers. A possible way is co-operation with a large airline. After a strategy study had been carried out, Olaf Dlugi thought this to be a chance for Augsburg Airways. This is how co-operation with Lufthansa came about. Dlugy explains, that "the study had shown that we did not have a chance of survival because of limited growth chances in the medium-term. What then applied for global airline alliances, which at that time were being founded, was to apply to us on a regional basis as well". Augsburg Airways is doing well as member in "Team Lufthansa". Dlugi does not see any disadvantages in this kind of partnership. "It is important that we do not lose our independence, which means that we need to keep our own branding".

Dlugi is convinced that a partnership offers great potential on the international market, where it is difficult to establish one's branding. "The costs for a regional airline to build up its own marketing abroad are tremendous. Apart from that it just will not be known well enough". Olaf Dlugi is speaking from experience. He refers to the route Munich-Zurich, where Augsburg Airways is almost unknown. "However, if I service this route as Team Lufthansa, I am not only able to use LH's existing sales and marketing structures, but also that company's popularity. That is the big advantage of an alliance between a regional airline and an international carrier".

Dlugi predicts that prices will continue to drop and that the low-cost structure of regional airlines can only be absorbed in the long run if it is possible to create a further progressive reduction of costs. "This will only be possible through growth and lowering of fixed costs, not by lowering wages. I am convinced that in the medium and long term regional carriers will not be able to survive without strong partners".

However, if you are not prepared to co-operate like this or you are not attractive enough to a strong partner and are still determined to operate a regional carrier, you will have to find another solution or niche in the market. SkyTeam has found the latter. It is an airline which charters a 50 seater Fokker F-27-500 to large parties of tourists (sports clubs, company delegations or orchestras). A cargo aircraft of the same type undertakes scheduled flights in DHL's route network. The company has since acquired another F-27-500 and a light cargo helicopter (MD-500E-turbine helicopter).

At its home airport the two-year-old airline has to tackle even graver problems like the overcrowding of airspace. The Deputy Manager Sascha Oliver Schott reports: "It is difficult to get the desired airport with the appropriate airway slots (ATC, Air Traffic Control). Air traffic control makes slots available which do not necessarily coincide with those of the airports, since these slots are being allocated from different sources". And everyone hands out slots according to their own criteria. For the airport ground capacity and check-in are most important while for air traffic control the safe use of airways is of primary importance. But in most cases all factors cannot be combined", claims Sascha Schott. "This means that one of the the slots has to be violated. You have to adhere to the ATC slot. This means that it is often impossible to take off or land at the times the airport has allocated". Another significant financial burden is the cost of European air traffic control and the resulting airport fees. This applies especially to larger hubs, explains Schott thus expressing the same thoughts as his colleague Dlugi.

The SkyTeam boss is convinced that independent regional airlines can only fly in a profit if their work is somehow specialised. They do not stand a chance to compete in the scheduled flight sector. "In order to survive in this market and because we want to stay independent, we have to service niches, which other established airlines do not want or cannot cover".

Schott can well imagine co-operation with an international carrier. But, "Lufthansa has not yet approached us with an offer. We are not important enough to be of any interest to Lufthansa or other Alliance partners". In particular cases SkyTeam would compare its company's own interests with the partner's. It would not want to compromise its independence. Sascha Schott confirms this when he states, "we are not interested in co-operating with anyone if we become completely dependent as is the case with Contact Air".

Germany's largest regional airline Eurowings (EW) manages to operate independently and is at the same time part of an alliance. Although the airline was able to operate profitably in the last few years, it had to abandon some routes because they were "uneconomic" like Berlin-Frankfurt last summer. According to Friedrich-Wilhelm Weitholz, new EW Head of the Board of Directors, the market in Europe will change in the next few years. Ecological aspects of the railway system have to be considered, especially since offers are becoming increasingly attractive. The passengers will furthermore become inclined to change to a different means of transport because the service will be improved. "Competition from the railway is increasing especially for point-to-point-connections, where the entire travelling time takes less than three hours. This applies unless the air fare is much cheaper that the train ticket", says Weitholz about future developments. He adds that this does not apply to connecting traffic. Passengers will use the plane, even if the shuttle flight takes only between 20 and 30 minutes. Furthermore transit connections to international hubs like the co-operation flights Eurowings carries out for KLM, cannot be replaced with rail connections. Weitholz is convinced, that "trains cannot offer the same frequency of connections as aircraft can". The EW Boss claims that the deregulation in air traffic led to the formation of larger units, which improved the market productivity of all parties involved. "I foresee a division in the airline industry. There will be some global aviation companies like KLM, Alitalia, Lufthansa, British Airways or Air France with global networks, which connect the "mega" hubs with high-capacity aircraft. Below those market leader are the regional airlines. They operate as feeder traffic to and from "mega" hubs and connect regional airports with less frequent flights where larger aircraft could not operate anyway".

Eurowings, which had according to Weitholz, already developed into an aviation company, will maintain its independence in any case. It will, however, be attached to co-operations like KLM, Northwest and Alitalia (Wings). Not only the alliance partners are strengthening the airline's success and make it less vulnerable, another secret of the structure's success it the "three pillar strategy", which concentrates on the following business areas: the airline's own scheduled services in Germany and Europe, co-operation services as well as tourists' charter flights.

Regional air traffic will always be very important because of the rate in which Europe is merging. Traffic to and from East European countries will be expanded within years to come. Here the provinces are also being discovered gradually and are linked with each other and with the hubs in international air traffic. It therefore does not come as a surprise that Eurowings intends to concentrate more on European traffic.

However, the market shrinks inexorably, which already poses a problem especially to small regional carriers. Hans Henning Romberg, Managing Director of Tempelhof Express Airlines can tell a thing or two about this: "The difficulty is to find appropriate routes, because many routes are already covered". This did not prevent Romberg to service one route which is already well covered by the competition (Berlin-Cologne) with his airline. The reason behind this is an unusual strategy, as the Tempelhof Express Boss explains, "it occurred to us that you get known relatively quickly on this route. This is not only because the route receives a lot of attention, but because there is a huge market potential". According to Romberg business was good initially. However, it soon became apparent that average profits on this route were too low because the price war of Lufthansa and Deutsche BA. It was impossible to achieve high-enough proceeds with a small aircraft and comparatively few frequencies (two or three as opposed to 20 or more). After all, the customer watches the price very carefully today.

Has Henning Romberg is not at all opposed to co-operating with other airlines. "I think the way in which Eurowings and KLM are working together is excellent. We are currently negotiating with Lufthansa about the route Erfurt-Munich. Merging with other small airlines might also be an option".

Romberg foresees tremendous chances for the future for regional airlines and this not only because of promising growth prognoses, "I think that in times in which transit airports are becoming more and more problematic in terms of punctuality, regional carriers have good oppotunities because they often fly non-stop. It is a fact that passengers would avoid Frankfurt increasingly because the quality of large hubs is getting worse.

Regional carrier Cirrus Airlines with headquarters in Saarbrücken has according to its MD Gerd Brandecker a very interesting history. "During the first three years of our existence we operated quite successfully with small aircraft (with up to ten seats) flying executives". When Hamburg Airlines, which had worked profitably out of Saarbrücken, ceased operating, Mr Brandecker had the idea to enter this segment. After all the routes to Hamburg, Berlin and Leipzig had been lucrative. At first it was considered to fly to Leipzig only with 19seater aircraft. However, one soon realised that this size of aircraft was unacceptable for passengers. "At the same time there was an opportunity to service the route to and from Hamburg, in which Luxair (13 percent of which belong to Lufthansa) showed a great deal of interest", admits Gerd Brandecker. Eventually Luxair declined, and "all of a sudden this route was no longer serviced and was handed to us on a platter. Of course I was not too reluctant to take on the business then. Had this not happen I would not have touched scheduled flights at that time".

Brandecker is aware how difficult it is to build up new routes, especially if you are competing against strong alliances. He is also convinced that Eurowings or Team Lufthansa would quickly service a profitable scheduled route in Germany should it become available. Despite this Brandecker is not opposed to alliances, "We will not shut ourselves off from anything positive. If Lufthansa should want to talk to us, we would think about co-operating. It always depends on the contract. You could become squashed if you are embraced by such a strong partner". The Cirrus chief alludes to the extremely high standard of international carriers like Lufthansa to which the small companies would have to comply. This could result in the weaker partner not being able to work profitably. Brandecker regards it as positive that in a partnership one can benefit from the fact that the other one is well known, from the global booking system and from incentive programs, which offer much encouragement to customers. Gerd Brandecker is overall convinced that there is a future for regional aviation. He will, however, not lose track of things. His motto is, "to grow healthily". "This means that we are either handed another service on a platter, or we will consolidate first".

It remains to be seen what the reality will be like in the new millennium. It is uncertain whether the railway will win ground off the regional air traffic with its high-speed route network, as long as hassle free luggage handling cannot be guaranteed and the railway does not offer more attractive prices.

From page 40 of FLUG REVUE 2/2000