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Europe's Regional Airlines Soldier On

Posted on: Friday, 4 November 2005, 03:00 CST

By Macrae, Duncan

With fuel bills soaring, carriers are refining their strategies to meet the low cost carrier challenge

Europe's regional airlines continue to battle against a variety of challenges, ranging from sky-high fuel prices to intense competition from low cost carriers (LCC) to what they see as a series of poorly prepared regulatory initiatives on the part of European authorities.

Traffic figures published by the European Regions Airline Association (ERA) for the first five months of the year show negative year-on-year growth in passenger numbers for more than one- third of airlines listed (see table). The picture, however, is one of contrasts, as no less than 19 carriers reported double-digit growth for the period, led by airBaltic, which almost doubled passenger traffic in the period - a clear case of being in the right place at the right time to reap the benefits of EU enlargement. One notable feature is that capacity increases (ASKs) are in many cases outstripping improvements in RPKs, keeping passenger load factors under pressure.

France's Regional is expanding its Embraer fleet with new 190s

Load factor at booming airBaltic, for example, dipped to 50.8% for Jan-May 05, compared with 53.9% for the first half of 2004.

The continuing success of the low cost carriers constitutes one of the major challenges for European regionals. The response to this challenge has in some cases looked something like "If you can't beat them, join them", but with a focus on offering enough of a service premium over the LCCs to justify a few extra euros on the ticket price.

Recent ERA statistics underline the impact of the LCC phenomenon. In 2004, only 23% of passengers paid full fare, compared with 44% just two years previously. Also, for the first time in 2004, as many passengers were visiting friends or relatives as undetaking business trips. Ten years ago, two-thirds of passengers were travelling on business.

These changing trends call for a rethink of traditional business models for regional operations. One example of a new carrier out to shake up the traditional image of the European regional airline is provided by Air Southwest, based in Plymouth, England. One of the UK's youngest regional carriers, Air Southwest operates a fleet of four Dash 8-30Os, serving routes from Plymouth, Newquay and Bristol to London Gatwick, Manchester, Leeds Bradford and Jersey.

CEO Malcolm Naylor explains that the company started operations in October 2003 with a very simple mission statement: "to be safe, reliable and affordable" - accompanied by a keen awareness that, with the regional market becoming increasingly competitive, "the traditional airline model would not work".

Driving down costs

Driving down costs is a key objective, enabling the company to offer fares that it describes as "much lower than has previously been feasible from a 50-seat operator". At the same time though, says Naylor, while ticket price is a key driver, the company has found that in competition with the LCCs, "attention to detail in how we deliver customer service, is often much more important to regular travellers than the possibility of saving a few additional euros". The airline avoids "nice to have" but expensive frills like lounges, through check-in and frequent flyer programmes. Air Southwest also decided from the start to avoid any interlining/code-sharing/ partnership deals, seen as adding complexity with no guarantee of genuine added value. Ticket sales are handled almost exclusively through the company's web site (93%). Despite the fact that the airline does not offer any form of remuneration for travel agents, around 20% of bookings are made on customers' behalf by travel agents via the web site. Naylor explains that pricing policy is based on permanently attractive lead-in prices with good availability rather than special offers and sales. The company sees this as the best way to achieve customer loyalty and sustainable traffic growth.

JANUARY TO MAY GROWTH IN ...

MAY GROWTH IN ...

ERA'S TOP PERFORMING AIRLINES JANUARY TO MAY 2005 (RPK GROWTH, SCHEDULED OPERATIONS)

The company is keen to be seen as something of an innovator, describing itself as having "reinvented the regional airline concept". Among other things it claims to be the first European Regional Airline to introduce all-inclusive fares, eliminating any add-ons for taxes, charges and other supplements. It also says it was among the first to offer a low fare finder on its web site, including seat availability for an entire month. In addition it offers some attractive frills - it boasts that it is the only UK airline offering a facility where customers can order a taxi in- flight, to be waiting for them on arrival at Plymouth or Newquay airport.

The company has undoubtedly come a long way within a short period of time. Its first route, from Southwest England to London Gatwick, had been abandoned by BA Citiexpress in the face of escalating losses. According to Naylor: "A combination of quality customer service, innovative marketing, tight control over costs and an all- inclusive lead-in fare of e40, resulted in market growth of 20% and an average annual load factor of 78%." For its first full financial year, it boasted an impressive profit margin (EBIT/sales) of just over 10%.

If it can keep that up, it will certainly be able to justify its claim to offer "a model for a new regional carrier, fir for the 21st century".

Others, however, might question whether there is such a thing as a model for a European Regional Airline, given the niche markets that many of them serve and the need for each carrier to adapt to the specific characteristic of their particular market - whether it be channeling highvolume feeder flow in large regional jets into the hub airport of a major airline parent, or an independent niche operation offering a business product based on smaller turboprops.

To fend off the LCC challenge, some airlines have been trying to move awav from their historical focus on business traffic, seeking to adapt their fare structure by introducing "leisure-oriented" fares to stimulate traffic on off-peak services. On the whole, however, lower-yield traffic is left to the LCCs, while the regionals focus on what the customer wants, i.e. reliability, frequency and product quality. High service standards, delivered by friendly and efficient crew and ground staff, are the key to success ... provided they are built on a controlled cost base.

As part of the service enhancement effort, some airlines are also focusing on improving the passenger product on the ground, through the introduction of dedicated terminals and "fast-track" security channels. Smaller independent carriers operating outside the major carrier networks have also had some success in moving in to take over "failed" routes, where an initial attempt by a previous airline to develop the route has been unsuccessful. In such cases, a second attempt can clearly capitalise on the earlier experience by introducing right-sized aircraft and then growing frequency. Some carriers have also been successful in introducing direct point-to- point regional services to replace exsting indirect links.

In a sign of optimism for the future, fleet expansion plans are back on the menu at some of the larger regionals. France's Regional has celebrated its improving financial health by finalising a firm order for six Embraer 19Os, plus a further six options, replacing an existing order for seven ERJ 145s. First deliveries of the aircraft, which will feature a single-class 100-seat layout, are scheduled for the first quarter of 2007. Also expanding is Austria's Tyrolean (part of the Austrian Airline group) which saw its ffeet grow by over 30% during 2004 and early 2005 as it added nine Fokker 10Os, three Canadair CRJs and one Dash 8-400 to its fleet.

While soaring fuel prices remain an obvious headache for airlines in Europe and worldwide, recent and ongoing legislative initiatives within Europe are also causing regional airline managers to see red.

ERA director general Mike Ambrose is particularly incensed with recent actions by Europe's politicians. Among his primary concerns:

Eastern Airways reported a 17.1% jump in passengers for the Jan- May period

ERA AIRPORT STATISTICS, JANUARY TO JUNE 2005

* The Commission's announced intention to extend the current emissions trading scheme to include the air transport sector, which he describes as a "particuarly frustrating" move - "Who needs greater incentive to burn less fuel to create less emissions, with prices at $65-70 per barrel?"

Appalling suggestion

* The idea of a tax on airline tickets to fund aid programmes for poor countries, the Overseas Development Aid (ODA) tax. He calls this an "appalling" suggestion, showing a lack of understanding at the highest political levels. He wonders how much of this money would go to the people who actually need it, and suggests that industry could offer much more practical help in the form of expertise, training and even aircraft that are no longer permitted to operate to European cities on noise grounds.

* Rules on passenger compensation and assistance, which he refers to as a "diabolically incompetent" piece of legislation, including the publication of misleading data on the EC's own website, which he says has been only partially corrected. He cites the disruptioncaused by the recent Gate Gourmet strike as an example showing how, because of the new rules, passenger expectations have been inflated way beyond what they are actually entitled to. He is also unhappy about the European Aviation Safety Agency (EASA) which he says is suffering from cashflow problems and is failing to achieve its original objectives because it lacks the necessary resources. According to Ambrose, the agency has failed to establish a mutually satisfactory business model for working with the national authorities, and he shares industry concerns that the agency could be taking over responsibilities in the safety domain before it is fully geared up to do so. He complains that the way in which the initial set of fees and charges was calculated was not satisfactory, failing to take account of advice from the Expert Working Group.

He expresses concern that upcoming rules on reduced-mobility passengers could be headed the same way. Again, he says, the initial intentions are good, but they must not result in an unreasonable burden on the airlines.

On a more positive note, Ambrose says he sees recent signs of improvement at the Commission level, in particular what he calls "a higher level of willingness to adhere to its own principles of good governance". He hopes that this will result in the Commission devoting greater attention to impact assessment when drafting new legislative proposals in the future.

* PASSENGER TRENDS FOR THE FIRST HALF OF 2005 ARE MIXED

REINVENTING THE REGIONAL AIRLINE CONCEPT

FENDING OFF THE LCC CHALLENGE

Copyright Aerospace Media Publishing Autumn 2005

Source: Interavia

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