Europe's regional airline executives could be excused for feeling pleased with themselves as they gathered in Hanover for the annual meeting of the European Regions Airline Association (ERA).
The industry is again heading for double digit growth this year, expanding at around twice the speed of the majors. Load factors are holding steady at record levels and aircraft orders stand at a high of over 600.
Financial returns are also beginning to look more healthy for a sector unusually exposed to the rollercoaster ride of the airline cycle. And a series of high profile stock-market listings among both long-standing regionals and the new breed of low-cost start-ups has only helped to underline a sense that the industry is coming of age.
But the industry presidents and chief executives, meeting at ERA's general assembly in September, also face some tough question over where they plan to go from here. Should they remain independent or throw in their lot with one of the majors?
Forcing their hand is the global reshaping of the industry and an increasingly competitive European marketplace. Regionals continue to report increasing pressure on yields. Not only is there competition between each other and from the low-cost start-ups, but they are also coming up against some major carriers as they take on bigger jet-powered aircraft and move onto ever denser, longer routes.
Larger jet aircraft bring with them higher operating costs and airport charges. This increase only requires cost savings to be found elsewhere. The presence at the ERA annual gathering of the chairmen of both Debonair and easyJet bore witness to a preoccupation with containing costs. Stelios Haji-Ioannou delivered his budget air travel message to a packed and attentive auditorium. But if the cost message was duly noted, few consider cutting out the frills and even fewer share his enthusiasm for going-it-alone.
Instead the general drift among Europe's regional airlines is toward increasing cooperation with the major carriers. The benefits are clear enough - helping smaller players to achieve economies of scale in ticketing, ground services and marketing. That in turn keeps down costs. And as regionals ramp up frequencies to attract and keep their core business traffic, the majors are there to provide the additional high yield passengers that the regionals need to fill their growing aircraft seat capacity.
This suits Europe's major's fine. They want to farm out to lower cost operators as much of their short-haul network as their pilots will let them get away with. Swissair already contracts out short-haul services requiring aircraft of 100 seats or less to its subsidiary Crossair, and shows every intention of continuing down this path. BA aims to contract out all routes requiring aircraft with less than 120 seats. Even Air France, which wants to dispose of services requiring aircraft below 100 seats, and Lufthansa, which aims to contract out flights serviced by 80-seaters, are going in the same direction.
Regional airlines with strong ties to Europe's flag carriers -Êeither as regional subsidiaries, franchisees or codeshare partners - tend to be leading industry growth. Although the largest regional carriers are on the whole subsidiaries of the majors they feed, the industry is flush with rising stars resulting from arms length major-regional airline cooperation.
German regional airline Augsburg Airways, for example, began operating under the German flag carrier's regional brand, Team Lufthansa, two years ago, and since then passenger traffic has more than trebled to a projected half million for 1998. Azzurra Air's business has likewise benefited from its ties to Alitalia. Since the inking of its franchise agreement late last year the Bergamo-based airline's traffic has boomed, growing 73,000 in the second quarter of this year to a projected 252,000 passengers for the full year. Jersey European Airways' 50%-plus rise in pre-tax profits in the year to March was driven by its franchise with Air France.
For regionals committing themselves wholeheartedly to one carrier, growth has been spectacular. The experience of London Gatwick-based GB Airways is typical. As a BA franchise partner the carrier doubled its traffic to over 800,000 in the year to April, with the addition of Malaga, Faro and Porto to its BA routes. It is just one of the booming BA franchise club which includes founder members such as CityFlyer Express and British Regional Airlines, as well as those further afield such as Sun-Air of Scandinavia.
KLM's franchisees KLM uk and KLM exel are also growing strongly. Maastricht-based Air exel Commuter, like KLM subisidary Air UK before it, gave up its own brand for the Dutch carrier's colours at the beginning of the year. Unlike the now wholly-owned KLM uk, however, the renamed KLM Exel remains independent. Financial director Robert Gibbs is confident that this was the right move for the airline and that, in what he describes as a "30 to 50-seater niche", the new brand is bringing in "a lot of work".
But many regional carriers are reluctant to lose their independence, preferring to keep their own brand on routes where it commands customer loyalty and juggling a number of alliances with majors carriers.
Eurowings, Europe's largest "independent" regional carrier with a projected traffic total of three million by year end, has codeshare/block seat arrangements with KLM, Air France and Alitalia. According to director of marketing and sales, Karl-Friedrich Müller, there is no reason for Eurowings to confine itself to one or the other of the major carriers, or to abandon its brand. To redress the predominance of its partner KLM, Müller is keen to increase business with the French carrier, and the only thing stopping him doing so is capacity constraints at Air France's hub at Paris Charles de Gaulle. With the opening of the Malpensa hub, he is also planning "larger scale" cooperation with Alitalia, which commenced with a Stuttgart-Venice codeshare earlier this year. "Just look at Air Excel. Its cooperation agreement with KLM limits its catchment area. It develops the brand of the larger carrier," says Müller.
Newcastle-based Gill Airways is also expanding rapidly on the basis of its Air France franchise started in October 1997. However, it does not want to become dependent. It counterbalances this with links to KLM uk. Patrick Byrne, the chief executive of another Air France franchisee, City Jet, wants his Dublin-based operation to retain a balance between its own work and franchise business.
This year two thirds of the traffic of Augsburg, will be under the Lufthansa flightcode compared with just half last year. But operating under its own brand is more profitable, says Claus Fischer, vice president of marketing and sales. "We are not keen on doing a full franchise," he says. Dominic Attard, Azzurra's managing director and chief executive officer talks of the need to strike a "balance between franchise and non-franchise" work.
It is difficult to find a single significant regional airline without some kind of link to a major. Cooperation with Europe's flag carriers has 'increased quite dramatically' over the last few years, comments an ERA spokesman. Yet, he adds, 'most regionals have already taken advantage' of cooperation with majors and there is likely to be less of this in the future. What regionals will be increasingly be doing, says the spokesman, is linking up amongst themselves.
By working together in air services, marketing, maintenance and ground services, regionals will be better able to resist the pressures to become the faceless providers of low cost capacity to majors.
In September, Regional Airlines of France began a codeshare relationship with Love Air of the UK on routes across the English Channel. Two months earlier Debonair, which late last year announced a codeshare with Azzurra, also began codesharing with AB Airlines between London Gatwick and Lisbon, and between Berlin and London Luton and Nice.
Franco Mancassola, chairman of Azzurra partner Debonair, plans to multiply codeshares with regional carriers across Europe. He is also keeping his eyes open for acquisition or merger possibilities in the European regional sector. But, he adds, "... even at arms length there is room for a great improvement of efficiency." He points out that by using the AB Airlines infrastructure at Gatwick Debonair is now more "cost efficient".
The chairman of the Luton-based carrier brought together 14 regional airlines in July to discuss the formation of a pan-European joint frequent flyer programme (FFP) slated at the time for launch in March next year. At the ERA conference this September he distributed a questionnaire to canvas the views of airline delegates, although by then he seemed less optimistic about an early launch. "The nature of the market and the course of events leave regional airlines with few choices but it shouldn't be that way," bemoans Mancassola, warning regionals against becoming the "lap dog" of the majors.
Lap dogs or not, regional airlines are sceptical about an FFPexcluding majors. Azzurra, for example, takes part in both Alitalia's FFP and the Qualiflyer FFP through its codeshares with Swissair's European alliance partner Air One, and hints that he wouldn't want to give it up. "FFP [among small regional airlines] are a good idea. The problem is that once small carriers have linked up with the FFPs of larger carriers they find that they have significant advantages that smaller carrier cannot reproduce," says Attard.
Regional airlines are also facing pressure to align themselves with one of the global alliances. Air Littoral of France, which Swissair agreed to buy in September, will soon join the collection of regional carrier's belonging to the Swiss carrier's European Qualiflyer Group - Crossair, DAT, Tyrolean, Lauda Air. The Star Alliance may make a decision on creating a 'third tier' of regional feeders this October. BA's chief executive Bob Ayling has said he will bring BA franchisees into the oneworld global alliance, and many of them say they look forward to the extra business generated from giving and receiving additional feed from the alliance members.
Those regional airlines that protest their independence are already tending towards building links with their major airline partner's global alliance partner. Eurowings and Gill Airways, for example, are working in Europe with both KLM and Alitalia, as well as Air France: the three major European carrier's associated with the projected Wings global alliance, while Eurowings already operates under a Northwest flightcode.
Others too are keen to position themselves. Portuguese regional carrier PGA Portugalia, which plans to bring in a strategic equity-owning partner, is looking for an airline within one of the major alliances.
For those carriers which have not yet sought out partnerships with other regionals, signed up to a major global alliance franchise or both, life in the future looks like getting a little lonely.
Source: Airline Business
