The resurgence of regional airlines continues, largely through a growing re-alignment with major carriers and a shift towards new jet aircraft. But airspace congestion, tougher environmental legislation and the threat of taxation could have a negative effect on demand in the next few years.
The Airline Business passenger ranking of the world's top 100 regional airlines again paints a positive picture, with double digit growth rates being maintained in Europe and the USA, outstripping by some distance those of their larger and more illustrious contemporaries. But one of the more significant aspects of the list is the fact that all but a handful of the top 100 airlines are affiliated, through equity involvement, franchising or important codeshares, with major airlines.
As a result, they are linked into the burgeoning global alliances that are rapidly changing the industry (see page 59). This, with the accelerating integration of regional jets into the fleets, is defining the shape of the market.
Fast alliance building
Alliance-building in Europe has come late but in the past five years has proceeded at such a frantic pace that few prime regional routes are now operated independently and the numbers continue to dwindle. Smaller operations, once dubbed as commuter or third-level, are being drawn into the net as major carriers perceive additional possibilities of feed into mainline routes. Among regionals, too, a modicum of consolidation is beginning to happen. This, says Mike Ambrose, director general of the European Regions Airline Association (ERA), could accelerate as it will become increasingly more difficult to disregard the potential benefits.
Carsten Spohr, Lufthansa's manager for regional partnerships, has no doubt about the reasons for this development, which, he says, can be found in a fundamental realignment of the airline industry. "The market is changing from competition between airlines to competition between alliances," Spohr says. "It is this which has promoted a strong tendency among regionals to orient themselves with major alliance groupings."
Performance progress of the principal regionals over the past five years indicates that this strategy, with the backing of a well-established global brand, has enhanced their recognition and standing in the marketplace. The top performers in Europe and the USA, all tied in to a major, have more than doubled revenues and passenger carryings in that period.
While franchises without equity involvement were initially the preferred partnership arrangements, majors in Europe and the USA have taken steps to guard against expressions of independence by their regional relatives. In what has often been a fundamental change of policy, several European majors have recently opted to buy into their principal regional partners as a sure way of safeguarding valuable feed and slots, taking their lead from North American counterparts such as American Airlines, Continental, Delta and Air Canada.
An example is the acquisition last October by British Airways of franchise partner CityFlyer Express, securing an invaluable 14% of scarce slots at London Gatwick Airport. Lufthansa's purchase of a 26% stake in Italian regional Air Dolomiti was also a defensive measure to ensure a continued feed into its Munich hub from northern Italy, while Swissair's financial investment in French regional Air Littoral provided improved access to the European Union market.
Loose partnerships
Where partnerships are more loosely defined, such as through limited codeshares or specific route agreements, regional airlines have successfully allied themselves to several partners. Germany's Eurowings has found its relationships with Air France, KLM and Alitalia particularly rewarding. But as global alliances tighten their grip and brand loyalty becomes increasingly important, how much longer such mixed relationships can be allowed to continue is unclear. Spohr believes that a clean-up of regional partnerships is inevitable in Europe, while Deborah McElroy, president of the US Regional Airline Association (RAA) sees no such conflicts in the USA, where relationships are far more widespread.
"Where it makes sense, and there is no direct competition which could affect financial performance, this will be fine," she says. Increased contract flying for majors, she adds, is one of the more recent changes in what has always been a cyclical industry.
One could speculate that some of these regional airlines, which are now household names, would have found it an uphill struggle to build a sustainable market independently, often in a competitive environment with the airlines with which they now co-operate. But ERA's Ambrose is more positive. He believes equally strong factors in the sharp growth of traffic in recent years are liberalisation, development of secondary hubs and the availability of more economic and faster regional aircraft that are as comfortable as big jets.
Jim French, chief executive of Jersey European Airways, disagrees that a link with a major is an essential ingredient to regional success. Although one-fifth of its business comes from a franchise agreement with Air France, he values the other 80% of independent operations that he says gives the airline the freedom to control its own destiny and follow an opportunistic path as markets emerge and develop. Only time will tell how long regionals such as Jersey European can enjoy their independence as hard economic realities begin to bite and majors start to put a brake on regional airline ambitions to encroach on their traditional territory.
Jets dominate
Nick Godwin, sales and marketing manager for BAE Systems Regional Aircraft, is convinced of the inexorable advance of the smaller jet. "Every route in Europe supporting fewer than 100 seats will in the future be flown by regional jets and regional airlines," he says. As BAE manufactures regional jets, his view may be biased, but recent trends suggest this prediction will largely come true. In particular, labour issues over flying larger regional jets have had little influence in Europe and the availability of economical 30-seat jets is moving the jet into a market sector previously considered the unchallengeable domain of turboprops.
Over the past two years, jets have outscored turboprops by a ratio of four to one, in terms of orders, confirming the intention of several regional airlines to move towards an all-jet fleet within three years.
At the beginning of the year, jet aircraft accounted for nearly half of regional fleets in Europe and over 20% of those in the USA. By the end of the year, this balance will have swung in favour of jets. Most airlines agree there will still be a place for turboprops in the foreseeable future, especially in the developing economies, but it is significant that among regional airlines allied to major airline groupings, jet aircraft account for well over half the total. When all jets on order have been delivered, accompanied by the concurrent phasing out of turboprops, at least three-quarters of these fleets will be jet-powered.
The 50-seat jet has scored heavily in the USA, where orders for around 400 aircraft have been logged over the past two years. The potentially massive contract for up to 500 Bombardier Regional Jets by Delta Air Lines for its Delta Connection partners (see page 77) and a similar deal by Continental Airlines for the Embraer RJ-145 raises another issue: that of the influence being exerted by the majors on the fleet composition of their regional associates.
Where the regional is owned, such unilateral decisions are understandable, make economic sense and ensure the "seamless" transfer so favoured by the brand managers. But if extended to the more loosely tied arrangement, it opens the debate about "big brother" tactics and would make the regionals mere adjuncts to a larger, dominant partner.
| Top 100 traffic highlights | |||
|
| 1999 | 1998 | Change |
| Total passengers (million) | 174.1 | 156.8 | 11.0% |
| Traffic (RPK billion) | 63.6 | 55.0 | 15.6% |
| Capacity (ASK billion) | 107.0 | 96.2 | 11.2% |
| Load Factor | 59.5% | 57.5% | 2.3 pts |
| Fleet | 2,810 | 2,560 | +250 |
Jet impact
The 30-seat jet category, the Fairchild 328JET and the Embraer RJ-135 are beginning to make an impact on both sides of the Atlantic, relegating small turboprops to a secondhand market and effectively spelling the end of new sales. No 30-seat turboprop is being produced and the only 19-seat aircraft now built, in small numbers, are the Raytheon Beech 1900D and Fairchild Metro 23 airliners, BAE, once a volume producer, delivered its final 29-seat Jetstream 41 at the start of last year. With the average fleet size in the USA now up to 36 seats and nearly twice that in Europe, the future for anything with fewer than 35 seats looks bleak.
But the real battle will be fought in the 70-120-seat category, although the case for the larger regional jet is less clear cut in the USA, where progress has been slow and tortuous on the issue of scope clauses enshrined in pilot labour contracts. All the major US carriers, with few exceptions, have been forced to limit the size and number of aircraft in the fleets of their regional associates. Industry analysts believe that this restrictive situation will take years to resolve and no substantial advances are expected within the next five years. Where this leaves the plethora of 70-120-seat regional jets (see table on page 56) now being offered is difficult to predict.
BAE Systems, which, on 21 March, launched its RJX development of the BAe 146/Avro RJ series of four-engined regional jets with a capacity from 70 to 120 seats, forecasts a requirement of 120 aircraft a year in that category. But, warns Godwin, if the continuing effect of US pilot scope clauses is taken into account, this figure reduces dramatically to just 35 aircraft. This slackened demand would clearly not be enough to sustain all the aircraft programmes flooding the market, even assuming that the double-digit growth in the regional market continues unabated. Yet manufacturers appear convinced of the viability of this market, perhaps keeping a nervous eye on the US pilots, and hoping that the regional market in other parts of the world, particularly in Asia-Pacific and Africa, comes to life.
But the sky of the future is clouded with other uncertainties. In Europe and the USA, the greatest threat to the continued growth in the air transport market as a whole, not just the regional sector, is airspace congestion, which has led to increasing flight delays that are increasingly being viewed as unacceptable on both continents.
"With growing jet fleets, we need to ensure that air traffic control will allow our members to realise the full potential of their developing operations," says the RAA's Deborah McElroy. But, while technological developments to ease the logjam grind their slow way through bureaucracies and national politics governments are giving serious consideration to using taxation as a means to constrain demand artificially.
In concert with a reluctance to build new infrastructure such as runways, particularly in Europe, these measures would have a devastating effect on traffic growth and could engineer a downward spiral towards stagnation.
Already, the cost of fuel over the past year has had a hard tough impact on the regional market. One airline says "the first five passengers out of the door are paying for fuel increases". Also referring to the fuel price situation and its effect on demand, David Swierenga, chief economist of the US Air Transport Association (ATA), has been quoted as saying that "the reduction of one or two passengers per flight can spell the difference between profit and loss".
A recent decision by oil producers association OPEC to only marginally increase production has brought a little relief and will ensure that prices stay at the present levels but environmental concerns about noise and emissions are waiting in the wings.
| 1999 performance comparison | ||||
|
| Europe | change | USA | Change |
| Number of airlines | 78 | na | 93 | -8.8% |
| Passengers carried (million) | 68.0 | 10.0% | 72.4 | +12.0% |
| Revenue passenger kilometres (RPK billion) | 38.3 | 8.8% | 30.3 | +19.7% |
| Available seat kilometres (ASK billion) | 65.3 | 9.7% | 52.6 | 14.8% |
| Passenger Load factor (%) | 56.2 | -1.1pts | 57.6 | 1.1 points |
| Fleet size | 1,130 | na | 2,237 | 5.7% |
| Average seating capacity | 67 | 5% | 36 | 8.4% |
| Sector distance (km) | 519 | 2% | 419 | 6.9% |
| Sector time | 1h 15min | 4 min | na | na |
| Flight hours (million) | 2.52 | na | 3.7 | +3.6% |
| Source: ERA, US Department of Transportation, FAA | ||||
Still going up
For now, growth continues apace. Overall statistics provided by ERA in Europe make impressive reading. In 1999, its 78 airline members carried 68 million passengers, a growth of 10% over 1998, with a fleet of which 48% aircraft are now jet-powered. The average seating capacity has increased by five seats to 67 seats, while sector length of 1h 15min, or 519km (280nm), has remained relatively static. This, however, is likely to start moving up again, as jets overtake turboprops in the European regional fleets.
A rise in capacity has led to a drop in the load factor. ERA's director of air transport policy, Andrew Clarke, estimates that in total there are 180 smaller scheduled airlines in Europe, carrying 100 million passengers a year, and connecting 1,100 city pairs. Business traffic accounts for around 60% of the total traffic, with 35% connecting on to other flights.
Figures from the US Federal Aviation Administration Aerospace Forecast gives a very similar picture in the USA, where 93 regional/commuter airlines (down from 102 in 1998) carried 72.4 million passengers in 1999, an increase of 12%. Passenger load factor was a point up at 57.6%. The average trip length was 419km, less than in Europe, which can be explained in part by slower and smaller size of aircraft, which had an average of 36 seats. The FAA forecasts that this will rise to more than 44 seats over the next 10 years.
The US industry again posted solid financial results. Operating revenues increased by 9.3% to just over $7 billion. With a smaller increase in expenses, operating profit came to $696 million, 15.5% higher than in 1998. Passenger yields were 3.8% lower than the year before, but were two-and-a-half times higher than those of larger air carriers.
The penchant for franchising and regional partnerships in Europe and North America has only been mirrored in Australia, (with Ansett and Qantas feeder shares), New Zealand (under Air New Zealand Link) and Taiwan. To a much more limited extent, Japanese, Brazilian, Argentinian, Mexican and South African airlines have also embraced the concept, but that is as far as it goes. The fact that only 10 airlines from outside the two power blocs make it into the Top 50, clearly indicates the scant progress made in the rest of the world. But taking a positive view, it also indicates the considerable scope that still exists, particularly in the Asia-Pacific region, now that the battered economies are recovering.
The Chinese market remains largely limited to trunk routes, until the country opens up more of the interior and makes air travel affordable to rural populations. It will happen in time, but there, as in many other nations in the region, protectionist government policies favouring the flag carriers prevent the growth of true regional services. This is particularly notable in the Arab world, where the establishment of a regional network with aircraft with fewer than 100 seats has been under discussions for years, but agreement between the states, even within the members of the Gulf Co-operation Council (GCC), is as far away as ever. Small individual steps have been taken in Jordan, Morocco and Tunisia, but all exist only on crumbs fed by the flag carriers, rather than being in a position of taking decisive steps to establish and then grow the market.
| Regional jet aircraft orders/deliveries -1999 | ||||||||
| 1999 | 1998 | |||||||
| Group/type | Seats | Deliveries | Orders | Cancellations | Net orders | Backlog | Deliveries | Orders |
| BAE SYSTEMS |
| |||||||
| BRJ85 | 85 | 11 | 1 | -1 | 0 | 7 | 10 | 0 |
| RJ100 | 100 | 12 | 7 | -5 | 2 | 3 | 10 | 10 |
| Total |
| 23 | 8 | -6 | 2 | 10 | 20 | 10 |
| Bombardier |
| |||||||
| CRJ-100/200 | 50 | 82 | 172 | -2 | 170 | 253 | 75 | 123 |
| CRJ-700 | 70 | 0 | 3 | 0 | 3 | 99 | 0 | 69 |
| Total |
| 82 | 175 | -2 | 173 | 352 | 75 | 192 |
| Embraer |
| |||||||
| RJ-135 | 37 | 16 | 6 | -3 | 3 | 121 | 0 | 126 |
| RJ-145 | 50 | 81 | 102 | -4 | 98 | 155 | 60 | 86 |
| RJ-170 | 70 | 0 | 30 | 0 | 30 | 30 | - | - |
| RJ-190 | 100+ | 0 | 30 | 0 | 30 | 30 | - | - |
| Total |
| 97 | 168 | -7 | 161 | 336 | 60 | 212 |
| Frairchild |
| |||||||
| 328JET | 33 | 15 | 78 | -6 | 72 | 82 | 0 | 27 |
| 428JET | 44 | 0 | 40 | 0 | 40 | 40 | - | - |
| 728JET* | 70 | 0 | 60 | 0 | 60 | 60 | - | - |
| Total |
| 15 | 178 | -6 | 172 | 182 | 0 | 27 |
| TOTAL JETS |
| 217 | 529 | -21 | 508 | 880 | 155 | 441 |
| NOTE: *728JET total excludes orders for 29x Envoy corporate versions. | ||||||||
| Turboprop aircraft orders/deliveries -1999 | ||||||||
| 1999 | 1998 | |||||||
| Group/type | Seats | Deliveries | Orders | Cancellations | Net orders | Backlog | Deliveries | Orders |
| ATR |
| |||||||
| ATR 42 | 50 | 12 | 14 | -1 | 13 | 6 | 10 | 4 |
| ATR 72 | 74 | 23 | 16 | -1 | 15 | 14 | 21 | 17 |
| Total |
| 35 | 30 | -2 | 28 | 20 | 31 | 21 |
| British Aerospace |
| |||||||
| J41 | 30 | 1 | 0 | 0 | 0 | 0 | 3 | 0 |
| ATP | 70 | 0 | 0 | 0 | 0 | 0 | 3 | 4 |
| Total |
| 1 | 0 | 0 | 0 | 0 | 6 | 4 |
| Bombardier |
| |||||||
| Dash 8-100/200 | 37 | 15 | 10 | 0 | 10 | 11 | 14 | 6 |
| Dash 8-300 | 50 | 10 | 16 | +1 | 17 | 12 | 16 | 17 |
| Dash 8-400 | 70 | 0 | 31 | 0 | 31 | 61 | 0 | 2 |
| Total |
| 25 | 57 | +1 | 58 | 84 | 30 | 25 |
| Embraer |
| |||||||
| EMB-120 | 30 | 7 | 0 | -2 | -2 | 0 | 14 | 20 |
| Fairchild/Dornier |
| |||||||
| Metro | 19 | 2 | 4 | 5 | 9 | 8 | 0 | 11 |
| 228 | 19 | 1 | 0 | -2 | -2 | 1 | 2 | 2 |
| 328 | 33 | 7 | 2 | -9 | -7 | 2 | 13 | 12 |
| Total |
| 10 | 6 | -6 | 0 | 11 | 15 | 25 |
| Raytheon |
| |||||||
| Beech 1900 | 19 | 36 | 19 | 0 | 19 | 31 | 45 | 28 |
| Saab |
| |||||||
| 340B+ | 37 | 3 | 0 | 0 | 0 | 0 | 24 | 0 |
| 2000 | 50 | 4 | 0 | 0 | 0 | 0 | 10 | 2 |
| Total |
| 7 | 0 | 0 | 0 | 0 | 34 | 2 |
| TOTAL TURBPROPS | 121 | 112 | -9 | 103 | 146 | 175 | 125 | |
|
| ||||||||
| TOTAL ALL REGIONALS | 338 | 641 | -30 | 611 | 1,026 | 330 | 566 | |
| Percentage Jets | 64% | 83% | - | 83% | 86% | 47% | 78% | |
| Notes: Cancellations shown as positive are orders converted from one aircraft type to another where no new order has been placed. British Aerospace changed its name to BAE Systems during the year. Data sourced from Airclaims CASE when no information provided by manufacturer. Source: Manufacturers/Flight International/Airclaims CASE | ||||||||
Government hindrance
India is an interesting example of how governments, in this case frequently changing administrations, hinder the development of air transport. As the world's seventh largest country with a population exceeded only by that of China, the opportunities for a co-ordinated network of regional services feeding into the principal hubs are enormous. Yet, independent second-tier airlines have struggled to survive, and although some feeder airlines have sprung up, these remain small, and the networks disparate.
The five Indian airlines with regional fleets between them carry about less than 100,000 passengers, which together puts them well outside the top 100. Much the same can be said about the Russian Federation and Associated States, where no real progress is expected until a dramatic improvement in the dire economic situation.
Yet, taking into account all these shortcomings and the various elements threatening the continued health of the regional airline market, the industry remains in a buoyant mood. Ironically, the largest market areas of Europe and North America, are also facing the biggest obstacles to future prosperity. While these, such as capacity constraints and environmental considerations will slow down growth, the overall trend remains firmly upwards.
Source: Airline Business
