Bucking the trend from the USA, some European majors have been buying their regional affiliates - despite warnings that costs will creep up
As the US majors rush to spin off their regional affiliates, some European carriers have been going in the opposite direction. Air France and British Airways have been at the forefront of this movement, taking 100% control of regional operations and, in large part, consolidating them during the last year or so. Elsewhere, there has been a gradual creep in the same direction, although there are plenty of warnings about the need not to blur the cost differences between regional and mainline carriers.
Lufthansa had planned to take over German regional Eurowings, but confined itself to a 49%stake to soothe competition concerns. Eurowings will remain as a strictly separate entity from the Lufthansa Cityline subsidiary. Elsewhere, SAS has drawn together a sizeable grouping across Scandinavia, while Austrian Airlines has been consolidating its regional holdings.
Iberia, however, has been a seller, achieving a long-term aim of disposing of its regional subsidiaries in the resorts of Gran Canaria and Malaga, neither of which added much to the mainline network centred on Madrid. Binter Canarias was floated this April, while Binter Mediterraneo had already been brought in June 2001 by Air Nostrum, Iberia's fast-growing but independent regional partner.
Just as the Europeans followed the USA in the move towards regional ownership, there are those who wonder if the same might happen again with disposals. "Some US majors are selling their regional partners to try and get a little bit of operational distance," says Jacques Bankir, chief executive of Air France-owned Regional. "I think some European airlines might match them."
Bankir has had first-hand experience of this process. He was at the helm during the emergence of Regional from the merger of Regional Airlines, Flandre Air and Proteus Airlines in 2000. Air France has also taken outright control of two other affiliates, Brit Air and Ireland's CityJet.
Air France says the reasons behind this move include a desire to develop connecting traffic, the ability of regionals to replace Air France aircraft on routes with little traffic, and where Air France does not have suitable aircraft, and the ability of regionals to react quickly to changing market conditions.
Deregulation
Bankir sees the tendency towards ownership of regionals as the "sixth arm" of the European deregulation process, following on from distribution, frequent-flier programmes, yield control, hub development and alliances. "With distribution, Europe was 10-12 years behind the USA. At least with this latest trend, we're only two or three years behind," he says, seeing this as an example of the gathering pace in Europe since liberalisation began more than a decade ago.
The majors acknowledge that there is a danger of diluting the relative cost advantage of the regional if the lines are blurred between it and the mainline operation. However, they believe that the risk can be managed. David Hunt, general manager for UK business at BA, says that this factor was acknowledged early on as it started to merge the regionals over which it has now gained full control. "When we set out on this course, we made sure we were operating on an arms-length basis," he says. Air France is also quick to stress the distinction. "The subsidiary must keep capability for choosing suppliers, reducing costs and optimising its network in co-ordination with the major carrier."
Bankir says the amount of feed into Paris CDG has increased since the Air France take-over, but stresses that Regional Airlines has "full economic responsibility" for its own operations, which are flown on a contract basis for Air France. However, the French major has made clear that it sees the regionals as a strategic tool for the mainline operations, testing new routes and also maintaining an Air France presence in thinner markets.
Bankir says the three carriers making up Regional Airlines had anyway "grown very fast" and "needed consolidation". All had a certain degree of fleet commonality, based around Embraer ERJ-135s and 145s. An option for 170s has been allowed to expire as Regional undertakes what Bankir describes as a "complete review of the 70-100 seat sector". Regional also says that it is considering the 728 regional jet from Fairchild Dornier, despite the manufacturer's much-publicised problems. Any order is dependent on a pick-up in traffic volumes, however.
As is often the case, the merger process proved more complicated than was originally expected, taking a year rather than the planned six months. This, Bankir says, is one of the reasons why Regional "did not do as well as hoped" last year. The other was the attacks of 11 September. As a result, 2001 revenues were down by around 10%.
Merged groupings
The merger saw a consolidation of the operations, with a single management team based in Nantes. Regional struck an agreement with the unions that there should be no compulsory redundancies, although 100 of the 1,600 or so employees decided to leave rather than relocate. Maintenance is now centred in Clermont-Ferrand, with production facilities at Lille and St Etienne - two former bases of merger partner Flandre Air. "Little by little, we are trying to put some order into the fleet and network," Banqir says.
At BA, David Hunt says taking control of regionals "is all about reducing fragmentation". Two years ago BA began the process by acquiring its original franchise partner CityFlyer Express which has since effectively merged into BA's mainline operations at London Gatwick. Its former fleet, mainly based on the Avro RJ, is now moving over to the new merged regional grouping.
A year ago, BA then acquired the British Regional Air Lines Group, which includes Manx Airlines. BA already owned Brymon, now a regional jet operator based in England's West Country, as well as the British Airways Regional operations centred on Manchester and Birmingham. From this April, all these carriers ceased to exist as separate entities and were officially merged as British Airways CitiExpress. There is now a single management team headquartered at Manchester and independent carrier names will be phased out.
Hunt makes it clear that the main drive behind this process has been a desire to simplify operations, and that he has a clear mandate from BA chief executive Rod Eddington. Hunt is about to embark on his own "future size and shape" review, mirroring that of the mainline parent. That strategic review helped to switch mainline focus more to direct services than hub feed, which Hunt admits is partly due to the scarcity of slots at the London Heathrow hub. However, he adds that there are still significant opportunities to feed, including service into secondary hubs such as from Scotland into Birmingham and Manchester. He adds that the ERJ-145, of which BA CitiExpress has 29, is also "ideal" for hub by-pass operations.
BA has more experience than most at competing with low-fare carriers. "We exist, without a shadow of a doubt, in the most competitive market in Europe," Hunt says. In response, BA has increased ticketing flexibility and slashed prices on some key UK routes.
However, Hunt says BA is keen to continue to differentiate itself from. "We're competing intelligently, but making sure we offer something different to our customers." He says the low-cost boom has hit volumes rather than yield. Air France may not yet have had to deal with the same low-cost presence, but it has long competed with France's TGV high-speed train network.
The low-cost/high-speed train challenge adds to what is already a tough climate for the European regional industry business. Achieving decent returns, or even making a profit, is undoubtedly difficult. If Bankir is right, and Europe is up to three years behind the USA, it will be interesting to see whether Air France and BA still have the same regional ownership strategy five years hence.
Source: Airline Business
