ANALYSIS: European airlines step up white-label operations

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Flybe Group had some good news to share with the stock market on 11 June, having made a pre-tax profit for the first time in four years in the 12 months ending 31 March and the UK-based regional operator is keen to emphasise the role that white-label contract flying played in that turnaround.

Revenues rose 11% to £868 million ($1.4 billion) in the last fiscal year, driven by "a significant rise in [Flybe's] white-label operations in Finland" through its contract with Finnair.

In 2013/2014, Flybe contracted out 22 fully crewed aircraft to Finnair, which, it says, makes it Europe's biggest independent white-label operator. That contact produced £6.3 million in pre-tax profit.

On top of that, Flybe has an existing contract to provide four crewed Bombardier Q400s for Brussels Airlines. Another aircraft is being deployed on behalf of Aurigny, a deal has just been sealed to provide an Embraer 175 to Helvetic this summer, and the airline says it is in discussions with other operators for more contract flying.

What was once a good money-spinner on the side is "becoming an increasingly important part of the Flybe business model", says chief executive Saad Hammad, who has made white-label one part of his "dual engine" growth plan, along with expansion of UK scheduled business.

And Flybe isn't the only carrier pursuing white-label opportunities.

When Aer Arann rebranded as Stobart Air earlier this year, its stated objective was to "become a specialist in franchise or contract flying for major European airlines" and, soon after, it agreed a deal to operate routes from London Southend on Flybe's behalf.

Julian Carr, Stobart's new managing director, says he wants to maintain the focus on white-label flying, pointing out that it poses far fewer risks than do standalone operations.

When Virgin Atlantic wanted to start a UK regional service to feed into its long-haul network last year, it decided to outsource the job to Aer Lingus, which provides four Airbus A320s under the branding Little Red.

While the UK carrier has been forced to defend Little Red's performance from its detractors, there are no doubts about the benefits for Aer Lingus.

So what are the attractions of white-label operations, and where is the demand coming from? For one thing, it's about trying to minimise risk. The supplier gets a steady income from what might otherwise be an underutilised aircraft and crew, and doesn't need to worry about filling the plane. Buyers of such services can get hold of units quickly and for short periods, without burdening themselves by buying or leasing additional aircraft.

Paul Simmons, Flybe's chief commercial officer, says demand for contract flying is primarily coming from European legacy flag carriers that need to feed traffic from thin routes into their hubs but find it "economically unviable" to operate those services themselves. Instead, they are turning to regional carriers as an alternative.

"The flag carriers typically have historic union arrangements, which means they are not best placed to deliver these kind of services; then there are the costs and other considerations. So we are having these conversations with them," says Simmons, who argues that contract flying comes at relatively little risk to either party.

But could Flybe just be operating these services purely because they have spare capacity, as evidenced by its grounding of 10 aircraft in March? Not so, says Simmons: "Just because you have aircraft on the ground doesn't mean you have to deploy those in a white-label solution, but it is the case that we can run these kinds of operations more efficiently and reliably than the flag carriers."

No doubt contract flying also seems more attractive for Flybe given that other parts of the business are not performing so well. The airline made a loss from Flybe Finland, its joint venture with Finnair.

Peter Morris, chief economist with Flightglobal consultancy Ascend, says the demand for contract flying has been spurred on by higher operational costs, including fuel costs, and by challenging labour relations, making it more attractive to contract out short-haul services to smaller operators.

"It is perhaps an inevitable result of the combination of tough labour relations, particularly in larger network carriers, and the commoditisation of short-haul services. So you have a willing buyer Virgin Atlantic for Little Red and a willing seller: Aer Lingus, with a lower cost structure, appropriate fleet and a fixed-price contract. It reduces risk for both of them. It just adds flexibility to airlines' options on both sides," says Morris.

"Higher fuel costs have made regional services (particularly with small aircraft) much less economic and airlines are desperate for any way to maintain services. This is one of the options provided the contractor can achieve the target cost."

Morris warns that airlines either as buyer or seller should not stake too much on white-label operations, cautioning that the long-term viability of such arrangements is questionable.

"Maybe this business model needs to gain critical mass to achieve major cost savings, but it is difficult to see the majors wanting to contract out large proportions of their service to third-party suppliers," says Morris. "In the case of British Airways and Lufthansa, the strategy seems to be using an internal supplier, with Vueling or Germanwings respectively, to achieve this same impact."