Even though it has taken almost five years to get a deal over the line, the coming together of European regional carriers Air Nostrum and CityJet still has a compelling rationale, in the view of the Spanish carrier’s chief executive Carlos Bertomeu.
Speaking to FlightGlobal, the long-serving airline chief – who will also serve as chief executive of the newly created Strategic Alliance of Regional Airlines (SARA) – explains his conviction that even at the height of the Covid-19 crisis, which forced the partners to pause their tie-up plans, consolidation loomed large when he considered the future of Europe’s regional airline sector.
“My strong point of view is that… when a sector starts the consolidation process and the rationale that justifies the consolidation process is strong… you as an independent company have three options: whether you are the one that starts the consolidation, or you are prepared to be consolidated… or you are going to be out,” he explains.
“If I can, I prefer to be the one who can start the process in Europe.”
With that consolidation journey beginning in earnest on 17 October through the creation of SARA, Bertomeu insists that the fundamental drivers of the move remain unchanged since Air Nostrum first explored opportunities to partner with Irish carrier CityJet several years ago.
“The idea is to make a strategic [European regional airline] group with common decisions and synergies,” he says.
His conviction that consolidation is strategically important to Air Nostrum comes from three considerations: similar moves among the large airline groups in Europe; the vulnerability of smaller, independent regional carriers – which has been demonstrated recently by the double-collapse of Flybe and challenges at wet-lease providers such as Xfly; and positive evidence provided by the regional airline consolidation that has played out in the USA.
“I am convinced… that the regional sector is going to consolidate,” he states. “And it is going to consolidate because it has happened with the bigger airlines, the [European] majors.
“It has happened in the low-cost sector, where there are two or three big players [in Europe].
“It has already happened in the States, where there are big platforms with different licences, even operating different planes in the same place for different majors.”
Bertomeu’s view is that whatever trends have played out in the past in Europe – such as moves towards big European carriers bringing regional operations in-house, as was the case with Cityline and Lufthansa – Europe’s future is likely to look more like the US model, where regional operators such as SkyWest and Republic Airways dominate the market by providing capacity to the majors.
Air Nostrum is already in that market space in Europe, flying for flag-carrier Iberia, while CityJet undertakes wet-leasing for carriers including SAS, Lufthansa and Brussels Airlines – a client base that the consolidated group would eventually aim to expand.
“Of course, in the States it’s easier because it’s not country-related like in Europe, so there are a few more inefficiencies [in Europe]… but I’m sure this is going to happen,” he says.
By joining forces in SARA, the aim is for Air Nostrum and CityJet’s 74 aircraft – 48 from the Spanish partner and 26 from the Irish one – to be at the forefront of Europe’s journey towards that point in the region’s liberalised air transport market.
“We are the two big independent suppliers of capacity for majors that remain in Europe,” Bertomeu says.
SARA is targetting a fleet in excess of 100 aircraft in the next three years, he adds.
“In the future I think that majors, our clients, will arrive at the conclusion that this is the kind of thing that is better externalised and better with somebody they can trust, with experience, and we deliver that,” Bertomeu says.
But while the rationale for consolidation in Europe’s regional sector is still strong, Bertomeu notes that some important things have changed since the deal was initially announced.
The European Commission first gave its approval for the tie-up in July 2019, the two carriers having announced their intention to join forces at Farnborough air show in 2018.
But the Covid-19 pandemic meant that airlines around the world, including Air Nostrum and CityJet, switched to survival mode.
In CityJet’s case, that meant entering examinership – a process in Irish law under which companies can protect themselves from creditors while they restructure.
Air Nostrum, meanwhile, accrued loan-related debt amounting to €244 million ($257 million), comprising €111 million received through state-owned holding company SEPI, plus €133 million received through state-owned bank Instituto de Credito Oficial. Before it received that support during the Covid-19 crisis, the carrier had no debt.
As a result, Bertomeu says, the deal had to be restructured to reflect the fact that a deeper merger was not possible, and European competition regulators needed to approve it again – as they did in March this year.
It also meant that after European Commission approval was received for the second time, stakeholders also needed to ensure the deal met the conditions attached to Air Nostrum’s state aid and CityJet’s examinership.
Consequently, “no one is buying anyone” under the revised deal, which Bertomeu says the two carriers have been working on for 18 months or so.
“The difference in the context now is that no money from me will go to them, and no money in the opposite way.
“If something happens, we will be there [for each other], but we will not be able to invest money in the other because of the constraints of the level of debt we have.”
The two carriers therefore need to “maintain ourselves” within the context of SARA.
“These are companies that maintain their licences and pay taxes and everything in their own countries, because this is the regulation,” he says.
But despite the revised terms of the deal, Bertomeu firmly restates his belief that it is the right move for the new partners.
“The rationale of starting the consolidation is still there,” he says. “I believe that 100%.”