COLIN BAKER IN INTERLAKEN This year's European Regions Airline Association (ERA) conference took place against a backdrop of concern over rising fuel and currency costs

The Swiss alpine scenery of Interlaken provided a dramatic setting for this year's annual assembly of the European Region's Airline Association (ERA). Gazing at the peaks which overlook this mountain resort, regional airline presidents could perhaps forget for a while at least the more hostile environment in which their own sector now finds itself.

There is little doubt that the twin evils of a strong US dollar and high fuel prices have hit the European regionals hard. Olaf Dlugi, managing director of Germany's Augsburg Airways, echoed the thoughts of many when he simply stated that "regionals are being squeezed". Not surprisingly, those carriers that have not traditionally hedged against the dollar and/or fuel price rises seemed ready to do so. Less easy to offset are the fears that continue to circulate in the industry about the likely impact of pending European decisions on airport slot allocation, navigation charges and environmental policy. Regionals clearly worry that they are in the firing line.

Despite the grim financial outlook, a sampling of the ERA members shows that more than half of the carriers were still showing operating profits in the first half of 2000 - although a year ago the figure was closer to two-thirds. There were also indications that the second quarter had been better than the first. This was in large part due to the usual seasonal upturn, but some of the improvement came from actions to raise fares in light of soaring fuel costs.

So, despite the relaxing setting, there were some anxious faces around. In addition to the customary angst about the latest noise coming out of Brussels, airline presidents, many with a personal stake in their airlines, were also left wondering whether there is still room for independent players given the harsh realities of running a European regional.

Less than a week before the meeting, Eurowings had said that Lufthansa planned to take a 24.9% stake in the airline. The feeling in Interlaken was that this would rise to nearer 50%, barring any block from competition regulators.

A further power shift in favour of the flag carrier is also taking place in France. Jean Paul Dubreuil announced that he was to step down as president of Regional Airlines following the announcement by Air France that it plans to increase its stake in the Nantes-based carrier from 70% to 100% by the end of the year. Air France is also taking full control of franchise partner Brit Air.

With the likes of Air France, Lufthansa and SAir bringing partner airlines more tightly into the fold, it was hardly surprisingly that the relationship between the majors and regionals came in for some close scrutiny. The prevailing feeling was that moving closer to the majors was becoming almost inevitable.

That said, more than one airline head was heard to warn of the dangers of ceding too much control to the majors. Such a warning came from Jan Palmer, chief executive officer at Skyways of Sweden - an SAS partner and winner of the ERA Airline of the Year award. He warned that if a major becomes too dominant then costs will not stay low.

To his credit, SAS president Jan Stenberg was conspicuous as one of the few representatives from the majors who had made it to Interlaken - although this may have been due to the fact that there were eight SAS partner or part-owned airlines at the event. Speaking in a room packed with hundreds of regional airline executives, he attempted to soothe their fears, conceding "the danger of giving up too much control".

Palmer, acknowledging Stenberg's reassurances, said that the problem lies less with boardroom strategy and more at the level of junior management. They "want control" of the smaller airlines, he warned, arguing that creeping control from the majors also means that "the costs creep onto you" as well.

While they may have been worried of ceding too much control to the majors, the regionals seemed relatively sanguine about any threat from the low-cost sector. Andre Auer, former president of the European Civil Aviation Conference (ECAC) felt that the regionals had "lessons to learn" from the low-fares experience. Many, however, felt that the fact that the low-cost carriers carried out a different job - "squeezing 150 people into a 120-seater aircraft" as one airline president put it - would spare them from the threat of direct competition.

European concerns

Elsewhere at the conference, Brussels was high on the agenda. Eurocontrol's latest proposals on air traffic control (ATC) charges did not go down at all well - hardly surprising given the suggestion that weight should no longer be a criterion. ERA estimates that this will mean an average cost increase of 83% for operators of aircraft up to an Airbus A320. Some airlines were estimating up to 150%. Also on the ATC side, ERA members emphasised the need for a single entity to control Europe's skies. On this issue at least, regionals are at one with Europe's Transport Commissioner Loyola de Palacio.

The same could not be said for the idea being floated in some quarters of Brussels that larger aircraft should be favoured over small when it comes to allocation of slots. This idea, ironically aimed at tackling congestion, was widely seen as discriminating against secondary airports - and the airlines that use them. Barry Eccelston, executive vice president of Fairchild Dornier warned that such a concept could stifle economic growth in regions with smaller airports that are served by regional jets.

Despite the challenges facing regional airlines, the mood was far from despondent. The burgeoning popularity of the regional jet was very much evident. Although there were a few concerns expressed that the rate of investment in regional jets was putting some carriers under strain, given the tough business climate, most carriers believe that the economic argument is undeniable.

A typical case was Rheintalflug, a member of Team Lufthansa based in western Austria. The airline, which is moving from turboprops towards an all-regional jet fleet, says that it finds the operating cost differential between a turboprop and a regional jet to be negligible, while passenger numbers have shot up. "Passengers avoiding turboprops is a reality," says Renate Moser, public affairs manager for Rheintalflug.

The airline has seen a 33% increase in passenger numbers since it introduced Embraer ERJ-145s on its St Gallen/ Altenrhein-Vienna route. "The statistics say that operating a jet brings airlines at least a 10%-plus increase in passengers," says Moser. "We never expected such a tremendous success as we have had on the St Gallen-Vienna route."

A number of airlines at the event commented that they only needed three-or-four more passengers per flight for regional jets to become the more attractive option.

Not surprisingly perhaps, the regional jet manufacturers were in a buoyant mood. Eccleston predicts: "The combination of route structures, distances, limited scope clauses, and the need for lighter-weight aircraft makes the European market receptive to the 70-to 110-seat aircraft under development."

The turboprops were far from giving in to their jet engine rivals. At a mountaintop dinner hosted by ATR, the Franco-Italian turboprop manufacturer, the company reported that business was at least holding up, if not increasing. Characteristic fighting talk came from Antwerp-based VLM's technical director Piet Wouters, who said: "There will always be a place for turboprops."

As is well known, however, ATR is interested in a link-up (possibly a joint marketing agreement) with Embraer. ATR officials were full of admiration for the Brazilian manufacturer. Embraer president Mauricio Botelho admitted that "there were lots of synergies" between the two companies, but emphasised that "so far, there is no agreement."

Look back in anger

It is now 20 years since the ERA was founded with five members, and the organisation's director general, Mike Ambrose, took the opportunity to look at how much progress had been achieved on key issues during this time.

"Twenty years ago there was a vision of a Europe without internal borders," he said, noting that while market access is vastly improved, ATC remains a major drawback.

Freedom of market access and consumer choice got seven out of ten, with lack of capacity at major hubs keeping the score down. The issue of unfair competition was given five out of ten due to continued rail and road subsidies. Several airlines at the assembly complained about subsidies to the rail industry in particular. European regulation was given a slightly better six out of ten, held back by poor performance from the JAA (joint aviation authorities).

Top of the class were regional aircraft, but Ambrose was careful only to give them nine out of ten for fear of reducing their bargaining position.

Source: Airline Business