When it was acquired along with parent CityJet by turnaround specialist Intro Aviation in April 2014, VLM's plan was to double its business by concentrating on wet-lease and charter operations.

Just over six months later, the Belgian turboprop operator's managing director Arthur White became the majority shareholder through a management buyout. Instead of concentrating on wet-lease and charter operations, he has decided to diversify VLM's business by building up a scheduled route network.

"The ACMI market got considerably smaller and more competitive over the last year," White tells Flightglobal, though he notes that business with charter customers – typically tour operators and corporate clients – is "booming in the 50-seat sector".

Allocating sufficient capacity for ACMI operations is a challenge, says White. Under an ACMI arrangement, the provider supplies the aircraft and crew while ensuring maintenance and insurance requirements – or a combination from these four ingredients – but the customer carries the commercial risk in the area of ticket sales.

Flightglobal's Ascend Fleets database shows that VLM has eight Fokker 50 turboprops in service, plus one in storage, and earlier this year the carrier assigned three to ACMI operations.

It is not the only European wet-lease carrier diversifying its businesses in a bid to protect itself from market fluctuations and increased competition.

Denim Air, for example, is in predicament similar to VLM's. The market for the Dutch wet-lease specialist's regional aircraft is "drastically" declining, chief executive Ronald Janssen tells Flightglobal, and for its Fokker 100 is "almost dead".

The issue is largely one of perception, he argues. While the legacy 100-seat twinjet is financially attractive and still provides high technical reliability rates at competitive maintenance costs, tour operators are not chartering the aircraft because it is seen as outdated, says Janssen.

Three-quarters of Denim’s revenue – which reached around €15 million ($16.6 million) last year – is generated through ad-hoc charters. Its fleet includes an Embraer ERJ-145 regional jet, an ATR 42 and a Fokker 50 turboprop. In order to attract more long-term contracts and stabilise the business, Denim plans to introduce a Boeing 737 for scheduled charters, in co-operation with tour operators, and expects ad-hoc charters' share of revenue to decline to just under half.

The 737 will join Denim's fleet either for the winter 2015/2016 schedule or, at the latest, next year's summer timetable, says Janssen. He foresees scope for further 737s – or Airbus A320-family types – at a later stage.

The fleet shift toward these types is intended to deliver a wider customer base of tour operators. It will increase competition, as the two narrowbody types are operated by a range of ACMI providers, but put Denim in a position where it goes up against budget carriers such as EasyJet and Ryanair.

UK operator Titan Airways has replaced 737 Classics with A320s to cut its fuel bill, but also because the latter have become standard equipment among many customers, says the carrier's commercial chief Alastair Kiernan: "The operators themselves know the cost of those [A320s] down to the nearest cent… That is important."

He says competition has increased because the crucially important summer peak season has shortened. Where leisure carriers and tour operators traditionally chartered aircraft between April and October, that period now typically runs from June until September, says Kiernan. Leisure carriers are managing their capacity requirements more carefully than in the past, he adds: "We are not seeing a real fall in market demand. What we are seeing is a fall in the period where carriers require to take an aircraft."

This has led to greater concentration during the peak season, and operating aircraft for other carriers becomes less economical with shorter lease periods. "It doesn't make a huge amount sense for us to take on aircraft and then fly them only for a period of three to four months," argues Kiernan.

Meanwhile, the winter period – when ACMI rates decline as demand falls – is becoming longer. "We have to make money during those four to five [summer] months in order to survive the winter period," says Kiernan, adding: "That is becoming increasingly difficult."

Today, long-term contracts tend to be limited to wet leases of widebodies, says Kiernan. But he adds that such deals are "very few and far between". Ad-hoc charters generate around 40% of Titan's revenue – which the airline foresees reaching around £80 million ($125 million) for the full year 2015 – and still represents a lucrative business for the airline. But it does require significant resources to keep fuelled aircraft and crew on standby to be available within 2.5h of the airline's Stansted base.

VLM's White argues that operators need to have a hybrid model as it has become "very difficult to operate purely on ACMI". As the model leaves all commercial risk with customers, he says, "it is only attractive for an airline to use an ACMI provider in times of rapid expansion or contraction [when flexible capacity is needed]".

But since Europe's aviation market has grown "very steadily" and airlines that previously used wet-lease providers started offering excess capacity themselves, ACMI rates have been driven "down to the point where people are expecting you to fly for cost [alone] or even under cost", says White.

ACMI contracts can provide "very good, very solid work", he asserts. "If I could fill all the aeroplanes with that work, I would." But he adds: "The basic fact is that everyone else had the same idea over the years, and that is to get someone else to take the risk."

Source: Cirium Dashboard