Niche route pioneers, low-cost operators or appendages of mainline carriers, Europe's regional airlines are at a crossroads

Exactly what is a regional airline? That is likely to be one of the questions members of the European Regions Airline Association (ERA) will be asking themselves as they gather this week for their general assembly in Salzburg, Austria. To join the ERA, you once had to operate aircraft with fewer than 100 seats. Then the net was extended to include airlines operating chiefly between secondary airports.

Now aggressive competition from low-cost carriers has led to the association changing the criterion for its 81 members to include all "short-haul airlines". There are reasons for this identity crisis. While the economic downturn has not affected European regionals as badly as their flag carrier counterparts, which depend for a large chunk of their revenue on the North Atlantic market, it has hit business travel, the regionals' core market. While ERA members carried 6.3% more passengers in the first half of this year than they did in the first six months of 2001, it has been at the expense of lower fares and profits.

The other development forcing regionals to look hard at their business models has been the growth of no-frills airlines such as EasyJet and Ryanair. EasyJet, in particular, has consciously targeted the corporate as well as leisure market, developing new routes to business destinations aimed at executives whose employers are tightening travel budgets.

The publicity blitz surrounding the no-frills sector - with its emphasis on low fares and booking on line - has led at least one traditional regional airline, British European, rebrand itself as the low-fare Flybe and market single tickets through its web site (although the carrier still flies six BAe 146s in Air France colours). Lufthansa partner Eurowings has also launched a no-frills operation, Germanwings, with tour operator TUI, from Cologne-Bonn Airport.

Regionals are caught in a squeeze, says Klaus Heinemann of Deutsche VerkehrsBank: on the one hand regionals that act as hub-feeders for major carriers find their revenues under pressure from major airlines flying fewer passengers and desperate to lower their overheads. On the other hand, niche route operators are feeling the pinch from no-frills carriers competing on similar city pairs.

Exaggerated threat

However, Mike Ambrose, ERA director-general, says the threat from no-frills carriers is exaggerated. "The regional airlines market is business-oriented," he says, and "local customers have continued to use them because they are the best ways of travelling between smaller cities."

There are still gaps in the market for airlines operating business-oriented schedules and using smaller aircraft, where low-cost carriers flying Boeing 737s would not be able to compete. KLM Cityhopper, for example, has just launched a series of routes between Amsterdam and North Sea oil producing centres and Norway's Wider¿e's Flyveselskap has almost doubled its domestic network to fill a hole left by the Braathens/SAS merger.

Where the low-cost explosion has had an effect, believes Ambrose, is in passengers' heightened price sensitivity. He is keen to label airlines such as EasyJet and Ryanair as "no-frills" rather than "low-cost" because operating to tight overheads is essential for most regional carriers. What distinguishes regionals from no-frills airlines is the level of service they offer and their business-oriented schedules, he says.

The main market for European regional airlines has been to act as feeders for flag carriers. There are 500 regional jets (with 100 seats or fewer) serving this market. Lufthansa's network is arguably the most advanced of all the major airlines. Its feeder airlines such as Air Dolomiti, Cirrus Airlines, Eurowings and Lufthansa CityLine operate close to 100 regional jets, while its turboprop carriers, jointly branded as Team Lufthansa, include airlines such as Augsburg Airways, Cimber Air and Contact Air. These airlines are a combination of wholly owned subsidiaries (Lufthansa CityLine), partly owned airlines (Air Dolomiti, Eurowings) and independent carriers which operate under a franchise.

Big brother pitfalls

The precise nature of the franchise relationship differs from airline to airline, but largely involves the regional paying a royalty in exchange for use of the mainline brand and access to its brand, route network and ticketing operation. While there are obvious attractions, there are pitfalls in becoming too dependent on a big-brother airline, warns Heinemann.

"It will sense your dependence and squeeze an unrealistic deal out of you," he says. Having a close link with a large airline is certainly no guarantee of survival; Air France feeder Gill Airways, based in Newcastle in the UK, collapsed a year ago having failed to restructure its operations after misplaced expansion.

If regionals cannot keep their independence, their best option might be to sell out completely to the major carrier. This is what happened when British Airways bought its London Gatwick-based regional feeder airline CityFlyer Express for £75 million ($116 million) three years ago as part of its now-defunct strategy to develop the airport as its second London hub. CityFlyer has now been disbanded and its BAE Systems Avro RJs are being redeployed to regional airports.

The need to rationalise operations in the post-11 September downturn has led to a new spate of consolidation by flag carriers. Despite its CityFlyer experience, BA has, for entirely different reasons, purchased and merged its independent affiliate British Regional Air Lines/Manx Airlines with its subsidiary Brymon into a new integrated CitiExpress regional operation. Air France has also taken its regional affiliates, Brit Air and Regional, into its mainline operation, while Lufthansa is understood to be reviewing its entire partner strategy, a move which could see it exercise the right to double its 24.5% stake in Eurowings.

However, Jim French, managing director of British European, is sceptical about the economics of mainline carriers taking their regional operations in-house and suspects the tide will soon turn. Operating costs inevitably rise as airlines inherit more aircraft types, all of which need to be maintained, and pilots, used to regional pay scales, demand salaries that reflect their status as employees of flag carriers.

Fritz Feitl, a regional airline aviation consultant and former chief executive of Tyrolean Airways (now part of Austrian Airlines), says that "in case after case, a major has acquired control, often outright ownership, of a regional partner and then systematically removed the very elements that made the regional successful and profitable in the first place".

Pressure on costs is forcing regional airlines to look closely at their aircraft types. Despite the long-running trend away from turboprops towards regional jets, propeller-driven aircraft still form a slim majority at 51% of ERA members' fleets, a drop of two percentage points from a year earlier, and carry almost 53% of passengers.

British European is one of a handful of airlines flying the Bombardier Dash 8 Q400, and French believes there is a strong future for lower-cost, high-speed turboprops, likening their perception today to that of diesel cars in parts of Europe a decade ago.

Then, diesel cars were viewed as economical, but noisy, slow and uncomfortable. Today, technological leaps have meant diesel cars are viewed as a more fuel-efficient alternative to petrol vehicles, and French thinks modern turboprops are destined for a similar image transformation.

Falling yields, he believes, will soon make smaller regional jets unviable on domestic routes. Sweden's Skyways Express is one operator which has changed its route network to use turboprops instead of regional jets.

However, manufacturers of regional jets, unsurprisingly, have a different view. Embraer's director of marketing intelligence, Orlando Neto, admits turboprops will always have a market in Europe, because of airports with short runways and other special conditions. But he says passenger perception and the greater baggage capacity of jets - which makes linking with long-haul services easier - will continue to drive their growth.

Large aircraft trend

Barry MacKinnon, vice-president of airline analysis at rival Bombardier, says that in Europe there is still a trend towards larger aircraft. Bombardier claims around 90% cockpit commonality between its Q400 turboprop and its CRJ regional jet family and is pushing hard for operators to move up the family chain.

The other main talking points at Salzburg will be perennial ones. The first, however, has taken on a new urgency following 11 September: the legislative requirements imposed on regional operators. Airlines have always complained that they are asked to shoulder the same regulatory burdens as their mainline counterparts. Now, with reinforced cockpit doors and other security measures compulsory for all commercial aircraft with more than 12 seats, regional operators believe they are again being asked to stump up over the odds for what is a marginal security risk. Although new aircraft will have the doors fitted as original equipment, operators will have to bear the cost of retrofitting their existing fleets.

The sector's other long-standing complaint has been its belief that governments and the European Commission (EC) favour other forms of transport over air. It is a beef that it is hard to argue with. Of an average €32 billion ($31 billion) handed out in state aid to transport projects annually throughout Europe, rail receives €31.9 billion. "That level of subsidy", says Ambrose, "could run Eurocontrol for more than seven years, and while we do not expect a perfect system, we do expect them [the EU] to have more understanding of the air transport system."

The ERA argues that regional air transport provides valuable social and economic links between Europe's secondary cities. Furthermore, the EC's repeated view that rail is better for the environment is based on erroneous information, the ERA maintains. Noise pollution, for example, is often cited as a reason to promote rail links above air.

But in a study carried out last year, the ERA found that noise levels at 30m (100ft) away from a high-speed rail line were almost twice as loud and lasted twice as long as those taken 280m from a runway when a "typical" regional aircraft is taking off or landing. These distances represent the closest proximity allowed under European law, and while regional aircraft, including turboprops have become quieter as newer aircraft have entered fleets, trains are getting louder as they become heavier and more powerful.

"The Commission has a difficult job reconciling the different interests of different transport sectors," Ambrose concedes. "Nevertheless, there is an inherent bias in favour of high-speed trains."

Carriage contracts

Another area of deep concern is a proposal to modify airlines' conditions of carriage contracts with passengers. The new "transparent" contracts, which set out minimum levels of service in areas such as ticket issuing, missed connections and check-in procedures, involve extra administration for airlines, which hits smaller airlines disproportionately hard, says the ERA.

Regional airlines may not have the political clout of flag carriers. On their own they employ only a small number of staff and few voices are raised in a nation's parliament and no one takes to the capital's streets in protest when an independent airline goes bust. This makes it even more difficult for the sector to make itself heard in a political environment unsympathetic to the airline industry. Caught in a vice between mainline partners demanding more for less and no-frills airlines cutting fares, representatives of regional airlines will spend much of this week in Salzburg asking themselves how they can make themselves less vulnerable.

Does their future depend on them throwing in their lot with mainline carriers or taking a more entrepreneurial approach to developing their own brand identity, market niche and profitable routes? For many, the solution might be a combination of the two.

Source: Flight International