The European regional sector survived the economic downturn better than many expected, but now faces a number of challenges - not least from the low-cost sector

"I am often asked what it's like to live with the low-cost carriers. It's like wearing underpants that don't fit - ultimately a pain in the ass." So says Jim French, managing director of flybe, the former British European. His words, spoken at October's European Regions Airline Association (ERA) general assembly in Salzburg, Austria, sum up the dilemma facing the region.

As shown in the latest 50 financial ranking of the world's leading regional carriers (see page 69) Europe's players have not fared well. While US counterparts managed to keep their operating margins just above breakeven for 2001, Europe chalked up a deficit of around 4%. Although there is a consensus that the worse is over, many ERA member presidents remain anxious that recovery will be tempered by low-cost carriers eating away at their market share.

This unease seems to go against the generally accepted wisdom that the two serve different markets: the regionals catering for time-sensitive business traffic and the low-cost carriers focusing on the price-sensitive leisure market. However, Rob Kuijpers, executive chairman of SN Brussels, the former regional arm of Sabena, warns that regionals cannot survive on business traffic alone. If the low-cost sector creams off leisure flyers while also attracting an element of the price-sensitive business market, regionals stand to lose a small, but critical proportion of their traffic.

There is no doubt that the arrival of the low-cost carriers is already being felt. "The growth of no-frills operations affects revenue yields elsewhere," warns ERA director general Mike Ambrose. "More airlines, including regional carriers, are looking at new ways of doing business."

A high profile example of this change in strategy has been flybe itself. The UKregional, although retaining its work as an Air France franchise carrier, has switched the bulk of its flying to a low-cost model. However, it continues to operate a fleet based around the BAe 146 and Bombardier Dash 8 rather than the standard Boeing 737 or Airbus A320 workhorses. As Jim French has not been shy of pointing out, this move comes at a time when the carrier faces stiff competition from budget competitors out of London and across the UK's secondary airports. Most recently, flybe is being challenged by MyTravelLite at Birmingham International Airport.

Interestingly, however, French says it was the response to the industry downturn of mainline carriers such as British Airways and bmi british midland that forced flybe to change its business model. BA and bmi have been discounting fares and increasing the flexibility on their short haul products in the face of low-cost competition, overcapacity and a drop-off in traffic.

French is a great admirer of the way low-cost carriers have grabbed the opportunities offered by the Internet, and points out that sales through now account for around half of all the carrier's bookings compared with 6% in January and 20% in July.

He is adamant that the BAe 146 and Bombardier Dash 8 fleet can achieve a cost base to enable the carrier to compete with the budget sector. French estimates that passengers are willing to pay a £15 ($22) premium on prices offered by the likes of Ryanair and other ultra low-cost carriers for a superior service. "We are becoming satisfied with the stability and level of the yields," French says. "The challenge is to bring costs down. The signs are very encouraging."

However, detractors are quick to point to the example of the now defunct Debonair, where the attempt to offer a premium low-cost service with BAe 146s has some uncomfortable parallels with the flybe model.

Regional jet response

Others in Salzburg maintain that the regional jet can compete in the low-cost sector. One is Barry MacKinnon, vice-president marketing at regional manufacturer Bombardier, who argues: "The 70-80 seat CRJ700 has fairly low seat mile costs. We think we have a product that can compete in this area." He points to the example of US regional and CRJ700 operator Horizon Air, which competes in Washington state against Southwest on routes from Spokane to Seattle and Portland.

But Saab Aircraft Leasing president Michael Magnusson takes issue with the idea that regional airlines can be truly low-cost. "They can be low-cost in the sense of low trip costs and low overheads, but not when it comes to low seat mile costs." He points out that traditionally, regional operators have had to have a fairly high fare structure in order to make money.

Indeed, despite the fact that the low-cost threat was much higher up the agenda than at past ERA general assemblies (a presentation on the successful US no-frills start-up JetBlue by its president Dave Barger was well received) many airline presidents are sticking to the old adage that the regional and low-cost sectors serve different markets. Regionals offer higher frequency, full-service flights to major airports - providing a different service to different customers.

They are also not slow to point out the advantages that the regional sector has over the low-cost model. Irish regional CityJet has had more experience than most of having to live alongside low-cost competition, sharing its Dublin base with Ryanair. Chief executive Geoffrey O'Byrne-White points out that CityJet, which is wholly owned by Air France, benefits from a market segment unavailable to Ryanair - transfer traffic. Around half the airline's passengers connect through the Paris Charles de Gaulle hub. "We have a different product from the likes of Ryanair," he says, adding that CDG has much better links to Paris than Beauvais Airport, used by Ryanair to serve the French capital.

A similar viewpoint comes from Roberto Stinga, president of Air Exel, which operates on behalf of KLM out of Eindhoven in the Netherlands. Air Exel is another carrier that is competing directly with Ryanair, which launched a daily London Stansted-Eindhoven service last year. However, Stinga says: "We didn't lose a single passenger when Ryanair came along. They are tapping into a different market to us." However, he adds: "If Ryanair starts flying three times a day on this route, we will pull our service." Although Stinga is confident that this scenario will not become reality due to the difficulties the low-cost carriers will face in obtaining satisfactory slots at Eindhoven, this demonstrates the threat to the regional sector. Once a low-cost sector has enough traffic to operate three Boeing 737 or Airbus A320 daily rotations on a city pair, it is difficult for a regional carrier to compete.

Even if the regional sector is facing competition from the low-cost sector, traffic continues to look relatively healthy. Figures for the first half of the year show that while 40% of ERA carriers saw a fall in traffic, 35% saw double-digit growth. Yields, which dipped throughout most of 2001 before recovering towards year-end, have increased, albeit slightly, in the first half of 2002.Analysis of the Top 50 ranking suggests that Europe's regionals saw a modest 3.2%growth in revenues in 2001, although US carriers did better still at 5%.

Meanwhile, the trend away from turboprops also continues, with regional jets continued to make further ground on both sides of the Atlantic over the last year. For the first time, the ERA notes that more than half of its members' fleet is made of jets.

An analysis of daily departures by Saab Aircraft Leasing, based on OAG schedule data for the third quarter of the year, shows that while turboprop flights declined by nearly 4% in Europe, regional jet departures grew by close to 10%. The big decline has taken place among the 50-seat turboprops while use of 30-seaters in Europe actually grew. Saab's Magnusson says the underlying factors behind this are a drop-off in the 19-seat turboprop market and a move towards jets in the 50-seater sector. "The economics of the 19-seat market are pretty difficult," says Magnusson, but he emphasises that, especially given the tough market conditions, the turboprop still has a lot going for it. Alluding to the more attractive economics or shorter sector lengths for turboprops, Magnusson says: "Regional airlines have got to look at the bottom line at the end of the day." Flybe's French has long been an advocate of the more economical operating costs of the turboprop.

However, in the much larger US market the use of turboprops has fallen dramatically across the board under the onslaught of the regional jet. Daily departures for turboprops were down 24% in the third quarter against a 36% rise for jets.

Recovery hopes

Despite little growth in prospect this year, the European regionals are banking on an upturn in their fortunes in 2003. "Of course our market will recover. It will rise again," says Exel's Stinga. Exel's story of a loss in 2001, breakeven anticipated for 2002 and a hoped-for return to profit in 2003 is far from atypical.

While the 2002 figures are likely to be significantly better than last year, Friedrich-Wilhelm Weitholz, chairman of the board at German regional Eurowings, points to an underlying problem. Even if Europe's regionals may not be losing huge amounts of money in the bad times, they rarely make large returns in the good times either.

The Top 50 ranking (see table below) suggest that the European regionals had shown operating margins of little more than 2% even in 2000. Although the results come with the usual warning over the difficulty in obtaining full accounts for regionals around the world, the European performance is in clear contrast to that of the US industry which appears to have remained in relative health over the past couple of years.

Stinga points out there in Europe there is more competition from other transport modes compared to the USA, and a greater emphasis on point-to-point rather than feeding hubs. Clas Helgstrand, director of flight operations at Swedish regional Falcon Air, argues that European carriers face greater taxes and costs than their US counterparts, and have been given less government support to meet new burdens in the post-11 September climate - a point backed up by the ERA's Mike Ambrose.

Another difference with the USA is that, while US majors are distancing themselves from their regional affiliates, Europe is still going the other way. Jaap Palmer, chief executive of Sweden's Skyways Express, is just one of many to decry this trend. "Some of us are increasingly being contaminated by major airline costs," he complains. By contrast, some US majors have started to reverse the process with regional sell-offs such as the flotation of Continental Express as ExpressJet.

Ownership issue

It is a sign of the times that this could be the last ERA general assembly which features the name Tyrolean Airways. The Austrian carrier is shortly due to for rebranding following its integration, along with Rheintalflug, into a single airline division within the Austrian Airlines Group. Flybe is left as one of only a small band of independently-owned European regionals and French makes no secret of the fact that this independence has allowed the airline to change its business model so quickly.

"The pace of change has quickened," warns Ambrose. The fallout from the Swissair collapse has seen Crossair, once Europe's largest regional, now wrapped up in the new Swiss and Sabena's DAT re-emerge as SN Brussels. Manufacturers too have seen consolidation. At the time of last year's assembly in Athens, Europe had three regional manufacturers - ATR, BAe Systems and Fairchild Dornier. Only the first of these is now left.

While most hope that 2003 will bring a period of stability to the regional sector in terms of profitability, all the signs are that this will continue to be a rapidly evolving industry.

Top 50 regional airline operations - 2001


Revenues US$

Operating margin

Net margin








North America














Rest of World







Grand total







Note: Calculations based on current Top 50 rankings. Change and margin have been rebased around those carriers for which appropriate figures were available. Rest of world includes Asia, Latin America and Africa/Middle East

Turboprop versus regional jet daily departures


European fleet

US fleet





















Total turboprop





Regional jets











Total regional jets





All types





NOTE: Daily departures for June-Sept Q3 2002 versus Q3 2001 based on OAG schedule data.

Source: Saab Aircraft Leasing



Source: Airline Business