Flybe has become Europe's largest independent carrier as the UK airline has reinvented itself in a changing market.

As the members of the European Regions Airline Association meet for their general assembly in the Olympic homeland of Athens this week, their arena is increasingly being invaded by budget carriers. But are they contending for the same prize and can there be only one victor?

The dividing line between Europe's low-cost and regional carriers is blurring, as budget carriers build regional presence and hybrid models emerge, such as Flybe in the UK.

Ryanair deputy chief executive Michael Cawley claims this is increasingly squeezing regional airlines out of the market: "There is less and less room for regional carriers because low-fare airlines, led by Ryanair, are bypassing hub connections for a fraction of the price and offering what the market really wants - low fares. That means that the only market left for regional carriers is the small pool of regional passengers who need a connection from the regions to one of the big hubs to travel long haul."

But ERA air transport policy director Andrew Clarke says regional carriers are continuing to flourish in the face of budget competition. Over the first five months of 2007, European regional passenger numbers rose by 8%. "This shows that the regional air industry is expanding," says Clarke. "Low-fares airlines are a new phenomenon, but regional airline expansion is still a fact as well."

The regional manufacturers agree. Executives from ATR, Bombardier and Embraer say that Europe's regional carriers still serve an important feeder and point-to-point role.

Embraer says: "EasyJet and Ryanair are using regional airports mainly to access nearby high-density markets, therefore not directly impacting true regional routes. Regional airlines are focused on business passengers in medium- and low-density markets, avoiding low-cost carrier competition. In general, low-cost carriers impact the revenue environment with their low-fare policies creating challenges for small capacity aircraft operations in the same area."


Jean-Yves Grosse, chief executive of Air France subsidiary Regional, agrees that the new reference point for "normal" fares has been a challenge. "Ryanair and EasyJet, up to now, have had clearly differing strategies," he says. "EasyJet is more focused on the business market, which remains the central part of our own strategy. There the competition tends to be more direct."

By deploying small aircraft, regional carriers fulfil two roles. They offer high-frequency flights with connectivity for business travellers and serve thin regional routes that cannot be sustained by larger aircraft.

Clarke says: "The fact that more flights between two points are served by low-cost airlines still leaves a vast swathe of markets that aren't connected. The regional airlines serve that market by feeding into hubs. Regional airlines are very flexible. If one market becomes unsustainable, they can move on to another. As low-fares airlines grow, they will enter markets that our carriers have been serving previously. Only a small proportion will be affected."

Business travellers account for roughly half of ERA members' traffic total. Clarke says budget carriers fail to offer the frequency and connectivity that business travellers need. He says this business-class niche means that fully inclusive service remains a competitive priority for Europe's regional carriers.

But Barry MacKinnon, Bombardier Regional vice-president for markets and airline analysis, says European network airlines such as Air France are simplifying their short-haul product and this is being replicated by their regional carriers. "A lot of [European] CRJ900 customers are operating with 90 seats. The USA is going in a somewhat different direction, with two or three classes. We certainly have plenty of examples of our clients operating in Europe in the low-fares environment. It is a new growing segment. You can argue that the budget model has been taken down to smaller city pairs of regions."

Examples include Q400 operator Flybe in the UK, Italian CRJ1000 launch customer Myair and CRJ900 operator Atlasjet of Turkey.


MacKinnon adds: "Flybe is an exciting example of a new market segment. What it is doing with Q400s is targeting markets that may not suit Boeing 737 operators like Ryanair."

Exeter-based Flybe, which recently acquired British Airways regional arm BA Connect, has become Europe's largest independent regional carrier. Starting life in 1979 as Jersey European Airways, it was rebranded British European in 2000. Flybe emerged in July 2002 when British European was forced to dramatically change its business model to survive in the low-fares era.

Flybe chief commercial officer Mike Rutter says: "The model of the regional carrier, which had historically been there, had become defunct. If we didn't want to be usurped by changes in low-cost carriers, we had to change rapidly."

Rutter believes the UK regional sector has been redefined. Under Flybe's low-cost regional model, it has right-sized its fleet with Bombardier Q400s and Embraer 195s to serve routes uneconomical for 150-seat operators. He says: "The Ryanairs and EasyJets of this world tend to concentrate on sectors of 2h or more, leaving carriers like us to have the right kind of model and vacuum up the rest of the market. As a result of that, what you've got is a shrinkage of regional carriers in the UK market place.

"We don't particularly worry ourselves about the regional operators at the bottom end. The guys in larger aircraft sector learn that they can't make money and pull back. We are winning the long-term strategic battle, but there are always a number of short-term tactical battles." Rutter says competition is "ferocious" on the 5-7% of its routes where Flybe's network overlaps with the larger budget carriers, but competition has diminished over time.

Within three to five years Rutter believes that Europe's regional carriers will be pushed into a niche role, serving thin business routes, as the budget regional model spreads.

Flybe is looking to capitalise on this development. It is planning to export its business model by 2009-10, mirroring its UK operation in mainland Europe. Rutter identifies France, Scandinavia and Spain as potential candidates, owing to their hub-and-spoke focus and underdeveloped point-to-point regional networks. Clarke believes other carriers will follow Flybe's example: "I am sure the line will blur. Given Flybe's obvious success, I am sure others will explore the market opportunities."

But Embraer says the regional low-cost model is too young to be considered a new segment: "We understand that the fundamental change is from a set of discrete and defined business models to a more gradual and continuous blurred area between the traditional four models: legacy, low-cost, regional and charter carriers."

Although regional airlines have always had to be cost-conscious, budget carriers have hit yields and encouraged renewed cost scrutiny. Together with spiralling fuel prices, this has increased demand for aircraft with low seat-kilometre costs and helped to revitalise the turboprop market.

Efficiency rules

ATR senior vice-president commercial John Moore says: "To some extent, this has contributed to the success of ATR. Major and regional airlines have to focus on controlling their costs. They need to use the most efficient aircraft. We've seen a dramatic increase in the demand for our aircraft over the last few years, which has partly been driven by demand from carriers trying to offer low costs on a regional basis and competition from low-cost carriers."

ATR's low-cost customers include Philippine low-cost carrier Cebu Pacific and India's Air Deccan. Moore says this emerging low-cost regional sector will create additional opportunities for ATR, but he does not see it forming the majority of its sales.

Bombardier's MacKinnon agrees that the increased competition has had a positive impact on European demand. He says the call for larger aircraft with lower seat-kilometre costs is part of the genesis behind the new CRJ1000, set to enter service in late 2009. "This is expanding our market. We are getting additional sales from this and view it positively. It has been folded into our forecasts. We are well positioned because we are the only manufacturer offering turboprops and regional jets," he says.

Embraer also welcomes changes within the market, saying: "Some legacy carriers are using our aircraft to right-size narrowbody flights and keep a presence in medium-density markets."

In 1988 two-thirds of aircraft in the European regional fleet had fewer than 40 seats. By 1997 this had declined to 31% and today the figure is 13%. Clarke says: "We've seen a huge change in aircraft size. We are seeing a constant move towards larger aircraft."

continuing trend

ATR, Bombardier and Embraer acknowledge this trend - which has prompted a flurry of large regional aircraft development over recent years - and see it continuing unabated.

They suggest a number of potential triggers for the upsizing, including increased infrastructure and fuel costs, environmental concerns, unit cost minimisation, market liberalisation and general traffic growth.

Moore says the 70-seat ATR 72 accounts for roughly 80% of ATR's current demand, having gradually overtaken the smaller ATR 42. But despite the shift, ATR has no plans to shelve the entry-level model. Moore says: "We are seeing good steady demand for [the ATR 42]. We don't see the market going away and do not hold the view that there is no further demand. It has probably stabilised where it is now."

ATR is forecasting demand for 2,700 new turboprops between now and 2026. Around 85% will be in the 60- to 90-seat category. Moore says ATR is studying the market for a larger turboprop aircraft, but has not made any decisions. Bombardier forecasts a need for 5,300 aircraft in the 20- to 99-seat segment over the next 20 years, with turboprops accounting for 15-20% of the total, while Embraer expects demand for 7,500 30- to 120-seat jets. The Brazilian manufacturer expects airlines to increasingly use 70- to 120-seat to right-size their fleets and bypass congested hubs.

Embraer believes that the 30- to 60-seat market has matured, but it says these aircraft will continue to play an important role in the regional sector. Although the 50-seat jet renewal cycle will begin in 2015-20, lasting at least five to 10 years, Embraer does not see a market for aircraft with fewer than 50 seats.

The Brazilian manufacturer expects entry-level aircraft of around 70 seats, but says: "As the economy continues to grow throughout Europe, we could see some long and thin market opportunities with good yields demanding a niche 50-seat jet service."

ATR also recognises a niche for smaller capacity operations. Moore says ATR has no plans to develop any smaller-capacity aircraft, despite a lack of new-build products to fulfil this potential market, but says it will be interesting to see how the market progresses.

He says: "Fewer and fewer regional carriers are still operating 30-seat aircraft, so that has created a niche opportunity for small carriers to fill that gap. It is a market that large regional carriers will find difficult to make sense of."

Used aircraft

Moore says larger regional carriers are limiting the number of types within their fleets, potentially fuelling this niche. He suggests this demand could be partly met with used aircraft. ATR forecasts demand for 135 aircraft in the 15- to 39-seat category over the next 20 years and 270 in the 40- to 59-seat segment.

Bombardier forecasts a need for 1,000 aircraft in the 20- to 59-seat range. MacKinnon believes infrastructure costs and environmental concerns will stem demand for small aircraft in Europe. Like Moore, he sees used aircraft as a source of entry-level capacity.

He says: "I don't think we'll see entry-level aircraft with fewer than 30 seats in Europe. The costs are too high. We are hard pressed to see new opportunities in the 30-seat segment in Europe."

Clarke says that ERA member Eastern Airways, a British Aerospace Jetstream specialist, has more than 20 routes in the UK and few face competition. He says: "It shows that even with the prevalence of low-fares airlines, there are many routes that are a regional airline niche."

Last year Eastern was forced to axe its Manchester-London Stansted link due to competition from German budget carrier Air Berlin. But Air Berlin found it unviable, and Eastern is planning to resume the link in October.

As budget and regional carriers hone theirskills and financial fitness, perhaps both can be winners in the race for market share.

Ryanair says low-fare airlines are bypassing hub connections for a fraction of the price

Despite low-cost carriers, Jetstream specialist Eastern Airways has carved a UK regional niche

To read more about the regional aircraft market, go to

Source: Flight International