The prospect of higher insurance and security costs resulting from the terrorist attacks pose a threat to European regional airlines' bottom line

Knowing a recession was at hand, Augsburg Airways president Olaf Dlugi approved changes in the German regional airline's strategic direction four months ago in order to better weather the downturn.

Deciding to sell three of its 50-seat aircraft and leasing an additional aircraft were key points of Augsburg's revised strategy to stay financially viable for the foreseeable future. "We had had a strong growth plan. We decided four months ago to not continue with that," says Dlugi. That decision may resonate especially strongly in Augsburg's future, in the aftermath of the 11 September terrorist attacks on the USA. "We're lucky we made that decision," Dlugi says. "Today we're convinced that it was the right decision."

As much of the aviation industry reels from the attacks' crippling assaults on life, property and financial equanimity, Europe's regional airlines find themselves on what they believe is far swampier ground than their major international counterparts. None has yet announced such drastic cost-cutting measures related to the terrorism as those revealed by British Airways, however.

The regionals have fewer and shorter routes than the major airlines, fewer employees and large aircraft, and lower operating costs, but the prospect of higher insurance and security costs resulting from the attacks pose greater threats to the regionals' bottom line.

Further, many regional airline operators believe they have less to gain, and much to lose, if governments step in to help subsidise majors through the crisis. They fear that majors which were already perched precariously on the brink of financial ruin before 11 September will use the aftermath of the terrorist attacks as an excuse to seek government aid to boost their sagging fortunes. "We need a solution where small companies can survive as well," says Dlugi.

Dlugi will be among the representatives of about 50 of the European Regions Airline Association (ERA)'s 80 member airlines attending the organisation's annual convention from 10-12 October in Athens, where such issues will top the agenda.

Anticipated after-effects will include passenger shortfalls and restoring travellers' confidence in air transport which, predicts ERA director general Mike Ambrose, "will lead to encouragement to lower fares to promote air travel at a time in which we'll likely be incurring higher costs. So the management of cash flow, the abandonment of development plans for now, and the stabilisation of the industry's economic position will dominate the conference."

Ambrose and other representatives of the regional airline industry are already calling for Europe's governments to pick up the tab for any mandated aviation security increase resulting from the terrorist assaults. Also high on the list of requests to the governments is some form of long-term assistance with insurance underwriters' proposed imposition of a $1.25 per passenger supplement that was to take effect from 1 October, which would be collected quarterly in advance. Such costs, the ERA and its members point out, would have to be passed on to passengers - and higher fares are likely neither to win passenger plaudits nor encourage more travel in the current climate.

Policy protection

"It's the governments' policies that are the targets. Why should air passengers pay to protect politics?" Ambrose says of increased security and its costs. "Why should air passengers have to pay for additional security when it has been so aptly demonstrated that those measures are designed to protect not just those people in the air but people on the ground? And if you think that you're going to cure the worldwide terrorist problem by curing airline security, you've misunderstood the question."

Intensified scrutiny of passengers and baggage at airports is also creating practical problems for regional airlines - particularly at those airports where sufficient high-tech security equipment is lacking and manual inspections must be carried out. Antonis Simigdalas, chief operating officer for Greece's Aegean Airlines, reports "a significant increase in ground time - up to 50% more. If you expand that into 12-15 trips per aircraft per day, it affects the schedule."

Higher numbers of both no-shows and unplanned travels have been in evidence at Aegean's travel counters since what Simigdalas calls "black Tuesday". "But we have not been able to identify a new pattern of the demand," Simigdalas says. "Overall, though, we've had a reduction of 8-10% in passenger traffic." That its passenger traffic has not fallen further is due, he suggests, to Aegean's considerable number of routes between islands, between which there is no means of fast surface transportation.

A few regional airlines may actually experience a measure of comparative good fortune through the crisis despite the general atmosphere of loss and uncertainty. For instance, Denmark's Cimber Air, a franchisee of both Lufthansa and SAS, could conceivably benefit if its partners with their large aircraft, find passenger traffic falls below acceptable levels on certain routes. "I don't know when that will happen or if that will happen," says president and chief executive (CEO) Jorgen Nielsen. He adds that much of the uncertainty will remain until the world knows fully the extent of retaliation to be taken for the attacks. "I think everyone is waiting for something else to happen to close the gap."

Independent regional airlines may be less hard hit by the crisis than their counterparts with close links to major airlines. ERA's Ambrose says: "If a regional has close ties with a major, and the major is in financial trouble, for example, the regional will go down with it. The independent regionals, with their own corporate identity on their tails, will therefore be at an advantage."

Dlugi of Augsburg Airways, which is owned by Lufthansa, concedes: "This is a tough question." However, he acknowledges that Augsburg, which has experienced about a 20% decline on Germany-UK routes since 11 September, has seen "no negative effect at all on flights under our own brand. The negative effects are all on Lufthansa flight numbers. We don't know why this is the case."

Quick to adapt

Independence frees British European to adapt quickly to market changes, says managing director Jim French, as it did on 20 September in picking up two new routes when fellow regional Gill Airways called it quits. "At times, you need to be extremely flexible in your approach without the burden of a decision process" that involves numerous committees and boards, French says. Depending on how the current drama plays out, and if other airlines must also call it a day, that independence could again serve British European well by allowing the airline to quickly "look at our existing structure, and switch resources from a weak route to a more beneficial one".

Chairman of Lisbon-based Portugalia, Joao Fonseca, says that the loss of passenger confidence "has not come at a very good moment" as the carrier struggles in what has been a difficult year. "We have witnessed a drop of around 25-30%, but I would also say that the market in general is not having a very good time," he says. He is coy as to whether any redundancies will be necessary among the 1,000 staff or indeed, if capacity issues will have to be addressed. "We are evaluating trends," he says.


In France, a major restructuring already underway in both fleet and personnel terms at Air Littoral has meant that the carrier has weathered the worst of the fallout from the US attacks so far, although it has lobbied the French Government for financial assistance. Any aid - if it comes - is as yet unspecified but Air Littoral has proposed a reduction in social taxes, company taxes or airport fees to alleviate the economic pressure. The French Government has yet to come to any firm conclusions.

"We've had a drop of 10-15% in traffic after the 11 September events as a result of a great number of cancellations and no-shows," Air Littoral says.

Newly incorporated into Air France, Regional Airlines says it has noticed "a major effect" on passenger numbers, given that part of its role is to feed into the parent. "However," says chairman and CEO Jacques Banquier, "this factor was limited by the fact that we operate a significant amount of cross-country routes within France but we are [nonetheless] 5% down."

Banquier says the airline will emphasise promoting its winter timetable, adding: "Who know what will happen?"

Finland's Air Botnia says it is continuing with fleet modernisation plans, replacing its five Saab 340s and six Fokker F28s with five Saab 2000s and five BAE Systems RJ85 aircraft. Air Botnia, which says it has not experienced "a rush to cancel", hopes to still break even by year's end in the face of tough trading conditions.

Luxembourg's Luxair is 2% down on normal traffic levels for scheduled passengers, having recovered from a 30% drop in the immediate aftermath of events in the USA.

Augsburg's Dlugi predicts that the financial hangover of the events of 2001 will last at least "a year or two". For the foreseeable future, most airlines will have to put aside any thoughts of expansion, adds Aegean's Simigdalas. He sums up the most pressing issue in one word: "Survival".

Source: Flight International