Europe's regional airlines are no longer the distinct niche they once were in a market where the boundaries between the sector and low-cost carriers are beginning to blur

Regional carriers are having to adopt a variety of new strategies as they battle to survive increasingly frequent incursions into their territory by low-cost carriers. The traditional mantra used to be that the two sectors are chasing different markets. Regionals were focused on business traffic and budget carriers were chasing the leisure traveller.

According to airline consultant and author Rigas Doganis, Europe's regional carriers need to rethink their strategy as they are finding themselves very vulnerable on what in the past were considered their traditional routes. "The picture is becoming very blurred," he says. "Regional carriers in the past could be defined by operating turboprops. Then they began flying small regional jets such as the Bombardier CRJ. Now they have aircraft with 100 seats, a market where they come up against the low-cost carriers."

New operations started up by easyJet and Ryanair, for example to Riga in Latvia, threaten regional incumbents such as airBaltic. Previously overlooked destinations in southern Europe that increasingly attract second-homers from the UK have been pounced on by Ryanair. With economies of scale and clear branding that regionals can only dream of, it can fill Boeing 737s where 50-seaters previously operated.

"Ryanair is the biggest regional carrier in Europe," Doganis insists. The regionals face being squeezed into thinner and thinner routes on which they operate aircraft of 50 seats or less. Even some niche markets will come under attack as low-cost carriers look for routes where they can expand. Both easyJet and Ryanair have ordered large numbers of new aircraft – easyJet ordered 120 Airbus A319s in 2002, while Ryanair has ordered another 70 737s. "They will need somewhere to fly them," says Doganis.

Hub bypass

Kjell Friedheim, who has a long history within the SAS regional affiliates and runs his own international consultancy, believes that there will gradually be more non-stops operated by regional carriers, bypassing the main hubs, but only on routes operated with 50-70 seat aircraft that do not merit the attention of the low-cost carriers.

"Not that many European city pairs can support 120-seater operations," he says, arguing that there is still a role for the regionals. However, he doubts that there is a future for routes operated with 30-seat aircraft, even where there is no low-cost competition. "Why should passengers pay three times as much for a 25 minute flight on a small aircraft?" he asks. In some parts of Europe high-speed trains are a logical alternative.

Friedheim believes that there is still much consolidation to be done in the industry and ultimately sees a European mainline market of three big players – Air France/KLM, British Airways and Lufthansa, all of whom are grouping their regional partners under common branding.

The Lufthansa grouping actually harbours a low-cost carrier. Regional carrier Eurowings is the owner of germanwings, a no-frills operation, which is seen as a benign presence within the Lufthansa team and more desirable than a more aggressive outsider. "If germanwings were not there someone else would be. It's better to keep it in the family," says Lufthansa CityLine managing director Karl-Heinz Kopfle, speaking at the annual conference of the European Regions Airline Association (ERA) in Rome.

Consolidation within Europe will come as network carriers pull off short-haul routes in the face of the low-cost challenge. Instead, they will look to affiliated regional carriers to feed their intercontinental services. This will be particularly relevant with the arrival of the A380 at Europe's airports. An effective feeder system will be essential if such a large aircraft is to be operated profitably from Frankfurt or London or Paris.

The regionals can then get the benefit of being marketed out of the budget of the bigger mainline carriers. All regional carriers are having to make strenuous moves to strip costs out of their business by better utilisation of aircraft and crews, and offering a pared-down service. Some have gone all the way, such as the UK's flybe and Oslo-based Norwegian, which have adopted a low-fare business model.

Despite the ever-present low-cost challenge, Europe's regional carriers continue to produce steady growth. Analysis of the latest Top 100 Regional Airline Ranking shows Europe's carriers posting nearly 8% growth in passenger numbers and 4.5% in revenue traffic last year (see page 48 onwards).

In the past year there has been a move towards regional carriers joining global alliances: Finland's blue1 joined the Star Alliance as a regional member last October. The carrier says it has seen an increase in business class passengers from its Lufthansa codeshare. The leases on its Saab 2000 aircraft will be up in 2007, and the carrier is considering replacing them with bigger aircraft.

Air Aegean is also considering joining Star as an associate member following its recent wide-ranging codeshare deal with Lufthansa. Air Aegean chief operating officer Antonis Simigdalas says: "If we codeshare with Lufthansa and end up tailoring our schedules with them it goes without saying that our main focus on long-range connections will be with Lufthansa and its partners in the Star Alliance."

Meanwhile, Portuguese regional carrier Portugalia has signed a codeshare deal with Dutch carrier KLM, creating its third SkyTeam association and taking it a step closer to alliance membership. Historically, it had a codeshare deal with SkyTeam founder Air France and recently unveiled a similar deal with Spain's would-be SkyTeam associate member Air Europa.

But a link-up with a major is not the only way forward and there are niches to be exploited. The 20 million inhabitants of Scandinavia are widely spread and for many air travel is their only means of travel, so regional services are vital. In such niche markets it is still possible to offer a full-fare, premium service. Malmö Aviation provides such a service, operating within Sweden out of Stockholm Bromma city airport from which it is not in competition with SAS.

VLM Airlines is another regional carrier successfully operating in a niche market. It flies Fokker 50s out of Antwerp, with a major hub at London City Airport. The Belgian regional carrier recently reported a trebling of 2004 net profits to €948,000 ($1.2 million) compared with €327,000 in 2003. Friedheim believes that business passengers are prepared to pay a premium for the convenience of being flown into central city airports, and says that regional airlines are missing a trick in failing to stress this advantage to passengers.

Public Service Obligation (PSO) air services is another niche for Europe's regional airlines. However, even these routes, which receive state subsidies, are beginning to attract the attention of the low-cost players. Ryanair, for example, is bidding for one of the six PSO contracts up for renewal in Ireland, according to Malcolm Naylor, managing director of Air Southwest, a regional carrier based at Plymouth in the UK.

The regional airline landscape has changed dramatically in Europe since 2001. A number of airlines have gone. For instance, Air Littoral has folded, Crossair has metamorphosed into Swiss and others have been subsumed into regional groupings like British Regional Airlines. Brymon has been absorbed into into BA Citiexpress while Tyrolean Airways and Rheintalflug are now branded as Austrian Arrows.

EU accession benefits

Accession to the European Union of 10 new member states last year had a marked effect on Baltic regionals, with Air Lithuania, Lithuanian Airlines and airBaltic reporting passenger growth of more than 22% in 2004.

Membership of the ERA has been boosted by carriers based in the new member states, compensating somewhat for the loss of founder member flybe, which left the association last year in its new guise of low-fare carrier.

One issue that continues to affect all sectors of air transport in Europe is that of passenger denied boarding legislation. An ERA complaint of European Commission maladministration was lodged with the European Ombudsman in early April, against what it calls "misleading information". "We regret the necessity of this step, but we feel we have no option but to put our faith in the objectiveness of a third party," says ERA director general Mike Ambrose (see news story on page 22).

Source: Airline Business