There are encouraging signs of start-ups and expansion in Europe though financial returns and yields are low. Europe's regional airlines are emerging from the recessionary gloom comparatively unscathed. The last three and a half years have seen their share of closures, but on balance the sector is growing. High external costs may act as a brake on operators' ambitions, but regionals could still miss expansion opportunities if they don't develop their marketing.

Preliminary data from the European Regional Airlines Association (ERA) shows 1994 growth of 15 per cent to an estimated 40 million passengers. Annual growth figures may have dropped from the 1989 high of 24 per cent to only 10 per cent in 1991, but the last three years have seen that figure jump back up into the mid-teens.

Still, depressed yields have kept financial returns low. 'Regional aviation tends to be a particularly precarious part of a pretty precarious industry. The returns are not great,' says Brad Burgess, managing director of BA franchisee CityFlyer Express.

The last two years have seen encouraging signs of startup and expansion activity: Air Nostrum's Fokker 50 operations in Spain; Germany's East West with a new Dornier 328; one-route niche operator CityJet in Ireland; and Eurosky, backed by US money, in Austria. Swedish operator Skyways took advantage of the demise of Swedair to treble capacity, growing its Saab 340 fleet from five to 14 in the 12 months to August 1994.

The boldest startup became the most notable failure - UK operator Euro Direct Airlines quickly built up an 11-aircraft operation but stopped operating after only 10 months. With the benefit of hindsight, overexpansion may well have been the root cause, but management blamed prohibitively high costs. 'Even when you get it right with superb employees, the European cost burden does not allow a reasonable return on funds invested,' says former chairman Neil Hansford.

High external costs are a long-standing complaint among regionals. A new report from the ERA says en route and airport user charges account for 18 per cent of regionals' total costs, against only 9 per cent for the majors. Figures for ground handling (including inflight services) are closer: 17 per cent for regionals, 14 per cent for majors.

Michael Hövel at Regional Aviation Consulting Services in Germany highlights the prevalent public ownership of European airports as a major contributor to the cost problem: 'There is not enough flexibility in [European] airport management. They are looking for revenue maximisation and would rather have all slots filled with 747s.'

Hövel says the two sides should cooperate more closely and is currently setting up a 'package for regional airports to work with regional carriers.' This would help the airlines improve their marketing.

A more revolutionary approach, aimed at major hub airports, is his call for dedicated regional terminals with appropriate lower cost infrastructure.

Hövel's proposals stem from his contention that most established 'independent' regionals in Europe are struggling to break out of their market niches because of a lack of commercial orientation and poor revenue management. Expansion opportunities certainly exist in the single European market as economies begin to bounce back.

Hövel suggests potential targets are the non-European majors which may be tempted by the offer of feeder traffic. But the lack of commercial 'infrastructure' lets them down. 'Regionals are not in a position to provide data to potential partners - there is not enough transparency in the accounting practices.'

But he reserves his strongest criticism for the lack of support regionals show the ERA. He claims they undervalue the organisation, which is asked to represent them on technical rather than commercial matters. Heavy lobbying by ERA helped persuade Eurocontrol to abandon a new charging forumla last year, yet members lost a simple yet powerful marketing opportunity when they turned down ERA's proposal to publish a European regional airlines timetable, says Hövel.

The structure of Europe's regional airline industry continues to evolve. British Airways has pulled in five franchisees and Air France Group will rely on more than one regional to operate its Express product, while Lufthansa CityLine is growing substantially. Other regionals are looking to partnerships and mergers among themselves to provide financial strength, such as the three-way merger that produced Regional Airlines in France. An ERA spokesman says: 'There is always a place for the niche carrier; that's a function of the geography and culture in Europe. But how to take a step up is the problem for those with no big partner.

Source: Airline Business