REPORT BY COLIN BAKER IN ATHENS
The crisis in the airline sector has hit Europe's regional sector hard. It will, however, provide opportunities for those that can get through it
The events of 11 September have clearly hurt all airlines, but not in the same way or to the same degree. While Europe's flag carriers are on the ropes - or in some cases out of the ring altogether - the Continent's regional airlines could find that opportunities as well as threats emerge from the crisis.
However, as regionals gathered in Athens early in October for the general assembly of the European Regions Airlines Association (ERA), the mood was subdued. Most agree that they will not have a clear picture of the fall-out from the crisis until the end of the year, as more figures become available and the majors start to announce their plans for the summer timetable. Beneath the surface there was clear expectation among the regionals that they could now make network gains as the major carriers seek to cut their losses on thinner routes.
Almost by definition, Europe's regionals have far less exposure to the collapse of traffic on the transatlantic. However, the ERA is quick to point out that damage has been done in terms of connecting traffic, even if it is less easily quantified. "They are just concentrating on survival at the moment," says Mike Ambrose, ERAdirector general, admitting that there are few hard figuresas yet to work with. "You start to get conjectural and hypothetical," he says, although he still insists that any compensation or support must be given on an equal basis for all airlines - regionals and majors alike. Ambrose wants more support from the European Commission (EC) on insurance and security, complaining that Brussels has only reluctantly given ground on the former.
The immediate impact of the terrorist attacks do show through in the September traffic figures for the ERA members. Overall, the numbers were down 1% for the month, although this represents 10 days of normal business and 20 days of chaos. Traffic had been growing roughly in line with the ERA's forecast annual growth rate of 5% this year before 11 September. That turned to a decline of 6-7% for the remainder of the month.
The European majors, represented by the Association of European Airlines (AEA), have already published figures for October which illustrate a steep decline for intra-regional traffic. A traffic decline of 5% year-on-year in the immediate aftermath of the attacks had become a 15% decline by the end of the month. Capacity cuts have not yet been felt to the same extent, although they are starting to feed through. A positive growth of 3.5% in intra-European capacity in the two weeks prior to 11 September turned to a decline of 1% by the end of October. These figures also include the impact of the collapse of Swissair at the start of October.
Network opportunity
The prospect of major network cuts by the majors has already caught the attention of the larger regionals. In Athens, airline presidents were making no secret of the fact that they expect to take over some of the routes and slots that are being shed. Moves were already under way to hand down less profitable services to lower-cost regional affiliates. The prospect now is that this could be accelerated.
It is interesting to note that Swissair had planned to roll many of its shorter routes into affiliate Crossair long before crisis struck. "They weren't buying all those regional jets for nothing," notes one analyst.
In the event, Crossair has emerged as the centre of plans to salvage something from the collapsed Swissair mainline operations. In Belgium, too, efforts are centred on folding bankrupt Sabena into its Delta Air Transport (DAT)regional arm.
It is ironic perhaps that a year ago, when Crossair hosted the last ERA assembly in Switzerland, the regionals were warning against the stifling control that some flag carriers seemed keen to exert over their affiliates. That would jeopardise their cost base and flexibility, warned the regionals. A year later, it is the regional arm that has proved to be the survivor in Switzerland and Belgium.
Even the strongest majors are starting to warn about the need to keep costs down at their regional affiliates with growing regional jetfleets. Air France executive vice president network management Bruno Matheu complains that regional jet manufacturers have to do something about unit costs, starting with aircraft price tags. "In Europe, it is very hard to make money with 50-seaters," he says.
Crossair was notable by its absence from the Athens meeting. Last year its charismatic founding chairman Mortiz Suter (who helped inspire the creation of the ERA) had led off the association's 20th anniversary celebrations. That was in stark contrast to the sombre mood this time with Suter - at least for the present - absent from the industry.
In Belgium, meanwhile, the speed with which regionals have added services to take advantage of the gap left by Sabena was certainly impressive. Antwerp-based regional VLM started operating out of Brussels Zaventum to London City (its effective hub) the day after flag carrier Sabena finally collapsed, a decision taken just days before launch. VLM marketing manager Peter Bary explains that although it had been eyeing this market for a considerable time, the demise of Sabena presented an opportunity to jump in. UK regional British European was also quick off the mark, with new services to Brussels from Birmingham, Newcastle and Edinburgh.
Other have not been so fortunate. UK regional Gill Airways ceased operations a week after the 11 September attacks as the Bank of Scotland pulled out of a proposed management buy-out. However, Gill was struggling long before September. Start-up National Jets Italia suspended operations in November, as it struggled in its quest to obtain financing.
Not all of the industry's problems have stemmed from 11 September. ERA figures for the first six months of the year show that there is a wide variance in the health of its members (see table). For the six months to June, passenger numbers were down 14%on the previous year and 12% against the ERA budget forecast. The average, however, masks a gap between a 25% fall for the weakest carrier and 20% growth for the strongest. The same is true for revenues, where the 2.5% average covered a range between a 10% fall and a 16% rise. Forward bookings at mid-year were also significantly down. "The attacks came at the end of a season of economic slowdown," says Ambrose. "Airlines will have to learn to adapt. The lean and mean will emerge stronger."
The aircraft financing community seems to be taking a similar view. One financier attending the ERA general assembly predicted: "It certainly seems that some will thrive and survive. However, we are still waiting for the fog to clear."
Financing for aircraft orders may yet prove difficult. Airline executives themselves concede that it is difficult to put a figure on a regional jet given the current business climate. A ball-park figure could be a 15% drop in value since September. Turboprops may have fared slightly worse. This makes it difficult for carriers when they go to the banks to finance aircraft orders that are now due for delivery.
Banks appear to be taking a two-stage approach when it comes to financing new aircraft. At the moment they are concentrating on the top 10 majors and the healthier low-cost sector. Approval has been given for new instructions for these carriers since 11 September. Regionals are likely to have to wait for a second stage before the financial community is prepared to invest. The issue is how long this will take. "Cash is king. The question is how much cash have carriers got. Is it enough to see them through the next six to nine months before confidence returns?" says the financier, although stressing that the financing community still has long-term faith in the industry's potential.
Source: Airline Business
