Regional airlines provide underappreciated but critical connectivity for passengers all over Europe. TIM ROBINSON reports how the European Regional Airlines Association (ERA) is assisting its members in negotiating these tough times.
Aging aircraft fleets, fewer seats, declining services, tight margins and intense competition - who would be in the regional airline business – especially in a Europe still experiencing an economic slump?
Fighting the corner of regional airlines in Europe is the European Regional Airline Association (ERA). It now has 191 members overall (including ten OEMs and 22 airports) as well as 53 regional carriers. These range from Air Greenland, to Hop! from Flybe to Widerøe. The association also benefits from the synergies from having both airlines and suppliers in the same organisation – and acts as a forum that members can learn from each other.
Yet, although ERA’s regional airlines only make up 9% of intra-European passenger services, they provide a vital social and economic function - linking remote communities and regions and providing connectivity to help businesses grow. Indeed, while the reasons behind Brexit and the election of Donald Trump are varied and beyond the scope of this article – one only needs to look at a voting map of either the UK or US to see what happens if regions are neglected in favour of the urban, cosmopolitan cities.
Speaking at ERA’s annual media briefing in February, Jonathan Sullivan, Managing Director at consultants Seabury Aviation and Aerospace, notes 2016 was “the year that the regions spoke.” Too late, decision-makers are now dealing with the aftermath of this neglect.
A lack of regional connectivity, is not just a case of illogical travel such as a passenger wanting to fly from Inverness to Bristol having to go via the hub of Amsterdam, but in effect helps consign huge swathes of the electorate to limited economic opportunities.
Indeed, an underappreciated fact, says Sullivan, is how many major corporate headquarters are often found outside cities. In Europe, for example, this includes Airbus, Fiat, Morrisons, BASF, VW, Lego, Volvo, Santander and others. All these giant brands drive economic growth in these regions and rely on efficient travel connections to generate business, visit customers and shift staff around sites etc. Thus while Europe's regional airlines have faced downward pressure from the European mega-LCCs such as easyJet and Ryanair, their business/leisure passenger spilt (77%/23%) is more like the full-service legacy carriers.
Finally, in some parts of the world, including Europe, regional airlines may not so much power regional growth, as provide essential air links to remote communities that could not survive. These subsidised services, called public service obligations (PSO), are open to all airlines and are transparently advertised, but are dominated by regional carriers with small aircraft. (If it was economical to run bigger aircraft, it would not be needed in the first place). These vital links provide a critical, but underappreciated social and logistical lifeline to remote communities. ERA is working on a campaign to promote PSOs among its members believing greater use should be made of these temporary air links to connect Europe’s remote communities.
Regional airlines' aircraft fleets are aging rapidly. (Adrian Pingstone)
Yet despite the economic, social (and political) benefits) Europe’s regional airlines are, if not in actual decline, then under extreme pressure. “It’s a tough business to be in” admitted Sullivan. Just in the past nine years, the ERA's member airlines relative market share has declined 20% as competition has intensified. Low-cost carriers in Europe have grown by 7.9% over the past year, above the market average of 3.5%, while regional airlines have bumped along the bottom with 1.5% growth.
A stagnant European economy, not fully-recovered from the crash of 2008 also has led to a decline in frequency and seats available. “Europe is in the doldrums” warned ERA’s President and KLM Cityhopper MD, Boet Kreiken.
Regional airlines have responded to this by shrinking flights and growing seats. On some routes, daily flights, for example, have been reduced to three times a week – putting off business travellers who desire the most convenient schedule. That in turn feeds into a perception that regions are 'cut off' stifling economic connectivity even further.
One symptom of this is the age of regional airlines' jet airliners. Alone among other airline sectors, the average age of regional jets in service has dramatically increased – the very opposite of the rest of the airline sector. While new RJs (such as the SJ100 and CSeries) are entering service and others are on the near horizon (MRJ, E2) there remains a lot of older aircraft still flying. Indeed, Seabury’s analysis shows that while ERA’s 53 airlines have 706 aircraft in service, at present they have only 88 aircraft on order.
Simple physics and the efficiencies of larger aircraft, means while the rest of the industry has been focused on up-gauging, regional airlines have yet to see the full benefits of next-generation RJs. And, while turboprop manufacturer ATR has enjoyed record orders in recent years, new turboprops being delivered would still not make up the shortfall as older regional jets are phased out. In addition, despite the fuel efficiencies and quietness of modern turboprop airliners, there is still some resistance from passengers who perceive that turboprops equal old propeller aircraft.
A ‘limited window’ for profits
Regional airlines provide vital connectivity to remote areas. (Air Greenland)
But this situation is partly due to a function of the niche that regional airlines occupy. If they do make a route serving a specific region a roaring success – then larger airlines will quickly move in. There is then, says Sullivan, a 'limited window of opportunity' for regional carriers to make profits and grow a route, before bigger players will move in to gobble up market share. “The definition of success for a regional airline” says Sullivan “is working themselves out of a job.”
Yet Europe’s sluggish economic growth is now constraining economic opportunities. A slowing of EU expansion since ten countries joined en masse in 2004– has also limited new markets for European airlines. At the same time, the larger LCCs, with economies of scale and lots more aircraft on order, will now be tempted in the near future to take on riskier, more marginal routes in order to try and stimulate growth. In particular, continued low oil prices will reduce the downside for LCCs to put extra capacity into riskier markets.
This extra competition is further bad news for Europe's squeezed regional airlines. As Sullivan notes, even this ‘window of opportunity’ for regional airlines is now shrinking.
A regional partnership model for the future? Gulf carrier Etihad's Swiss outpost - Etihad Regional. (Etihad Regional)
This tough business climate – along with new worries about Brexit and what that could mean for regional carriers has kept trade organisation ERA busy working for its members. ERA predicts that despite the pressures on its airline members, results from 2016 will show a good year for Europe’s smaller airlines, with increased demand and better load factors.
Sullivan’s analysis is that regional airlines should react by focusing on the business market first, building brand loyalty among business passengers. In the medium term, he suggests that region carrier should consider a partnership strategy with larger airlines to act as feeders into their bigger networks. One model for this kind of relationship might well be Etihad’s European beachhead, Switzerland’s Darwin Airline (Etihad Regional).
Going forward, one key initiative that ERA is championing is alerting its members to up to €1bn worth of credit for fleet renewal from the European Investment Bank (EIB) – as the 2008 crash has made accessing finance much more difficult. Indeed, ERA observes it has been easier to get finance for airport equipment, than for actual aircraft. A decision by the EIB in July 2016 to open up new lending guidelines was preceded by a three-year campaign by ERA highlighting the investment opportunities offered by regional carriers.
These loans are targeted directly at regional airlines to upgrade their equipment with newer, more fuel-efficient regional jets. Unlocking this finance from the EIB, could be a critical step in reversing the aging fleet problem and speeding up the introduction of next generation regional aircraft.
This initiative is already starting to pay off. Simon McNamara, Director General, ERA says that several of ERA’s member airlines are now in negotiations with the EIB, with potential orders in the next six months. Could this year’s Paris Air Show see a flurry of orders for regional jets?
EU Passenger compensation regulations are imposing an extra burden on small airlines, says ERA. (ATR)
Meanwhile, ERA notes that progress in two key areas of concern for its members has come to a virtual standstill. A planned review of the controversial EU621 passenger compensation regulation has become a political football over UK-Spanish disagreement about Gibraltar’s sovereignty – with little sign of progress over the past 18 months. This EU consumer regulation, dealing with delays and cancelled flights has been disputed by airlines for extending their responsibility (and therefore compensation) to events that carriers say are completely beyond their control – the latest being birdstrikes. A recent case had seen an ERA member held liable for a flight delay following a birdstrike by a non-aviation specialist judge as they ruled birds are present in the air, so the incident was thus foreseeable. ERA has been pressing the European Safety regulator, EASA to intervene as an impartial expert body to warn judges that making airlines liable for this could have a negative impact on safety.
Another project going nowhere fast is, of course, Single European Sky (SES) - the grand project to modernise Europe’s fragmented ATM and create more efficient airspace. With Brexit and other populist forces are threatening to pull Europe apart, the prognosis for any swift action on SES is not good. Yet it is still estimated by Eurocontrol that rationalisation and optimisation of Europe’s ATM system could save airlines 10% in fuel burn. For regional airlines that already operate on thin margins this saving would not be insignificant. “It’s very frustrating” says McNamara.
A soft (aviation) Brexit needed
A soft Brexit as possible is needed for regional airlines, says ERA (Flybe)
Another issue of concern for ERA for its members is the EU's Emissions Trading Scheme (ETS) which applies to flights within the EU. For smaller carriers of the kind that makes up most of ERA’s airline membership, this means the burden of extra administration.
While ICAO agreed in October 2016 to extend the ETS into a global system, ensuring a level playing field for all airlines, ERA is still frustrated that Europe's ETS will be extended until 2025 and is concerned there could be twin carbon-trading schemes (EU and ICAO) in operation – making for even more paperwork and red tape for small airlines and affecting competitiveness.
Finally, for all European airlines, there is the looming shadow of the UK’s decision to leave the EU – which ERA’s D-G McNamara describes as “a European issue, not just a UK issue.” McNamara says that ERA’s position is consistent – what is needed for ERA’s regional airlines is “as soft Brexit as possible” – allowing airlines the same (or similar) access to markets and regulation – such as continued traffic rights and especially for regional airlines; aircraft and crew, maintenance and insurance (ACMI) leasing. McNamara is bullish that when Article 50 is triggered, negotiators on both sides will put Europe's consumers first. “Everyone’s talking doomsday but there needs to be a solution that works.” Brexit for the wider European airline industry, is not purely a UK challenge.
Could EIB finance allow Europe's regional airlines to revamp their fleets? (Bombardier)
In short, despite their small size in comparison to Europe’s legacy airlines and LCCs, regional airlines remain extremely important - both in generating economic growth through linking regions of Europe and for social reasons – connecting remote communities. As politicians on both sides of the Atlantic found out last year – neglect the regions at your peril.