ERA 2006: Ambitious Air Nostrum won’t compromise its core identity

 - September 13, 2006, 4:35 AM

Officials from small carriers meeting in Barcelona this month for the European Regions Airline Association general assembly very likely will bump into Carlos Bertomeu, chief executive of local Spanish operator Air Nostrum. In so doing, they also might hope that some of his success will brush off. In the past 10 years, Air Nostrum has seen passenger numbers increase by 1,700 percent, flights grow by 1,000 percent and billings expand by an impressive 3,400 percent.

In less than 12 years since its first operation–16 passengers flew on a Fokker 50 from Valencia to Bilbao in December 1994–the carrier has built a fleet of more than 60 regional jets and turboprops that fly almost five million passengers a year to 34 Spanish and 31 foreign airports. Almost 2,000 people work for Air Nostrum, whose 2,750 weekly flights on 117 routes make it the third busiest carrier at Madrid Airport, the second at Barcelona and Seville, and the primary operator at 15 Spanish regional airports. Revenue last year totaled about €555 million (around $715 million), up 11 percent on 2004 and yielding the airline a net profit of €22.7 million ($29.3 million).

Emilio Serratosa, president of parent company Nefinsa Group–a private family-owned investment firm that holds 96.8 percent of Air Nostrum– said the negative effect of record high fuel prices put “strong pressure” on costs. The airline has completed heavy cost-cutting in the past three years, “on the order of 30 percent in a sector that has a 4 percent [profit margin],” Bertomeu reckoned. “But it seems that the fuel [price increase] eats everything.”

Air Nostrum recently took delivery of its second and third (of at least nine) Bombardier Canadair CRJ900ER regional jets as it upgrades and expands its fleet under a business strategy that has proved remarkably effective. A partnership with Iberia and a step-by-step progression from providing feeder service to Madrid to linking Spanish and other European secondary cities have proved vital to Air Nostrum’s development.

When starting the operation, former Nefinsa investment manager Bertomeu
identified three conditions for success: an alliance with Iberia, sufficient size to obtain genuine economies of scale and cooperation with local authorities. He managed to achieve all three objectives.

Bertomeu also succeeded in uncovering greater-than-expected demand and in establishing good industrial relations at Air Nostrum: “I have been 12 years without a strike,” he crowed. On the down side, yield from the operation, which has always concentrated on business-class traffic, didn’t materialize to the extent he had hoped.

Bertomeu planned an Iberia partnership from Day 1, and “absolute coordination” has been a major feature of operations, he said. “In the beginning we could not use the trademark until we had demonstrated [our ability to represent Iberia adequately],” he added. “There was coordination and code share, but we had to show we could compete long term and had financial support.”

Established in 1997, the Iberia Regional franchise led to increased hub feed for the major, providing international long-haul connections via Madrid and Barcelona to and from the Spanish regions. The relationship deepened in 1999 when Iberia joined the British Airways-dominated Oneworld global alliance and Air Nostrum became an affiliate partner.

Only four years earlier Air Nostrum launched operations with Fokker 50 feeder service from Valencia, situated about halfway down the country’s Mediterranean east coast, and other cities to Madrid in central Spain and Barcelona in the northeast. The Spanish regional next inaugurated Madrid feeder service from other European secondary cities, increasing the feed through Iberia’s main hub.

Now, as it progresses through its 12th year, Air Nostrum has reached its third development phase, involving nonstop links between Spanish secondary domestic points. Next, it plans to establish a future international network among medium-sized European cities without using hubs or other “centers of distribution.”

Evolution of the fleet during 12 years of operation has seen Air Nostrum move on from initially three (and ultimately 12) 50-seat Fokker 50s to 68-passenger ATR 72s, of which it currently flies seven. It has also used a pair of smaller ATR 42s.

In 1998 Air Nostrum added the first 50-seat Bombardier CRJ200 regional jets and today it flies 29 examples. With five CRJ700s and its first CRJ900ERs, the airline maintains a 37-strong CRJ fleet. The currently ordered nine CRJ900ERs could grow in number to 16 as the airline converts CRJ200 options, of which Air Nostrum held 20, which also allows it to take additional 50-seat Q300 turboprops. The airline now flies 18 Q300s and a pair of British Aerospace 146 quad-jets. After receiving outstanding aircraft–whether taken as Dash 8s or CRJs–Air Nostrum will become Bombardier’s largest European customer.

The airline recently embarked on an ambitious expansion plan to increase  passenger numbers by some 40 percent by 2009 from last year’s 4.7 million. The strategy involves three steps: increasing fleet size to at least 80 aircraft, introducing the larger-capacity CRJ900ERs (on regional routes to be agreed with Iberia), and increasing aircraft use through more frequent services from Madrid and Barcelona, both of which have undergone recent expansion. According to Bertomeu, the new terminals will enable Air Nostrum to reduce costs through greater economies of scale and increase income while providing better connections.

Bertomeu attributes much of Air Nostrum’s success to its agility in being able “to reinvent the company every day.” He insists that does not mean it will lose its character, despite continued growth and adoption of larger equipment, however: “In the future, I imagine Air Nostrum as a very big company, but always operating at the regional level.”

Bertomeu cited many opportunities to address “in the international network of low- and medium-density [routes], in which we are well positioned.” They include connecting services via Madrid as an alternative to competing hubs.

With much of Iberia’s competition coming from low-cost carriers (LCCs), the major has teamed with four partners including Nefinsa in laying plans for such an operation at Barcelona, while it concentrates on originating and connecting traffic at its Madrid headquarters hub. Iberia has said it will drop “cross-sectional” services in the next few years because LCCs have made them unprofitable, leaving Air Nostrum/Iberia Regional to serve remaining business traffic on those routes.

Asked about the challenges associated with the rise of LCCs, Bertomeu seemed less than alarmed. “Air Nostrum flies low-density routes, with a minimum tourist element and based completely on connecting with Iberia,” he explained. “LCCs are dedicated to very price-sensitive, high-density tourism with no connections. Until now, coexistence has been very easy, and experience has shown that almost all the routes can exist with sufficiently low prices.”