BE’s narrowbody plans may hinge on OEM help

 - October 8, 2007, 11:16 AM

UK regional carrier British European Airlines hopes to marshal more active support ofairframe manufacturers as it considers a larger, longer-range replacement for its BAe 146s. Since a loss in 2000 to 2001 continued into the following financial year, a change of leadership has seen an overhaul of the airline (which now brands itself a low-fare operator, marketed as Flybe) and its fleet under managing director Jim French, who predicts a return to profit in the 12 months leading to March 31 of next year. If the airline can sustain the turnaround, it could become an attractive prospect for further investment by its present private-trust owners or by venture capitalists, according to French.

By the end of this month, BE will have relinquished its Bombardier CRJs, all four aircraft having been placed with Air Sahara to support the Indian operator’s fleet of Boeing 737s. To build the turboprop element of a planned two-type fleet, the airline is taking seventeen 78-seat Bombardier Q400s (joining an existing four aircraft) and holds options on a further 20, which, if exercised, could see deliveries continuing to 2008. It has already traded in three Q200s and four Q300s. After it takes four new aircraft this year, BE will receive eight Dash 8s next year and five during 2005 and 2006. The jet contingent comprises BAe 146-200/300s and BE expects to see a number of short-term 146 wet- and dry-lease arrangements during the next several months as crews re-train and the airline completes its initial fleet overhaul.

French plans to expand BE’s route network more deeply into Europe, including new or extra services to Italy, Spain and the Nordic region. Although the airline can readily fill the BAe 146s, French pointed out that the type has proven restrictive in some operations. “In operations from Southampton, the 146 has a limited range potential because of the runway length, and southern Spain is beyond its best economic range, which means the seat cost goes up and loads are limited to 98 passengers,” said French.

BE will require at least eight to ten 120+-seaters to replace the 146 fleet, but it remains in initial stages of type evaluation. The 146s could fly in a revised route network that involves no increase in range. French said that technical data on the 108-seat Embraer 195 suggest “serious payload range restrictions when operating from Southampton.” BE also will look at the Airbus A319 and the Boeing 737-700 in 150-seat configuration, he said.

“It’s very early days, but we understand that they both have good payload-range out of Southampton,” said French, who expects a decision before the middle of next year, with a view toward unveiling formal plans in about a year’s time. The decision process could include the manufacturer’s involvement in proving the viability of their aircraft and BE’s ability to operate them commercially. “The dream ticket would be
to have a well developed plan with the OEMs for a trial [of
the aircraft],” said French. “Once the research has been done, followed by a short-term trial, we would be able to confirm plans.”

Asked if the fleet renewal would coincide with a need for new investment in BE from the Walker family trust, French said, “The truth is that an airline is not normally part of a classic trust portfolio, but the owners have supported us through very difficult times.” Return to profitability could increase the airline’s value to potential investors, and the present owners could release part or all of their holding, perhaps in three to five years.

The BE managing director confirmed that the airline receives “constant” inquiries from venture capitalists, but first “we must complete the fleet rationalization and decide where we go next.” Venture capitalists like to enter the market just before an upturn in value, according to French. “The way we go will depend on how the airline develops. If we commit to a broader route network needing a general fleet of 150-seaters, the current shareholders might be less likely to support the move, so they could welcome such investors,” he said.

But despite BE’s self-proclaimed identity as a low-fare airline, can it really be considered such given that its operations involve code-sharing, franchise
activities, interline agreements, business-class lounges, flexible tickets and allocated seating,all hallmarks of mainstream carriers? “Since we’ve gone this
way totally, there has been a dramatic turnaround in the fortunes and economics of the business,” claimed French. BE has changed many of its customer terms and conditions, resulting in an increase in ancillary income (from such areas as onboard catering, baggage and credit-card charges and premiums from telesales and computer-reservations systems usage), which French expects will contribute more than 10 percent of the airline’s profitability.

“I still marvel at the [low] break-even yield now required on the Q400 in short-haul UK and European services in our new cost and fares structure; it can be less than 50 percent of the yield required two years ago on the previous [Q200/300] model,” said French. “We now have a fantastic opportunity to open new markets. We are looking closely at the future of our code-share, franchise and interline arrangements. I have no problem with what we are offering because we have to manage, but we are reviewing everything else in the light of changes in the market. There is a lot of contractual commitment, so there is time to explore our options until the end of 2005.”

What is certain is the value of support for regional airlines from airports such as Southampton, where BE now controls a strong presence. “It is absolutely critical that we spend a lot of time [together] to understand and agree how to do things,” said French.  Such support is not simply tied to direct job creation, but has many ancillary aspects, he explained. “Landing and passenger-related charges and marketing support–Southampton is one of the most proactive airports, but there are things they need to work on [such as] terminal and ramp capacity and car parks.”

Most recently BE has turned its attention to two regional airports in southwest England–Exeter (Devon) and Bristol. Both have good highway connections that can feed passengers from large catchment areas, and Exeter enjoys commercial development and “immigration” from southeast England, according to French.
“Exeter has the chance to be proactive in re-thinking its terminal facilities and layout; I see wonderful opportunities at Bristol, especially for Q400 service to France.”

French said rebranding the airline and redefining its product has produced almost $20 million in cost-based savings over the past year and about $30 million this fiscal year. After fleet and route-network changes, re-equipment financing stands as the last–and perhaps most challenging–phase of its five-point recovery strategy.