Heavy losses prompt drastic changes at BEA

 - May 21, 2008, 9:12 AM

After several years of 25-percent compound growth, UK regional British European Airlines is adopting a more measured approach to provide less unpredictable development after posting losses last year. Moves in late June to meet shareholders’ revised aims included the voluntary departure of chief executive Barry Perrott and the decision to release the Canadair RJ fleet. The airline lost money in the 12 months ending March 31 this year, after reduced profits in the preceding year, and had a “difficult” first quarter, according to former COO Jim French, who has recently assumed the post of managing director.

French told AIN that the airline, whose services include franchise, code-share and wet-lease operations for Air France, must match capacity to traffic and work to attract yield rather than volume. Within days of his appointment, French told employees: “The main goal is to return the business to profitability. We have become too complex, which causes inefficiencies and a lack of flexibility. This has significantly disrupted  our aircrew and maintenance technicians.” The carrier “must simplify wherever possible, understand our objectives and revise plans to achieve those goals.”

British European has three BAe 146-100s, eight -200s, and six -300s; three Dash 8-200s and six -300s; four CRJ-200s; and one Shorts SD360. Deliveries of four de Havilland Dash 8Q-400s are scheduled to begin next month.

French concedes that disposing of the four CRJs “might take some time. They are financed on UK tax leases, so we must assess the options and penalties. While extremely reliable, the CRJs are not economical in our network.” Two CRJs were dedicated to Air France, but that airline’s acquisition of several regional carriers gave the mainline carrier a surplus of 50-seat RJs.

RJXs Still In Plans

French has reassured BAE Systems that the airline will take 12 Avro RJX100s for which it signed a memorandum of understanding in April; options are held on a further eight. British European will be the first operator of the new Avro when it takes delivery of the first one next  April. Deliveries will continue through March 2006. Although routes have not been decided, French said the first RJXs would operate from Birmingham or Belfast, where there would be available crew and good maintenance support.

Arrival of the first RJX coincides with lease expiration of a 146, with others expiring at regular intervals thereafter. French hopes to shrink the 100-seat fleet to just 12 RJX100s, with flexibility to take all 20–with or without the 146s. Realistically, British European is “most likely” to add at least 17 replacement aircraft, with any retained 146s taken from five ex-Thai Airways -300s that are nearest in specification to the RJX. The RJXs will probably all be finance leased.

The airline is also considering the acquisition of more 78-seat Dash 8Q-400s to provide an “ideal” fleet of eight. The additional capacity (over that of the CRJs) could be used to replace some 146 services, said French. Meanwhile, a Dash 8-300 will replace the Shorts 360.

British European has monitored Dash 8Q-400 performance. On paper, the operating economics of the turboprop are “quite exceptional,” according to French. “It offers a seat cost well below that of a Boeing 737, with a cruise speed similar to the 146.” He said dispatch reliability of the twin turboprop has improved: “It’s now 98 percent, which is quite acceptable, and climbing.” The UK airline is looking forward to receiving approval for Q400 operations at London City Airport. “The Civil Aviation Authority must be satisfied it can fly a 6.5-degree glideslope with a low probability of diversion.”

Focus on LCY, Birmingham

The airline must focus on operations at Birmingham and London City, said French, who is looking closely at capacity on all routes. “We are reducing flights on the Aberdeen-London City route, which had been running three 146 flights a day.” Core traffic has stabilized at load factors “in the mid-60s [percent].” In mid-July a Dash 8-200 was introduced between those airports, while the 146 formerly used on the route is now deployed on Birmingham-Channel Islands runs that have high summer loads.

Both aircrew and maintenance technicians have been disrupted by the airline’s complexity, according to French. “Maintenance suffered from changes of routine. Pilot problems resulted from changing bases and attrition, both of which disturbed pilots’ domestic lives.” The effect on morale was such that pilot attrition reached 25 percent a year, but has now been reduced to 6 percent, a rate French thinks can be sustained with the prospect of the new RJX coming online. “But we must improve pilots’ general quality of life by stabilizing their professional life.”

French concedes that British European has been running below its 2001 traffic targets of an expected 2.4 million passengers, plus an additional 500,000 on behalf of Air France. To become more stable, French said the airline must be less opportunistic in the future. “When we were owned by [the late] Jack Walker, he would fund the opportunistic approach, but now he has been replaced by normal shareholder practice,” he said. “We need a longer-term strategy. Normal business cycles mean that some routes will become marginal, so if we see a greater opportunity we must balance the new venture against the risk.”

Therefore, French said, British European must be driven by demand, not capacity. “If there is a lesson we learned, it is from having replaced five Fokker F27s with nine Dash 8s and then adding CRJs and more 146s. That meant introducing two new types simultaneously, in addition to increasing fleet size significantly. That tends to force you into taking more risk than normal. Current growth has to slow down.”

Plans to sell shares have been delayed by at least three years, said French. “The real issue now is to tailor our capacity and keep costs on the floor.” The British European managing director said the airline has “a good advance fuel and currency purchase policy, and we still enjoy good market improvements and good yield. Last year we chased volume and saw yield collapse; we must not try to be Ryanair, EasyJet or British Airways.”