RAA Special Section: Europe’s regionals put skids on ill-timed capacity growth

 - April 30, 2009, 11:46 AM

Short-haul operators in Europe have been seeing almost no growth in passenger numbers and have struggled to reduce capacity to offset lower traffic as the global economic downturn has turned to recession. After a disappointing 2008 that saw load factors fall, European Regions Airline Association (ERA) members now suffer “a considerable worsening” in demand. Recognition that a boom has always followed the doom in “cycles of about every eight years” is all that tempers the “full horror of the situation,” said ERA director-general Mike Ambrose.

The ERA official confirmed that member carriers are “cutting capacity to cater to the slump in demand,” something they had singularly failed to do effectively last year. New ERA statistics released in early April show that while revenue passenger miles grew by 3.5 percent last year over 2007, capacity grew by 4.6 percent, leading to an inevitable–albeit small–fall in scheduled passenger load factor.

Nevertheless, Ambrose expressed some encouragement that a few areas of the market have improved. “Pockets of growth were apparent in some geographic regions in 2008, particularly in some Scandinavian, Baltic and eastern European states,” he said. Also, initial reports covering the first two months of this year appear to offer him grounds for at least a little hope. While passenger numbers remain below the traffic levels of 12 months earlier, the relative year-on-year decline has reduced. “The fall in both months was less than in November and December,” revealed Ambrose. “And February fell less than [did] January, but I’m not saying that the market has bottomed out.”

Funding Plea
As ERA members met in the Polish capital city Warsaw last month, the association’s director-general used the occasion to plead for politicians to join airlines in preserving the industry’s economic and social contribution. “The effects of the current crisis are already severely reducing the economic viability of many airlines,” said Ambrose.

“The industry now calls urgently on Europe’s regulators to avoid introducing inefficient and burdensome requirements and look instead at supporting beneficial projects, such as Sesar [the Single European Sky air-traffic management research program] with public funding,” he added. “We must all work together to ensure aviation continues to contribute to Europe’s overall employment and social goals.”

Ambrose said that the Warsaw conference began with a reality check as speakers outlined the circumstances that had generated the economic crisis and considered what airlines could do to survive. “I would love [the] European Parliament environment committee to have been there to hear how operators can benefit from any incentives to improve their efficiency,” he noted.

He also is encouraged by a certain “can do” attitude among ERA carriers as they left the conference with “a determination to succeed.” Ambrose reported a “tremendous energy, with no doom and gloom.” But how will those emotions translate in the marketplace? “That is up to the airline chief executives,” said Ambrose. “Every company has to look at its strategy to survive by making cuts and changes; we need a parallel action from [regulators and politicians] to eliminate anything that is not adding value in terms of financial viability and safety.”

Ambrose said the air-transport industry strongly supports the SES and he welcomed the recently approved second package of measures (SES II) scheduled for introduction before mid-year. SES II involves common regulation, performance targets, new technology and an extended role for the European Aviation Safety Agency (EASA) in an effort to make European airspace more efficient through better coordination and management. “The European Commission and EASA should work together to eliminate duplication and seek economies of scale,” he told AIN at the end of last month’s conference.

Reviewing overall air-transport trends since 2001, Steve Fletcher, a principal at consultant SH&E, said aircraft capacity increases had come from large aircraft flying longer routes. Numbers of seats offered on regional operations (aircraft flying fewer than 100 passengers over sectors of less than 500 miles), however, had remained largely static.

Such consistency–or stagnation, depending on one’s perspective–was offset by ERA’s improving load factors compared with major carriers: there is now only a four-percentage point difference between the two sectors on intra-European services. Fletcher cited International Air Transport Association predictions that airlines wouldn’t remove enough capacity to match an expected traffic decline of 6.5 percent early this year.

“Survival is going to be the main priority for two or three years,” said Fletcher. “Survivors will be those who have funds and manage their capacity and costs.”
Christian McCormick, chief executive of French bank subsidiary Natixis Transport Finance, told almost 150 conference delegates that, despite the sub-prime lending crisis, “2008 [was] one of the most active years in air finance.” Nevertheless, a period of relative market stability ended with the troubles experienced by aircraft lessors International Lease Finance and General Electric Commercial Aviation Services.

He said only 30 percent of the 20 largest banks remained active in aircraft financing during last year’s fourth quarter. Excluding export-credit agency activity, McCormick predicted that banks would reduce aircraft financing by 50 percent this year.

Workforce Collaboration
Airline speakers outlined different ways they had responded to the emerging economic crisis in the past year. For Stefan Wentjärvi, president of Blue 1, improved cooperation with the Finnish regional’s workforce was key. As aircraft utilization dropped and staff costs increased, the airline managed to offer more training time, optional leave arrangements and negotiate a productivity deal.

In Switzerland, five-year-old Baboo continues to rejoice in the exuberance of youth, bringing a strong team spirit and nimbleness to bear as it maintains growth. President Jacques Bankir offered a new definition of a regional airline: “an expensive low-cost carrier.”

Having started with a pair of 50-seat Bombardier Q300s, it now operates two 74-seat Q400s and tripled its capacity quickly last year by introducing three Embraer E190s. Bankir attributes Baboo’s success to the right fleet, the right routes, customer focus and image quality.

Frustrated that subsidiarity principles allow individual national aviation authorities in the European Union to opt out of certain legislation, Ambrose wants to see “the simple concept of a single EU register” for aircraft owned and operated by airlines of member states. Such a requirement would overcome the myriad potential inconsistencies that can arise with, say, a Greek carrier flying a French aircraft with an Italian crew between Ireland and Denmark. “If an aircraft can fly between two partner countries, there is no case for anything other than an EU register,” said Ambrose.

The ERA director-general acknowledged the limited assistance immediately available to Europe’s smaller operators from the region’s legislators, but vowed to maintain pressure on them. “We must accept that there is little the EC can do in the short term to help the survival of the industry,” said Ambrose. “It has already pushed the SES forward, but now it must advance longer-term goals to relieve airlines of some of our burdens. The EC’s priorities should not be in passengers’ rights. It should recognize that the air-transport industry is a driver for economic growth.”