Results define Gothenburg’s home-grown airline

 - October 23, 2006, 10:56 AM

Circumstances have certainly done few favors for the 2005 ERA General Assembly’s hometown airline. From its first day of operation, Gothenburg-based City Airline seemed marked for failure. It flew its first revenue service four years ago, on Sept. 10, 2001, the day before the U.S. terrorist attacks that accelerated the global economic recession already under way. But rather than despair, City Airline chose to take heart in the fact that the only way to go was up.

“We had to learn the hard way, and have been doing so since Day One,” said chief executive Tom Ericsson. Unlike older operators, City Airline did not have to engineer change to cut entrenched costs or improve existing efficiencies.

Ericsson’s pragmatism extends to characteristics he seeks in employees, with a stated preference for pilots from general aviation rather than major airlines. In his words, he prefers people who can bring entrepreneurial skills learned in smaller operations, rather than the bad habits often learned in bloated bureaucracies.

An aviation neophyte, Ericsson feels no nostalgia for how things happened in another place at another time. Hence, he takes a purely businesslike approach, aiming “to fill as many seats as possible to the highest value.” Indeed, he claims to bring no emotions to his position, having joined City Airline from a position running a U.S. private education company. That’s not to say the management team doesn’t benefit from experience in the airline industry. Friedel Roedig, a former chief executive of the Star Alliance global airline partnership and ex-employee of Germany’s Lufthansa, provides the aviation know-how.

Ericsson already knew Lars Magnusson, the Swedish industrialist who started the process of building City Airline four years before its first revenue flight and who also owns STS Education, one of the world’s largest international education companies. Magnusson believes in offering a broad route network, linking non-hub airports, rather than competing against hub-feeder flights by Scandinavian flag carrier SAS. He wants City Airline to remain flexible by using spare capacity to wet-lease aircraft and provide code-share feed to other European operators.

So, is Ericsson free to run the airline or must he constantly do his master’s bidding? Since one man owns the airline, Ericsson described the process of coming to major decisions straightforward. Magnusson is not “operationally engaged,” leaving the chief executive to manage the airline. “Mr. Magnusson is involved, but he allows you to run the operation once you have argued your case,” said Ericsson.

Just last month Ericsson successfully argued the case to fly once a day to Lulea in northern Sweden, a service that starts this month with an Embraer ERJ 145. Such ability to take decisions for almost immediate application seems to demonstrate the advantage of pragmatic private ownership.

Before the advent of City Airline, Gothenburg “just fed other [SAS] points,” such as Scandinavian capital cities Stockholm, Copenhagen and Oslo, and through them the rest of the world. Now, City Airline sees Gothenburg’s Landvetter Airport as a secondary point between the larger Stockholm Arlanda and Copenhagen Kastrup hubs. It sees itself as “a low-cost airline for business traffic at reasonable fares.”

Only regional jets have allowed the airline to pursue Magnusson’s vision, said Ericsson, because the target routes were too long for practical turboprop operation. An RJ in two hours can fly a route that would take a turboprop, say, two hours 45 minutes.

City Airline aims to serve strong business routes to the south and west of Gothenburg each morning and evening, along with leisure-oriented flights to the north and east during the day to boost aircraft use. The business flights principally serve Lyon, France; Manchester and Birmingham, UK; Milan and Zurich.

Originally, it had hoped to “overnight” aircraft at north and east points such as Tallin, Estonia, and the Finnish capital Helsinki for early-morning feed to Gothenburg, but that plan proved impractical. Now, those cities–as well as Milan and the Norwegian city of Bergen–get middle-of-the-day service. City Airline does not have to provide corporate transport for other elements of Magnusson’s Janus group, although it does fly weekly charters to Salzburg to feed the group’s tourism and hotel businesses.

City Airline earned its certificate in January 2001 and a month later began wet leasing a 37-seat Embraer ERJ 135 to British Midland Airways for Glasgow-Manchester services. The same aircraft inaugurated City Airline’s own schedule to Manchester on Sept. 10, 2001. Soon afterwards, it leased a second ERJ 135 to UK regional Eastern Airways for the Norwich-Aberdeen route–important for North Sea energy-industry business traffic.

City now flies three 37-seat ERJ 135s and three 49-seat ERJ 145s. Four aircraft serve eight established destinations from Gothenburg; one provides charter flights, and a Lyon-based machine operates corporate and ad hoc charters as well as scheduled flights. The airline maintains sales offices in France, Italy, Switzerland and the UK.

It owns none of the 37-seat ERJs directly, although two belong to the parent group. Ericsson cited “a good mix” of terms covering the four aircraft flown on operating leases from other sources.

Two ERJs on short, six- to 12-month terms offer “great flexibility” without necessarily commanding higher monthly rates than the other aircraft, while two others operate under three- to five-year leases. Ericsson suggests that as some regionals trade up from 50-seaters, increased supply could see lease rates fall.

Emphasizing the need to tie aircraft to specific routes, Ericsson would like to fly longer-range ERJ 145LRs. “There is an extremely narrow margin for success in terms of operating cost, yield and load factor,” he said. The aircraft work best on routes of around two hours, and for sectors such as Lyon and Milan, range becomes an issue with full loads or strong headwinds.

The LR’s higher performance would allow Ericsson to consider future destinations, but City Airline’s requirement for 10-hours-per-day utilization from three round trips could limit potential applications. “Sectors of much more than two hours always increase cost, but do not improve yield,” he said. “Replacement of current aircraft with LRs could become “a more firm objective in, say, five years’ time.”

Ericsson looks forward to acquiring a fourth ERJ 145 during next year’s second quarter, possibly a used example. City Airline also holds a deferred option on a new Embraer aircraft. It hasn’t yet started direct talks, but has looked at ex-Swiss International Airlines equipment among others.

Ericsson eschews larger aircraft, if only because that would mean diluting yield to achieve load factor. Given increasing fuel prices, would turboprops better serve any route? “If a route makes sense with a turboprop, we would do it,” said Ericsson, although he expects that would involve cooperation with another carrier.

He described fuel price as a “very sensitive” area, as the ERJs inevitably suffer “huge consumption per seat, more than larger aircraft.” City Airline joins with other non-Swedish operators to buy fuel in bulk. It currently doesn’t hedge, but, according to Ericsson, it “needs to constantly re-evaluate [its policy].”

Origin and destination (O&D) passengers account for about 95 percent of City Airline’s traffic. A few flights, such as from Birmingham and Manchester, connect with Helsinki after a “short” Gothenburg transfer. The heavy O&D element reflects strong business traffic that City Airline must attract to reach the two-thirds loads it needs to make money.

While City Airline is “not well known outside Scandinavia,” Ericsson has cannily forged partnerships with the biggest global alliances to gain more connecting traffic. Links with British Midland, Finnair and Alitalia tie City to the Star Alliance, Oneworld and Sky Team, respectively. It also code-shares with Hungarian flag-carrier Malev.

Ready for a Fight

Having previously avoided competition against Lufthansa, Ericsson now appears ready to take on the German flag carrier. He has identified (but does not name) two prospective destinations: “City Airline is now much stronger and I want to see what we can do,” said Ericsson.

In the first half of this year City Airline has seen revenue rise some 51 percent over figures from the same period last year. City’s nonstop services command a premium compared with price-sensitive hub-connecting services. By aiming “to make money, not become a big name,” Ericsson said he wants no part in “stupid” competition for market share through low prices.

In considering new destinations, Ericsson looks for morning/evening markets that will yield €200 ($245) per seat per sector at a 60-percent load factor and with a high share of business passen-gers. Middle-of-the-day operations need around €130 to €140 ($160 to $172).

He said he expects to meet expansion goals by increasing frequency rather than capacity, because markets that command larger aircraft are “too competitive.” By staying with 50-seaters, he added, the airline could support other carriers whose own aircraft occasionally prove too large. He mentioned a potential role in opening new routes for operators of larger RJs such as Embraer 170s.

City Airline employs about 70 people. “Very few” pilots leave (and none go to majors such as SAS), so flight-crew turnover is “basically zero.” Although pilots might aspire to join the major airlines–“everyone wants to improve their own position”–Ericsson pointed out that SAS has experienced “a bad time.”

“You won’t know if the airline is going to be there next year,” he said.

While in City Airline’s earliest days some pilots joined as captains, now he airline recruits only first officers. First-officer salaries start at around SwKr23,000 ($3,000+) a month, with captains beginning at a little above SwKr30,000 ($3,950) a month. Ericsson opposes automatic annual wage increases. Crews fly 700 to 800 hours per year–“close to the maximum permitted,” but the airline has no trouble complying with flight-time limits, said Ericsson.

Ericsson wants “locally based and committed” pilots who can show other skills. He said pilots living elsewhere, such as in Stockholm, often harbor more mercenary attitudes. “I’m interested in people who will contribute to the success of City Airline by doing more than sitting behind the wheel,” he said.

Ericsson said his best airline recruits come from carriers other than majors, where he fears they may have lost the entrepreneurial skills he seeks. For some of the same reasons, City does not hire ex-military pilots. Typically, the new-hires might bring a background in EMS operations or corporate aviation, although some come from other regionals.  

The airline carries European JAR145 certification and conducts its own maintenance up to A checks. Engineering provider OGMA of Portugal completed three C checks during the middle of his year, and has scheduled a fourth or the coming winter. OGMA earned raves from Ericsson, who said he might send Rolls-Royce AE3007 engines there for overhaul.

City Airline employs 15 people in its engineering department and technical offices. It outsources all maintenance training. As with flight crew, Ericsson reports “more or less zero” staff turnover.

All in all, Ericsson expressed satisfaction with the progress he has seen so far. “The first objective was to be profitable and we made E550,000 ($675,000) in the first six months [of this year] on scheduled service, wet-lease operations and charter,” he said. While he wouldn’t predict the future, adding enough destinations to employ a fifth aircraft at Gothenburg ranks on his wish list.

Along with five ERJs on 10 to 12 Gothenburg routes by 2010, City Airlines aims to fly an additional five machines on “special missions” contracts for corporate shuttle, charter and wet-lease. Ericsson said he was glad to see other European carriers working to raise fares, but stressed the importance that fuel prices “do not go ballistic.”

What sort of strategies the competition employs will be a critical factor in City Airline’s development. City Airline’s ability to increase yields in the past year while maintaining load factors proved the value of premium service between secondary airports, but Ericsson said he will not compete against “big guys” flying 70-seaters.

Not For Sale

Ericsson recognizes that competition can lead to a loss of independence through failure or takeover, but City Airline is not for sale. “If you are successful, then others will want to buy you, but Mr. Magnusson does not want to sell,” he said. “Rather than become part of a larger operation, the airline’s philosophy is to cooperate with others.”

Accordingly, City Airline would like to provide services for SAS on routes where the flag carrier does not fit ideally in terms of capacity and costs. Ericsson pointed to services such as Stockholm to Birmingham (which currently supports three Boeing 737 flights a week) or from Oslo to Birmingham. Copenhagen could also be a potential candidate, but Ericsson has not surveyed the Danish market, and concedes that SAS’s close relationship with Bombardier CRJ operator Cimber Air places City Airline at a disadvantage.

At the same time, Ericsson seemed wary of any SAS moves that could hurt business. His concern, as one might guess, centers on the chance that SAS will do anything to grab market share, even if it means losing money on the route. “The national carrier has been in great difficulty, which has made it like a badly wounded animal that could do things out of desperation,” he said. “If SAS is not careful, yield could go ‘straight down to the basement’–but they will win market share.”