UK regionals proving that less is more

 - October 23, 2006, 11:03 AM

Throughout the world established airlines struggle to compete against start-up operators employing bare-bones business models or serving niche business markets. Trends in the UK illustrate the problems–and the opportunities–the situation presents British Airways and the likes of lean, young regionals such as Air Southwest and Eastern Airways.

Developments under way at BA perhaps best illustrate the dilemma facing major airlines everywhere. Cutting costs from every conceivable area–including regional operations–commands all the attention a CFO can muster. Since privatization nearly 20 years ago, all BA op-erations have suffered successive cost- cutting exercises. Now, chief executive designate Willie Walsh (fresh from re-inventing Irish flag carrier Aer Lingus as a low-cost airline) is preparing to apply his own stamp to all things BA, including CitiExpress.

BA CitiExpress (BACE), which now flies all of British Airways’ non-London-Heathrow/Gatwick-based airplanes that carry less than 100 seats, took root in Manchester on the remains of the former BA Regional and several other UK short- haul airlines acquired by the parent company in 2002. A few months ago, BACE unveiled its 2005-07 business plan to employees, including a reported low-cost offering (under the project name BA Red), possibly as soon as next month. Although it would not confirm the existence of BA Red, the regional’s latest business plan includes reduction and redistribution of the fleet and dropping or suspending eight routes.

Business First

BACE aims to reduce employee costs by 22 percent while improving productivity by 5 percent. It also wants to cut travel to leisure destinations while attracting more business travelers. Apparently some staff will transfer to BA franchisee GB Airways, slated to begin several new routes from Manchester.

BACE will release about 10 aircraft, including its last five BAe 146s and possibly six stored BAe ATP turboprops, for which it still pays lease fees. Afterward, the fleet will include 27 Embraer ERJ 145s, seven de Havilland Dash 8-300s and 14 Avro RJ85s and RJ100s, including six RJ100s leased from BAE Systems.

Manchester will lose its Avros in November as that base accommodates new longer-range GB Airways flights and the expected new BA Red flights. Manchester will host nine BACE ERJ 145s and the Dash 8s. Eight Avro RJs will fly from Birmingham, alongside seven ERJ 145s. Four will fly from London City, with crews now based in Edinburgh.

Six BACE ERJ 145s will cover expanded services from Bristol in southwest England, as will three in Southampton and two in Edinburgh. Individual Avro RJs will operate from the Isle of Man and from Inverness in northern Scotland. From early next year, Swiss International Airlines will sublease six of BA’s Avro RJ100s.

Meanwhile, the BA Red exercise would incorporate a low-fare model on which prices do not include taxes, surcharges and available extras. The frills would include meals, seat pre-allocation and lounge access. Cabin crew would tidy the aircraft during turnarounds away from base (except for overnight stops).

No Frills, No Surprises

Unlike BA, Plymouth, UK-based Air Southwest has already embraced a low-fare philosophy, but one that rejects any thought of “hiding” taxes, fees or extras in its fares. “We do not impose surcharges for fuel or anything else for that matter, as we are now selling purely gross fares,” said Malcolm Naylor, Air Southwest CEO. The two-year-old regional’s one-way prices start as low as £19 ($35), with all routes available from £29 ($53). Internet bookings account for 93 percent of Air Southwest’s sales, and an electronic information service–e-Southwest–promotes special offers.

Ironically, Air Southwest owes its existence to BA, having taken over the major airline’s abandoned southwest-UK routes. After beginning with a pair of de Havilland Dash 8-300s leased from GECAS, Air Southwest bought two of the 50-seat turboprops directly from Bombardier.

The network, which carried 170,000 passengers in its first year, has expanded from the original Newquay/Plymouth-London routes to include Bristol, Jersey (Channel Isles), Leeds Bradford and Manchester. Newquay-Dublin accounts for the airline’s first international route. In the interest of “maximum flexibility,” several services involve multiple legs connecting in Bristol, Newquay or Plymouth.

Load factor in the second year of operations averaged 75 percent–“well ahead of forecast,” according to Naylor. After posting a pre-tax loss of roughly £200,000 ($370,000) in the 12 months leading to March 31 of last year, the airline this year reported a profit of £1.3 million ($2.4 million). Revenue increased from £3.3 million ($6.1 million) to £12.5 million ($23 million).

“We have had a remarkable first two years, despite record high fuel prices,” said Naylor. In fact, parent company Sutton Harbour, owner of Plymouth Airport, posted a 49-percent gain in operating profits last year due to “better-than-expected results from [Air Southwest.]”

Things look just as upbeat at Eastern Airways, winner of the ERA Airline of the Year silver award for the past two years. The airline’s 750 flights a week carry about 500,000 passengers a year, roughly equivalent to an average load of 13 to 14 passengers. Its core business travelers represent energy, finance, high-technology, insurance, steel and telecommunications industries.

Owing its importance to offshore energy fields in the northern North Sea, Aberdeen is the busiest of Eastern’s hubs, connecting nine other UK cities, while the Isle of Man links four destinations. Regional airports serving Birmingham, Bristol, Leads-Bradford, Manchester, Newcastle, Norwich (important for the southern North Sea) and Southampton each support three routes. Inverness and Durham Tees Valley (formerly Tees-side, in northeast England) serve two points, while Edinburgh, Humberside, London Stansted, Nottingham and Wick each serve a single market.

In the past year, Eastern has enhanced service to the very north of Scotland, basing a Jetstream at Wick (facilitating day trips to London via Inverness), and adding Aberdeen-Bristol and -Southampton flights. Eastern’s new Bristol-Durham Tees Valley service, flown with a single 19-seat Jetstream 31, offers a substantial time saving over the seven-hour car journey. The airline flies six J31/32s overall, supplementing fifteen 29-seat Jetstream 41s.

The airline’s latest acquisition, a single leased 50-seat Saab 2000, flies longer, “fatter” routes that best exploit its capacity and speed, said head of marketing and sales Keith Watson. The dynamic expansion means that Eastern has kept “very busy” introducing Saab 2000 pilots and building the Jetstream flight-crew complement.

Watson reported passenger revenue and yield growing “at a satisfactory level.” Eastern hedges fuel-purchase commitments, but has also raised fares to reflect increased costs. The airline has restructured its marketing and sales budget by reducing agents’ commission, and has turned its focus to key business customers to add revenue. Watson concedes that most reservations come through traditional global distribution systems, although Internet bookings and Web site use have increased following changes to the airline’s online booking “engine.”