With the EU's expansion eastward, established airlines in the post-communist countries have joined a flurry of start-ups in reinventing themselves as regional carriers
When delegates from the European Regions Airline Association (ERA) meet in Vienna for their annual general assembly this week, one of the hot topics will be growth in eastern and central Europe. Signing up new members in the 10 countries that joined the European Union in May is a priority for the association and it may find new recruits from newly right-sized national airlines.
The ERA already has six members from the new EU states and four from other eastern European nations. Some, such as Lithuanian Airlines and Slovenia's Adria Airways, are flag carriers, while others, including Aero Airlines of Estonia, fall neatly into the ERA tradition of niche start-ups. The fact that national carriers would even consider joining the ERA, rather than automatically follow other network carriers into the Association of European Airlines, is proof of a pragmatic approach by these airlines, says ERA director-general Mike Ambrose.
With the exception of LOT Polish Airlines, which services the large Polish-American community with its transatlantic service, most carriers in the EU accession states have given up long-haul routes and become de facto regional carriers. "They are not necessarily branding themselves as 'regional', but they are recognising that their interests are different from those of the big western European flag carriers," says Ambrose.
There are differences between eastern and central European flag carriers and the ERA's older western European members. First, the established members were able to develop routes with the assistance of majors - an option largely unavailable to central and eastern European airlines. Second, unlike western European airlines that saw the air transport sector in the European Union liberalised in three stages, between 1987 and 1992, those in the accession states have been thrown in at the deep end, with full cabotage rights extended into their home markets from day one.
There are economic issues, too. Western European regionals developed in sophisticated economies in which they offered a value proposition: save time by flying from a local airport. With the exception of Cyprus and Malta, the new EU members come from a communist past and the average gross domestic product in these states is less than half that in the rest of the EU. Also, travel under communist rule was difficult, with restrictions on internal as well as external trips. As a result, the vast majority of people in the accession states have never experienced air travel and there is no "air mentality", says Ambrose.
Great optimism
Despite this, there is great optimism for the future. "After 15 years, incomes are still rising and people have bought cars, made home improvements and are now turning towards travel," says Piotr Dubno, executive vice-president of the LOT Polish Airlines group.
The LOT group probably has the best chance of all the former flag carriers to develop profitable regional services. In its favour, Poland is a large country with a poor road infrastructure and the airline has also established a regional arm, EuroLOT, which is an ERA member. A 100% subsidiary, EuroLOT operates a fleet of 12 ATRs under a wet-lease deal for LOT, which retains control of network planning. This gives LOT the kind of freedom over pilot wage deals it needs to expand the network. EuroLOT flights feed Warsaw from points in Poland as well as neighbouring states. "We want to grow the importance of Warsaw as a regional hub, offering an easier alternative to Frankfurt or Paris for eastern routes," says Krzysztof Ziebinski, LOT's head of industry affairs and alliance strategy. Currently, 60% of EuroLOT traffic connects at Warsaw.
The ERA expects other players to mirror EuroLOT's growth, even though other countries do not have as many local airports. Ambrose says: "It is the wrong conclusion to say there are no secondary airports [in the new states]; Poland is quite a size and even in the others there will be a growth in services from local airports, especially for flights to neighbouring states avoiding a stopover."
Swedish regional Swedline, for example, started operations recently to Palanga airport, outside Lithuania's second city of Klaipeda, and ERA members are set to follow suit in exploring new market niches, says Ambrose. He also looks further afield to nations waiting to become EU members. Romania, which is scheduled to join in 2009, has opened up its market, allowing Carpatair to create a network from its base at the country's second city, Timisoara, using a mixed fleet of Saab turboprops.
The right choice of aircraft is key to the development of regional routes in the accession states. Many small carriers are now finding the narrowbodies they acquired in the 1990s too large for anything other than European trunk routes to Brussels, London and Paris. "Quite a few airlines are still using aircraft much too big for their requirements," says Ambrose. "Previous fleet direction was driven more by national interest than efficiency." He predicts either a stagnation of routes or re-sizing of aircraft fleets. Some, such as Latvia's AirBaltic, already use regional jets (three Avro RJ70s augment its core fleet of five Fokker 50s), but the real opportunities lie in new regional jet models from Bombardier and Embraer, which will effectively take away much of the operating costs, says Ambrose. LOT, for example, is switching many of its mainline routes to 70-seater Embraer 170s and also deploys ERJ-145s on thin routes.
"We decided to be a launch customer of the 170 as part of a decision to adjust our fleet to be closer to the needs of the market capacity," says Dubno. LOT's service to Dublin immediately became one of its highest-yield routes, and the carrier expects to add Lisbon later this year. Neither city would have been feasible using its 737s, says Dubno.
Regional jets
The availability of affordable regional jets will also open new opportunities. Ambrose highlights Malta, and says Luqa airport could be an east-west hub for the Mediterranean. Currently flights from Spain to Greece, for example, pass through northern European hubs, but 70- to 100-seat jets would do the job better, with quicker journey times for passengers, he adds.
An example of a national airline taking an innovative approach to new market opportunities is Adria. The carrier, from tiny Slovenia, realised its low chances of survival as an independent flag carrier and instead it is among the first to exploit new sixth-freedom rights. Apart from its base in the capital, Ljubljana, it is using Vienna as a de facto second base, with flights to Frankfurt and Munich. Adria, too, uses regional jets. It owns six Bombardier CRJ200s as well as its three Airbus A320s, but says the 50-seat jets are a way to fly a competitive number of frequencies and still achieve profitable load factors.
Other carriers are likely to follow LOT's and Adria's lead in right-sizing their fleet to meet local demand and define their role closer to that of regional airlines rather than flag carriers, predicts Ambrose. Czech carrier CSA is taking seven ATR 42-500s over the course of this year and next. Despite this, the carrier is also expected to sign a new deal for around 12 A320s or 737s by the end of the year.
The rationale for this decision lies with the strategy of the Air France/Delta Air Lines-led SkyTeam alliance to develop Prague as its central European hub. CSA, along with LOT - which joined the rival Lufthansa-led Star Alliance in October 2003 - are full members of alliances. However, there is a new trend emerging, with Adria signing as a regional affiliate member of Star earlier this month alongside Croatia Airlines and following Finland's Blue1. Under the concept, regional members must be sponsored by a full member - Lufthansa in these cases - which could lead to demands to deposit passengers into the major network hubs, warns Ambrose. "If you get into bed with a gorilla, you need to be careful where you sleep," he says. For LOT, however, the experience of alliance membership has been only positive. Ziebinski says that far from being domineering, its Star Alliance mentor Lufthansa has never meddled in route planning or fleet decisions.
Low-fares threat
Yet if alliance membership offers regionals some element of security, the threat of low-fares competition remains acute in the low-wage region. Slovakian SkyEurope, already dominant in its home market, has expanded into Austria, Hungary and Poland; and start-ups appear monthly.
In common with the rest of Europe, ERA members from the new states are tailoring their offerings to focus on the business traveller, with more frequencies to business destinations. Ultimately, this is the strategy the flag carriers of the bloc, along with those from all of Europe's smaller countries, will have to follow.
Ambrose predicts differences in interests will become more apparent as the big get bigger and the small drift either towards alliances or remain independent. In Vienna this week, ERA members large and small will share their tactics for dealing with the big boys, with members from the new states included.
ERA 2004 will be held in vienna from 29 September-1 october
JUSTIN WASTNAGE / LONDON & WARSAW
Source: Flight International
