At the sight of a fight some people bare their fists; others walk away. While TAT, Air Inter, AOM and Air Liberté battle it out in a merciless price war between Paris and the French regions, Régional Airlines is collecting the profits from its provincial connections.
'While many of our competitors have entered price wars, we have been able to avoid this fracas by operating in a niche market,' declares Jean-Paul Dubreuil, president and chief executive of Régional Airlines.
The carrier has already extended its concept to crossborder routes, aided by a growing collection of alliances with major airlines and through this year's acquisition of Deutsche BA's regional operation. Last year, Regional Airlines became the first French airline to be floated on the stock exchange, and this year it will introduce the Embraer 145 50-seat jet into Europe.
Régional has doubled its traffic in three years by expanding to 110 small routes, avoiding Paris and often enjoying a monopoly. 'Régional avoids direct competition with the majors, flying routes which the majors do not have suitable aircraft for,' says Jean-François Granjon, financial analyst at French bank Crédit Lyonnais. With low costs and high-yielding business traffic, Régional's break-even load factor is 45 per cent.
Régional is tapping in to a growing recognition that the French world of business and transport no longer revolves around Paris. 'Régional is catering for increasing demand from regional business travellers and for the decentralisation of French business outside Paris,' says Granjon. In doing so, Régional also avoids direct competition with the French road and rail networks, which also radiate from Paris.
In contrast with many regional carriers, the airline has taken bold steps outside its national borders, developing connections to 27 points including 10 European capitals. The airline's main hub at Clermont-Ferrand in central France was set up in November 1992. Régional carried 58,000 local passengers and 73,000 transit passengers through the hub in 1996. Services radiate out from the hub to eight towns in the west of France, including Rennes, Nantes and Pau, and eastwards to French cities such as Lyons and Marseille and to European destinations including Milan, Turin and Geneva.
In April last year the airline set up a mini-hub at Le Havre in northern France, through which aircraft from Nantes and Rouen in the west continue on to Brussels and Amsterdam. Régional also has a mini-hub at Bordeaux in the south of France, ideally located for flights to southern destinations such as Barcelona, Madrid and Lisbon.
The airline's network is boosted by its burgeoning collection of partnerships with major airlines, which include recent agreements with SAS, Swissair and KLM as well as Iberia, Air France and Crossair. The association with major airlines boosts Régional's status and provides access to markets otherwise difficult for a carrier of its size to reach.
Iberia remains Régional's main codesharing partner. Régional and Iberia are currently 'trying to reach a consensus about which new routes to codeshare on.' These are likely to be operated by Régional's new EMB.145s, states Iberia's vice president network development José Bolirinos. The two already cooperate from Madrid, Barcelona and Bilbao to secondary cities in France, such as Nice and Marseille. This arrangement provides Iberia 'with a low-cost, low-risk regional feeder in France and Régional access to Iberia's frequent flyer programme and the Spanish market', says Bolirinos.
On 1 April, Régional was due to start codesharing with two new partners, SAS on Lyons-Copenhagen and Swissair on Toulouse-Zürich. On the same date, Régional was to extend its codesharing agreement with KLM to Marseille-Amsterdam, following an initial codeshare between Clermont-Ferrand and Amsterdam in January. There is a block-seat agreement with Crossair on four daily flights between Geneva and Bordeaux. Brit Air and Flandre Air feed traffic into Régional's hub at Clermont-Ferrand. Régional also operates two Saab 2000s for Air France Europe, which uses them exclusively from Lyons to Marseille and Toulouse and on a block-seat basis on Lyon-Nantes.
Although Dubreuil does not exclude a future partner in central Europe, Régional's current development focus is on the UKmarket. The carrier is in talks with a UK carrier which 'uses the same type of aircraft as we do' about helping to develop its small hub at Le Havre, by offering connections to UKcities like Manchester, Southampton and Birmingham. Dubreuil also foresees connections from Le Havre to Brussels, Amsterdam and a German destination, probably Düsseldorf.
Dubreuil is adamant that Régional will avoid direct involvement in the UK market as 'the fares are too low, with a high turnover of startups, and UK costs are too high. Besides we have so many things to do in the rest of Europe'. He is also unwilling to ally with British Airways because of potential conflicts with his other partners.
The fourth largest regional carrier in France, Régional Airlines carried 408,000 passengers in 1996 and has a target of 600,000 by 1998. Sales have increased by 42 per cent annually since 1991 and reached FFr 578 million (US$113 million) in 1996. Stockbrokers Cheuvreux de Virieu forecast that turnover will increase to $155 million in 1998, but Granjon introduces a note of caution, warning that 'Régional will grow but not as fast as presented by the stock exchange'. Net profits were FFr 21.6 million ($4.2 million) in 1996 and are forecast to reach $7.6 million in 1998.
On 17 October 1996, Régional became the first French airline to be listed on the stock market, with a debut on the secondary market in Paris. The initial public share offer of 11 per cent of the company - 125,000 shares at a minimum price of FFr 240 each - was 41 times oversubscribed. In February the company sold a further 3 per cent of its shares, leaving 70 per cent of the airline in the hands of Groupe Dubreuil, a family firm whose main business interests are supermarkets, distribution and fuel, with the remaining 16 per cent owned by Régional employees. Selling 14 per cent of its shares has raised the company's profile to match its continued growth, as well as FFr45 million in capital to finance aircraft acquisition.
The arrival of three EMB.145s this year should enable Régional to cut costs on its longer sectors, while offering the passenger appeal of a jet. The carrier has two more on order, plus five options. If the aircraft perform well, Dubreuil says Régional intends to standardise its 50-seater fleet in the next three years, implying that it will dispose of its 10 Saab 2000s (plus one more from August 1997), all of which are on short-term leases. But he says the airline may decide to split its 50-seater fleet between the EMB.145 and Saab 2000. Asource at Saab predicts that the Embraers will be dedicated to longer routes, while the Saab 2000s will be used on medium-haul routes. Régional also operates eight Saab 340Bs, two ATR42s and nine Jetstream 31s. It will not introduce larger aircraft and may transfer some Saab 340s to smaller German routes, says Dubreuil.
While Régional's primary focus so far has been on business passengers, Dubreuil says one of Régional's goals in 1997 is to 'add some leisure passengers to our core . . . as long as we can introduce 50-seaters in our fleet and fly to southern destinations we can think about leisure passengers'. It will adopt a cautious approach, as 'it's easy to reduce fares but difficult to increase them'.
Régional Airlines made a key strategic move into the German market in January 1997 via its involvement in the acquisition of Deutsche BA's five Saab 2000s and its regional routes. While Régional had planned to acquire all of the DBA regional operation, majority German ownership is required to allow the carrier to continue DBA's Germany-Switzerland operations. As a result, the operation has been folded into a new company, Regional Airlines Deutschland, in which the French carrier owns 49 per cent.
The remainder is owned by a private German investor, Friedrich van Bohlen. He also held a non-active majority stake in the former Delta Air, which was taken over by British Airways and three German banks to form Deutsche BA in March 1992.
Deutsche BA says it divested its regional routes because they were 'no longer profitable' and they detracted from its core jet operations. Granjon says DBA fell down by being just one element of a global group with multiple interests, unlike Régional which 'is concentrating on its core business'.
The deal has not only provided Régional access to Germany - France's prime market - but also removed undue emphasis on Spain. 'Spain was representing too important a part of our activity with more than 40 per cent of sales in 1996,' says Dubreuil.
Régional says turnover from its new German affiliate was $39 million in 1996 with 160,000 passengers, and it expects the airline to carry 170,000 passengers this year.
The German network currently comprises 10 domestic and international routes from three main bases at Stuttgart (to Münster, Lyon, Geneva and Italy); Friedrichshafen (to Düsseldorf and Berlin); and Bremen (to Zürich). Regional means to develop Stuttgart as a future hub with efforts initially homing in on the existing Lyons-Stuttgart route, which will serve as the link between Régional's French and German networks. The airline is also looking at a future connection between Clermont-Ferrand and Stuttgart, though this is 'quite far ahead', says Dubreuil.
In the next year, Régional plans to consolidate the German business, examining which routes are performing well and which aircraft should be used on existing routes. In 1998 Dubreuil says he will 'see if there are any further opportunities'. Whereas the Münster-Bremen and Stuttgart-Lyons routes are performing well, Régional's Stuttgart-Switzerland service has 'some problems' due to inadequate frequencies, states a German source.
Future planned expansion includes routes to central Europe, an area which stockbrokers Philippe de Portzamparc (PP) predict the carrier will 'inevitably be drawn towards in the medium and long term'. Dubreuil confirms that 'we have been looking at the Hungarian market for the last few months but we're not ready for that yet', citing worries about low yields.
Régional faces some immediate difficulties with its German acquisition. The operation 'has been more difficult to put in place than we thought', admits Dubreuil. The German authorities have been 'tough' in demanding new documentation and the company has yet to acquire its own operating licence; it still uses DBA's code.
Moreover, Gallic pride appears to be conflicting with German passenger loyalty. Despite initial intentions to develop it as an independent German subsidiary, Regional Airlines Deutschland is quintessentially French. 'What we intend to do is to sell the product as a French company,' says Dubreuil. 'For us it's all Régional Airlines, with the same top management and sales teams and the same strategy and behaviour in Germany as in France.' Dubreuil maintains that Régional's name is 'not particularly French' and easily exportable throughout Europe.
However, one consultant accuses Régional of taking a 'French view of a German situation'. Regional Airlines 'is not a name in Germany right now and needs to start from the basics. The French owners don't see it like this - they think that because they have a good reputation here in France, it must be the same in Germany.'
Régional may need to change its strategy in Germany, states the German source; whereas in France the carrier rides on the success of avoiding the congested Paris airports, there is less emphasis on one central airport in Germany.
The consultant suggests that Regional is encountering difficulties with German travel agents, who look upon the carrier as a newcomer and resent losing DBA's high commission overrides, deemed to be a key factor in DBA's withdrawal from regional markets. But Dubreuil insists agents have welcomed the takeover and says the new owners are paying good commissions.
The consultant further warns that Regional's yield will be lower in Germany than in France because DBA catered for all passenger types. Regional's business focus is particularly problematic on traditional leisure destinations, such as Stuttgart-Nice, where passenger numbers are already dropping, he says. Dubreuil insists that the route has 'leisure traffic with high yields . . . German travellers to Nice are paying very reasonable fares and there is also some business traffic'.
The consultant speculates that Regional will enter a codesharing agreement with Lufthansa or be brought under the Team Lufthansa umbrella. While the airline avoids direct competition with Lufthansa, Dubreuil considers that 'it will be difficult to enter any agreement with Lufthansa - I don't think we need them at this time'. He points out that Régional has agreements with many of Lufthansa's competitors, and says he is unwilling to become an exclusive Team Lufthansa partner. 'We are not ready to be committed to just one carrier and do what they want by demand. We will not change our policy by 100 per cent . . . we want to keep our soul and independence.'
Whichever direction Régional looks to next, two things seem certain. Dubreuil is emphatic that it will not abandon its individuality and its novel concept. 'I've been asked to open new routes to Paris many times but I always say that's not our business,' says Dubreuil. The airline will also be quick to respond to new opportunities. 'My life at Régional has been a case of whether to take or not to take. Hopefully I have taken most of the opportunities that were offered to me,' boasts Dubreuil.
Source: Airline Business
