Günter Endres/LONDON
Despite their continued heady growth rates, there are signs that profits among the world's leading regional airlines, like those of their mainline counterparts are beginning to feel the impact fuel hikes and, outside the US market at least, weakening exchange rates. Europe's regionals too are looking are steeling themselves for a possible escalation in navigation charges.
The Top 50 ranking of regional financial results (over page) suggests that revenues indeed ran at a healthy 8.6% during 1999 - a result only marginally down on the double digit growth of previous years. However, the indication is that net profit margins fell by a point, slipping to some 5.2% for those that issue a figure. That still leaves regionals outperforming their mainline counterparts, where net profitability has remained stubbornly down at the 3% mark and then buoyed up by a round of asset sales.
Naturally, the regional profit estimate is only a tentative figure. Few of the carriers have traditionally provided a full set of reports and accounts. Some of those European and US carriers that once did report independently have since been acquired by majors, so further obscuring their financial results. In fact, the level of profitability has been among the chief attractions behind acquisition deals.
Notable among such deals is last year's acquisition by Delta Air Lines of its two leading affiliates Comair and Atlantic Southeast Airlines (ASA). Although still independent operations, together they now form the core of a Delta Connection business with revenues of more than $1 billion. Both have been slotted into the ranking on the basis of their last set of results before acquisition. In Europe, too deals have been in progress. Air France has bought its biggest local franchises Brit Air and Regional Airlines, as well as Irish carrier CityJet, while Lufthansa has just announced an investment in Eurowings.
Such deals come as Europe's regionals struggle with a fuel price which has doubled over the past year. And if that were not of enough concern, the alarm is now sounding over plans by Eurocontrol to introduce a new charging formula for navigation fees. That is still under discussion, but many regionals are already concerned that have a devastating effect on their viability.
The European Regions Airlines Association (ERA), which represents 82 carriers, has been quick to warn that changes to navigational charges being considered by Eurocontrol's Possible Pricing Mechanism (PPM) task force could cost airlines e7-8 ($8-9) per passenger. ERA's director general Mike Ambrose claims that any such proposed changes could have severe repercussions on the economies of Europe's regional communities and the airlines that serve them. He also does not rule out job losses.
Although Eurocontrol is still only at the deliberation stage and there is no guarantee that it will impose either of the two options most feared by the regionals (see table), the fact that it has revived these plans at all after a four-year moratorium is cause for ERA's concern.
Contrasting fortunes
A handful of results covering the first six months of 2000 indicates that high fuel prices continue to bite, although US airlines in dollar areas are generally faring better than their European counterparts.
The mixed message theme is well illustrated by contrasting first half results from two of Europe's largest regionals - British Regional Air Lines (BRAL) and Crossair.
The Swiss airline, long held up as an example of how a regional should be run, announced a loss of $3.7 million in the first half - its first such loss since 1992. Yet BRAL, which operates largely under a British Airways franchise and is less exposed to Europe's currency weaknesses, achieved record first half results. Pre-tax profits rose 12%, which chairman Sir Michael Bishop takes as support for the strategy of moving towards an all-jet fleet. Another five Embraer ERJ-145s are to be delivered by the end of next year.
Recent fare increases in Europe and a more pro-active forward fuel-buying policy should improve the figures for many carriers in the second half of this year. US airlines also report that the introduction of regional jets has boosted traffic and enabled them to improve their position in the marketplace.
But airlines on both sides of the Atlantic will be keeping a close eye on the fuel price, although the recent OPEC decision to increase output is not expected to lead to a dramatic fall. And even if it does, there is still the fear in Europe, at least, that the advantages could be quickly eroded if charges raise the cost of flying.
| Eurocontrol charging options - per passenger | |||
| Aircraft type | Existing formula | Option 1 | Option 2 |
| Saab 340 | 2.2 | 8.4 | 20.3 |
| Fokker 50 | 1.6 | 4.3 | 9.7 |
| Regional Jets | 1.5 | 2.9 | 5.4 |
| Boeing 737 | 1.1 | 1.7 | 3.0 |
| Boeing 767 | 1.0 | 1.2 | 1.4 |
| Source: ERA (Ratio of charge, Boeing 747 = 1) | |||
Source: Airline Business
