The rush by major airlines into global alliances has been repeated at a regional level
Günter Endres/LONDON
Global alliances with fancy names like oneworld, Wings and Star have become fashionable in the airline industry. But a quiet revolution has also taken place at a regional level in Europe, where flag carriers have spun a vast second-tier web of alliances, drawing in smaller airlines to extend and secure market influence and, in some instances, swallow up potential competitors.
British Airways led the way with the first franchises - CityFlyer Express and Loganair - signed in July 1993 and July 1994, respectively, since widened to include another seven in Europe and one in South Africa. Other European majors were slow to enter the race, but today there is a still-growing net of alliances, partnerships and codeshare agreements with regional airlines spread across the continent and transcending national boundaries.
There were two main attractions for the majors in linking with smaller carriers which both still hold good. It enabled them to access valuable feed from provincial cities into their intercontinental or regional hubs and provided the opportunity to transfer thinner, marginal routes to lower-cost operators with more suitable, smaller capacity aircraft. A third axis - route development - has also come into effect. It makes more economic sense for majors to use regional affiliates to establish and develop new routes, especially where the likely benefits cannot easily be evaluated.
Regional benefits
For the regional carriers, the benefits are obvious. With the backing of a well-established global brand, recognition in the market is enhanced, while opportunities for growth are multiplied. Performance figures for the leading regional airlines bear this out, illustrating the past five years' progress. The converse is also true in that without aligning with a flag carrier or other major airline, many regionals would have had little chance to make the transition from small niche operators to fully fledged second-tier airlines.
Carsten Spohr, Lufthansa's manager for regional partnerships, says the reason can be found in a fundamental realignment of the airline industry. "The market is changing from competition between airlines to competition between alliances," he says. "It is this which has promoted a strong tendency among regionals to orientate themselves with the major alliance groupings." But it is not just the majors, looking for market access and hub feed, that are doing the courting. More often than not, says Spohr, it is the regionals which make the first approach.
According to the UK-based European Regions Airline Association (ERA), which has 78 airline members, the regional airline industry has achieved above-average growth each year since European liberalisation. While not all this growth can be attributed to the development of partnerships, there is no doubt that these have had a positive effect, says Mike Ambrose, ERA's director general. But traffic growth has also come as the result of feeder connections to a main hub being backed up by the development of secondary hubs and direct point-to-point services between smaller cities. "The very act of liberalisation has also generated traffic," says Ambrose, as have product improvement and operating economics. "Improved economics have allowed aircraft to be flown on routes that were previously unsustainable. The fact that you can now fly faster for longer distances, and at better comfort levels, should also give an edge to our market sector."
Ambrose does not think alliance structures are purely a matter of vertical integration filtering down from the majors. "I can see within Europe greater alliance building between regionals or franchisees," he says, citing as an example Crossair and Delta Air Transport, which both operate similar types. "There is some considerable advantage to sharing maintenance and training facilities," Ambrose adds, suggesting also that this could be extended to joint purchasing, with the associated increase in buying power. Some of the larger airlines such as Air France, BA and Lufthansa could soon be looking towards equipment commonality among their associates.
Relationships in the airline industry take many different forms and opinions on how to achieve the desired endgame vary considerably among the majors.
They range from low-level, specific-route codeshare arrangements to part or full franchise agreements, either with or without equity participation.
With most franchise deals, the regional airline operates in the colours and to the standard - in terms of quality of service and safety culture - of the major partner, providing a seamless transfer from mainline services to regional connections.
If such franchises can be likened to an engagement, the forging of an equity partnership takes the relationship a step further into marriage, although the circumstances and reasoning may differ. After six years of a successful franchising agreement, BA, for example, bought CityFlyer Express at the end of last year - a purchase prompted by venture capitalists, who owned 60% of shares and wanted to recover their investment, according to CityFlyer managing director Brad Burgess. Although HSBC, which was employed to handle the sale, considered all manners of disposal, the opportunity to secure 14% of valuable slots at London Gatwick was too good for BA to miss. Burgess says that having flown and operated as a BA carrier for the last six years provides continuity and it will be 'business as usual'.
Lufthansa's recent acquisition of a 26% stake in Trieste-based Air Dolomiti was also a defensive measure, admits Spohr, and was made to safeguard the important hub feed into Munich from northern Italy. The SAir Group's acquisition of a 49% stake in France's Air Littoral, on the other hand, was a means to improve Swissair's access to the European Union market.
Where no equity or only a partial holding by a major is involved, regional airlines have not been slow to exploit available opportunities outside their stable relationships. Three of Europe's largest - Germany's Eurowings and French companies Air Littoral and Regional Airlines - could be said to have taken full advantage and are playing the field quite successfully. While this does not appear to create major conflicts, Spohr believes that as global alliances widen and consolidate, such mixed relationships will no longer be acceptable and will lead to a clean-up of regional partnerships. The difficulties associated with systems compatibility and potential frequent flier crossovers will also hasten this, he adds.
Lufthansa's arrangement with Air Littoral hints at this. It had a sizeable codeshare agreement with the French regional, but when the SAir Group bought a 49% stake, the codeshare was terminated by mutual consent, says Spohr, although Team Lufthansa still wet-leases three Canadair Regional Jets for some services. Lufthansa had itself the opportunity to buy into Air Littoral, but did not consider the market benefits sufficient to invest.
Teamwork
Leading Star Alliance member Lufthansa draws one-sixth of its passengers from regional operations with aircraft of less than 100 seats. In addition to wholly owned subsidiary Lufthansa CityLine, one of the world's top regional carriers adding 4.5 million passengers to the mainline operation, Lufthansa has franchise arrangements with five independent airlines operating under the Team Lufthansa umbrella: Air Littoral, Augsburg Airways, Cimber Air, Contact Air and Rheintalflug. Team Lufthansa airlines serve 45 destinations and carry 1.4 million passengers a year.
Lufthansa's purchase of its 26% equity stake in Air Dolomiti last September consolidated its access to the Italian market, further strengthening co-operation between the two carriers, which had been initiated five years earlier. In addition to a domestic route system through Verona and Trieste, Air Dolomiti flights also serve Düsseldorf, Frankfurt and Munich in Germany, as well as extending to France and Spain. In line with Lufthansa CityLine and Team Lufthansa, Air Dolomiti's passengers can also earn points in Lufthansa's Miles & More frequent flier programme.
Star Alliance member SAS has an extended regional reach throughout Scandinavia, all based on equity investments.
Germany's largest independent regional airline, Eurowings, has kept Lufthansa at arms length, preferring instead the company of KLM and Air France - associations that go back to 1987 and 1995 respectively. Eurowings connects six German cities with Paris Charles de Gaulle and flies from 11 airports to Amsterdam. Rome and Milan are also served in co-operation with Alitalia. About DM125 million ($65 million) of a turnover of DM706 million in 1998 were derived directly from its partnership operations. Eurowings estimates that last year it carried 1.1 million passengers on KLM associated flights, 275,000 passengers for Air France, plus another 200,000 on wet-leases, and 90,000 on Alitalia codeshares.
KLM has a largely unified branding in the market, with subsidiaries and franchises in several countries operating in full KLM markings and with equivalent service. All feed into the carrier's Amsterdam hub, generating 4 million passengers for its long-haul services. KLM uk and KLM cityhopper are wholly owned, the former UK-based airline being the second-biggest carrier at the Dutch hub. Swiss partner Air Engiadina and its associate, Air Alps, set up in Austria to access Europe's liberalised air transport regime, have been rebranded as KLM alps, providing flights into Amsterdam from Bern, Innsbruck and Salzburg. The fifth airline to adopt the KLM regional partner livery is local carrier KLM exel, based in Maastricht.
Regional reach
KLM's regional reach has been enhanced through its 30% equity investment in Norway's Braathens, which gives it an interest in Braathens Malmö Aviation, and through its wide-ranging alliance with Alitalia. The Italian flag carrier also has its regional partners operating under the Alitalia Express brand. All regional services qualify for membership of KLM's Flying Dutchman loyalty programme, and those of its major alliance partners' programmes WorldPerks (Northwest), MilleMiglia (Alitalia) and Wings (Braathens).
UK lead
BA, a leader in the oneworld global alliance, started the process in 1993 and counts nine franchisees among its European associates, including two wholly owned. The biggest market areas of France and Germany have been covered with majority ownership in Air Liberté in France, and whole ownership of Deutsche BA in Germany. Both operate aircraft with more than 100-seat capacity.
Spanish flag carrier Iberia, also part of oneworld, signed its first franchise in May 1996 with Air Nostrum, which now operates as Iberia Regional. Founded only 18 months before, Air Nostrum grew exceptionally fast, establishing new routes on the Iberian peninsula, as well as competing with Iberia on some services. The airline's founder and chief executive, Carlos Bertomeu, says he set out to provide an effective competition in a market that Iberia had entirely dominated, but realised at an early stage that some critical mass was necessary to achieve his objective. This policy of rapid growth, normally a recipe for disaster, nevertheless soon brought his airline to the flag carrier's attention. Air Nostrum had one big advantage in that the Iberian market was relatively immature and had better potential for growth than most other regions.
Iberia's state holding company SEPI agreed in December to sell its wholly owned associate Binter Canarias to a consortium in the Canary Islands. But with an inter-island market of more than 1.5 million passengers annually, Iberia wants to keep Binter as a franchise, even though returns from the mostly subsidised routes are low. The future of another subsidiary, Binter Mediterraneo, linking southern Spain with the Balearic Islands, remains unclear.
Like BA, Air France has built a network of regional associates, almost without equity involvement. The largest is Morlaix-based Brit Air, which operates 13 franchise and seven wet-lease services for Air France. It is facing fierce competition in the local regional market, however, and to maintain its impressive growth is looking further afield. Discussions are in progress with Delta Air Lines to tie in with the newly formed Air France-Delta grouping. With limited opportunities at the Paris airports, Brit Air is firmly focused on developing strong regional hubs such as Lyon, Rennes and Nice. It already operates many services from Lyon and is particularly interested in accessing Delta's New York-Lyon route. "I think that Delta has as much need for connecting traffic as we need passengers switching from long-haul services to us," says Brit Air president Xavier Leclercq.
Interestingly, Brit Air is chasing market share at Lyon with another Air France franchisee, Proteus Airlines, although with the latter operating smaller aircraft, there should be room for two side by side. Proteus acquired Lille-based Flandre Air last October and plans to fully integrate operations. Flandre Air provides services for Air France rival Air Liberté, majority-owned by BA, but no decision has been made on whether that association can continue.
Regional Airlines operates the Lyon-Stuttgart and Bordeaux-Madrid routes. The only other French associate is Corse Mediterranée, in which Air France has an 11.95% shareholding, but is believed to be negotiating a bigger stake. This would lead to the Corsican airline expanding its partnership, which involves four routes - two from the island to Paris, and two from Marseille to Lyon and Bordeaux, accounting for 15% of its Fr540million ($85 million) turnover. Corse Mediterranée plans to expand the Marseille hub with further routes northwards and a new push across to North Africa, all in partnership with Air France. New aircraft with capacities from 70-120 seats are under consideration. Air France has also established bridgeheads in Austria, Germany, Ireland, Switzerland and the UK, with feed into Paris and connections from provincial cities into foreign capitals.
Reaping benefits
Swissair's Qualiflyer grouping reaps considerable benefits from regional associations, headed by majority-owned Crossair, whose annual revenues and passenger figures exceed those of several European flag carriers. The links extend to Sabena, in whom Swissair has a 49% shareholding, and its regional subsidiary Delta Air Transport (DAT). Both operate similar jet fleets and will gain advantages from any future integrated operations. Crossair has accessed the EU market through Crossair Europe, 40% owned, and also co-operates with Portugalia and codeshares with BA on the Basle-London route. Sabena has strengthened its franchise with Schreiner Aviation of the Netherlands.
Persistent talk about the imminent demise of the turboprop in regional airline service are exaggerated, although it is significant that among those regional airlines allied to a major airline grouping, jet aircraft now account for just over half of the total. When all jets on order have been delivered, replacing many of the turboprops, at least three-quarters of the fleets will be turbofan-powered. Several airlines have stated that they are working towards an all-jet fleet by 2004. Among the whole ERA membership, where jets now account for 48% of all aircraft, Ambrose says by the end of this year, the balance will have swung in favour of jets.
The growth of the regional jet and the development and introduction of ever smaller types, now down to 30 seats, has been largely influenced by the requirement of the main partner. As regional traffic tends to be dominated by business, the majors needed to ensure that a step-down from a large Airbus and Boeing jet into a smaller regional aircraft was also not perceived as a step-down in either technology, speed or service, especially in regard to the modern turboprop aircraft.
Ambrose says, however, that normal evolution has played a greater part, as manufacturers have built jet aircraft that provide acceptable economics even over shorter distances. "Regional airlines have the opportunity for the first time to fly a small turbofan and make a profit that has changed the market," he says. He also points out that the availability of regional jet aircraft families have had a spin-off in terms of considerably reduced operating costs, training, spares provision and maintenance.
But the definition of the regional airline is also changing. Aircraft size should never have, and certainly should no longer be, used to pigeonhole airlines, and a regional airline is any carrier providing services between regional cities and from regional airports into the major hubs, says Ambrose. Certainly, as regional airlines begin to consider aircraft above 100 seats, the distinction is blurring.
Incomplete process
The process of alliance building is by no means complete - in some ways it is only just beginning. Developing alternative airports and more secondary hubs could provide further opportunities for new entrants into the regional market. But Ambrose believes that progressive liberalisation and the relaxation of European ownership rules could more profoundly affect the market. If this happens, he can envisage foreign airlines - especially from the USA - buying regional airlines to feed long-haul services out of Europe. Ambrose concludes: "I can see the European and US models being copied on a wider scale."
Source: Flight International
