Some key European regional carriers have adopted the low-cost business model, and are confident that they can successfully combine the two different cultures.
Regional airlines have always boasted of their ability to react quickly to change. Ironically, this has been most clearly demonstrated of late by the speed with which a number of well-established European regionals have been busy abandoning the traditional model, to reinvent themselves in the image of low-cost carriers. Some, at least, see this as a sign of things to come, as the growth of the low-cost sector continues to force traditional carriers to re-examine the way they do business.
In another break with tradition, this trend has not come from the dominant US market, but is being led by European independents. British European has transformed itself into flybe, while Norwegian Air Shuttle has been reborn as Norwegian and the former management team at Austria's Rheintalflug is now back in the air with InterSky.
By contrast only Atlantic Coast Airlines (ACA) has so far flirted with the idea among the big US express operators. In July ACA caused a major stir with the announcement that it planned to transform itself into a low-cost operator at Washington Dulles flying 50-seat Bombardier CRJs. However, since then, the Mesa Group has launched a take-over bid for ACA and made clear that it would ditch this idea if this were successful.
In Europe, however, the experiment is already in full force. Europe's regional airline association, the ERA, has been forced to debate whether it now adapts its rules to retain members who no longer fit the classic regional model and which in some cases are moving up to mainline aircraft types.
UK-based flybe has been among the pioneers and now ranks as the third largest budget carrier in the UK, Europe's largest and most developed low-cost market. The airline had been in trouble since at least 2000 when the industry downturn started to bite.
Changing flybe
Chief Executive Jim French explains that, in the summer of 2002, the carrier's management team reviewed flybe's business performance and decided there were serious structural problems. 'Fares were below cost levels and we couldn't put the fares up,' he says. 'We looked at the low-cost model and decided they were doing some clever things.'
Flybe has brought commission rates down to 1% from 10% and now sells around 80% of its seats online, not too far off the levels achieved by the region ' low-cost leaders easyJet and Ryanair. It provides an economy-plus product offering frequent flyer points, a lounge, priority check-in and on-board service, alongside the standard product.
French says the airline has adopted an aggressive branding exercise, including sponsorship for English soccer team Birmingham City, which has itself recently been showing good form. Part of the process has been a radical change to the in-flight product, with passengers paying for onboard services. There are also no ticket refunds and travellers are charged for itinerary changes and for booking with credit cards. The network too has been redesigned to focus on more leisure-type destinations.
All this may sounds very much like the standard low-cost model. There is, however, a key difference. In contrast to the mainline Boeing 737 or Airbus A320 families used as the workhorses of the low-cost sector, flybe still has a regional fleet, based around Bombardier Dash-8 turboprops and BAe 146 jets, French is a big fan of the new 78-seat Dash-8 Q400, of which it has three flying and another 15 coming soon. 'The seat economics are the best in the sub-120 seat class. Nothing can touch it,' he says. Even before the decision to adopt the low-cost model, French believed that the lower operating costs of turboprops would prove their worth in an environment where yields were under severe pressure. The carrier is now phasing out its older Dash 8-Q200/300s and CRJ200 jets to standardise on the Q400.
While the average seat costs on a Q400 are higher than on the larger 737, French argues that flybe is 'not competing on seat costs'. He estimates that the carrier can get at least two, and up to three, frequencies for a similar total cost as a single 737 service.
There is a possibility, however, that the airline will add mainline aircraft to its fleet in the not-too-distant future. French explains that some of the carrier's Spanish routes are beyond the economic range of the BAe 146. 'They are operating at sub-optimum levels,' he says.
Until BAE Systems took the decision to cancel the programme two years ago. flybe had been the launch customer for the new Avro RJX, a further update for the original BAe 146, already relaunched as the Avro RJ. French is now reconsidering his options, which range from the 737 and A320, through to the Embraer 195, more Q400s or even taking newer versions of the BAe 146/Avro RJ.
He admits that if flybe selected the 737 or A320 it would neutralise the seat-cost advantage enjoyed by some of the airline's competitors, but is cautious about going down this route. 'If we do conclude that this is the direction to go in, we would look to do it very flexibly,' he says. 'In the short-term, we would probably look towards damp leases. There are some very attractive deals in the marketplace.'
But he warns: 'This would be a fundamental change for the airline. Not commercially, but operationally.' He adds that the speed with which the Q400s can be integrated into the fleet will have a major bearing on the decision, at least in terms of timing, as trying to introduce two new aircraft simultaneously may be a bridge too far. The switch to the Q400 has been delayed by hitches in the complex deal stuck with Bombardier, which involved a number of aircraft exchanges, including losing the four CRJ200s. Two are on their way to Air Sahara in India, but left more slowly than planned.
French adds that adapting the low-cost model has also brought a major cultural challenge: 'It has been a classic change-management process. The first challenge was convincing ourselves, then the staff, and then outsiders.'
Although some costs have been taken out of the business, French concedes that flybe is not in the same low-cost bracket as Ryanair. In terms of fare and service levels he believes that flybe sits somewhere just ahead of easyJet but below the mainline carriers - similar to the ground occupied by Go, the former British Airways low-cost product since acquired by easyJet.
Norwegian transformed
Norwegian's change of strategy is in many ways even more revolutionary than that of flybe. After years of concentrating largely on domestic services with turboprops, the carrier was relaunched as a low-cost operator in September 2002, initially with six 737s. The carrier now has eight 737-300s with two more due early next year, all on leases of around five years. At the same time, the former Fokker 50 operation has been wound down and will cease by year-end.
Managing director Stig Willassen explains that the move to a 737 was necessary, as the alternatives, such as the Dash-8 or 146, did not offer sufficient seat economies. The only competition on the routes that Norwegian is serving - a mixture of domestic and Mediterranean destinations - comes from SAS Scandinavian Airlines, the region's super power. 'We had to operate on the same basis,' he says.
Willassen points out that a number of the domestic city pairs served by Norwegian have higher volumes than many people imagine, helping to justify the use of mainline aircraft. In fact, Willassen says that the operational headache presented by the switch to a mainline fleet has not been the main challenge facing the airline, although it did require a capital injection of around NKr150 million ($21 million) from the carrier's owners.
The biggest changes have come on the cultural side. 'We now have a huge commercial department,' he says. Over half of all ticket sales are made over the Internet, with a quarter going through travel agents - who get no commission.
However, Willassen says that the carrier already had a cost-conscious attitude ingrained into its culture from its years as a relatively small regional carrier competing against SAS. 'This transferred neatly into the low-cost operation,' he says. Willassen has long complained at what he sees as the high prices charged by SAS in the region.
The 'rebellion' by business passengers against high fares features prominently in the philosophy behind low-cost regional InterSky. The Austrian-registered carrier has been operating two Dash-8 Q300s out of the Swiss capital Berne since March 2002 and opened a base at Friederichshafen in early October. Chief executive officer Renate Moser was vice-president of marketing at regional Rheintalflug from 1990 to 2001, before the latter was taken over by Austrian Airlines. One of the Q400s came from Rheintalflug.
'Business passengers are spending less,' she says. 'If you look at the new low-cost carriers in Germany, up to 70% of their passengers are travelling for business.' InterSky has decided to operate a two-class product, which Moser says is designed to maximise load factors. Early bookers can get fares of SFr29 ($22) per sector, with Swiss regulations demanding that at least five seats be offered at the lowest available price.
Moser points to Berne's position as the capital of the Swiss Federation, as well as the number of 'high-class' tourists visiting the Bernese Oberland mountains as factors in the carrier's decision to offer a business-class product. She says the business-class fares are 60% below IATA levels, which she describes as a 'fair price'.
Moser insists that the availability of low-cost seats does not seem to be putting business-class passengers off, claiming that a certain number of passengers seem to be willing to pay for the extra comfort. The proportion of business class passengers is 20% on the Paris route, 10% on Vienna and 5% to Berlin. The carrier has a moveable curtain, so can configure the aircraft to match the number of business passengers. Despite the differences in their individual strategies, the likes of flybe, Norwegian and InterSky have one thing in common Ð independence. Although flybe does some franchise work on behalf of Air France, this contract is up for renewal in 2005, and French makes it clear that there is likely to be a parting of the ways as flybe's new strategy no longer fits within the Air France network.
US contrast
In the US market, the role of the regional as a hub feeder is, if anything, becoming more entrenched. However, there are shifts there too and ACA announced its low-cost product plans, on the back of its failure to reach an agreement with United Airlines to provide feeder traffic.
ACA's chairman Kerry Skeen said his carrier would offer: 'A product based on what today's consumers are demanding : low, simple fares, excellent service and convenient schedules featuring frequent departures and flexible ticketing rules.' However, the largest aircraft in the carrier's fleet is the 50-seat CRJ, well below the mainline types or even the Dash-8 Q400. Equity analyst James Parker, at Raymond James & Associates, for one has argued that 50-seat regional aircraft simply do not fit into the low-cost model. Jonathan Ornstein, chairman of Mesa, the US regional trying to take over ACA, too has said that this strategy is 'wrong', given the 7-9% margins that can be made flying for a major carrier.
The majority of European regionals are just as closely tied to, or increasingly owned by, their mainline partners, giving limited room for manoeuvre in adopting the low-cost model. Air France and SAS have bought up virtually their entire feeder network over the past three years or so. Lufthansa too has made moves in the same direction, while British Airways has strengthened its grip.
However, flybe's French sees plenty of opportunities arising for the low-cost regional model. He points to the changing face of the European airline industry, with consolidation likely to see the number of major hubs reduced. Amsterdam Schiphol is given as a prime example following the proposed take-over of KLM by Air France. He believes that these secondary hubs are well suited to low-cost regional point-to-point service.
While French concedes that some traditional regional carriers may be able to survive in niche markets that are too small to be targeted by low-cost carriers, he warns that as such regionals grow beyond their niche, they are in danger of being exposed to the full force of low-cost competition. They then too may need to face up to low-cost economics.
REPORT BY COLIN BAKER IN LONDON
Source: Airline Business
