Friday, 20 October 2017

Brexit threatens turbulence for Europe's regional airlines

The timing of Flybe's second profit warning in a year was rather unfortunate, coming as it did on the opening day of Europe's regional airlines' annual get-together.

The Flybe news was of an altogether lesser magnitude than the failure a few days previously of Monarch – after all, Britain's largest regional airline still expects to make a profit, albeit a somewhat smaller one than twice forecast.

But with the company's share price tumbling, Chief Executive Christine Ourmières-Widener was a notable absentee from the platform at the European Regions Airline Association's General Assembly, in Athens, where she had been expected to take part in an open forum involving senior female figures from the industry.

Flybe blames higher than expected maintenance costs, following on from earlier IT failings, which had led to the first profits warning. But the situation also needs to be seen in the context of increasing nervousness over Brexit, which is damping down demand in the UK domestic scheduled market and causing increasing concern right across the continent.

Indeed, in the session from which Ms Ourmières-Widener was missing, it was revealed that 84 per cent of delegates from across Europe and the wider world expected Brexit to impact on the industry negatively. Brexit also polled joint second among the biggest issues facing European aviation, with only air traffic control congestion ranking higher.

Another conference session recalled Donald Rumsfeld's famous 2002 assertion: "There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don't know we don't know."

We know – or at least think we know – that Brexit will happen. But then we don't actually know what Brexit will look like. While our European colleagues look on in dismay at a government seemingly relishing hari-kari as a preferred alternative to resolving once and for all its own internal divides, the actions of the UK cabinet remind me of one of those company away days we used to enjoy before the financial malaise put paid to such luxuries around 2008.

The away-day moderator asks everyone round the Cabinet table: "If Brexit was a vegetable, what would it be?" 

"A cucumber!" pipes up one Minister. And then the rest of the day is lost as they all argue over whether a cucumber is a vegetable at all, or if it's actually a fruit.

While the airline industry in the UK is afflicted by the low pound and the stasis at the heart of government, our colleagues in the rest of Europe have actually been doing not too badly – notwithstanding the caveat voiced by outgoing President Boet Kreiken, who said: “Brexit so far is a nightmare for all of us in Europe.”

Passenger numbers are generally up across the continent, said Kreiken. And the new deal between Airbus and Canada’s regional aircraft manufacturer, Bombardier (which will see the latter’s C Series jets assembled in the USA), seems to have wrong-footed Boeing and its “dumping” claim, which had led to a promise of punitive import tariffs.

And if diversity is a sign of good health, then the industry in Europe is way more healthy than that in the States. Commentator John Strickland told the conference that Europe’s so-called legacy carriers (traditional, mostly former state airlines) and the three largest low-cost operators (Ryanair, easyJet and Wizz) together accounted for 50 per cent of the continent’s available seat-kilometres (ASKs). In the USA, land of entrepreneurial ambition, the total is 90 per cent. Put another way, this means that half of Europe’s airline passengers are flying with smaller regional carriers.

And, he said, setting to one side the ongoing woes of some of the remaining government-controlled carriers and of some of the smaller operators (and perhaps also of Norwegian, whose rapid expansion on many fronts may have overstretched it), demand has generally risen and has recovered well in the wake of, for example, terrorism incidents in Turkey and elsewhere.

Regional airlines, he said, were well placed to take advantage of new opportunities in niche markets, or where legacy carriers had abandoned thinner routes.
The challenges they face going forward includes prohibitive pricing regimes at some airports, aimed at squeezing out smaller aircraft; pilot shortages; and a lack of development of smaller aircraft by manufacturers .

The general upward drift in the size of regional aircraft may bring lower seat costs, but such “trading up” is not appropriate in some markets and may even be impossible. A case in point is Norway, where innovative regional carrier Widerøe’s aging fleet of Bombardier Dash 8 short-field aircraft can’t go on flying indefinitely.

At the very lower end of the market, the change in UK regulations that now permits the use of single-engine aircraft, with consequently lower operating costs, may yet open up new opportunities for services to, for example, the remoter Scottish islands. But we are talking here about aircraft like the Cessna Caravan utility aircraft, or the very much more luxurious Swiss Pilatus PC-12, both of which seat fewer than 20 in any configuration.
Cessna Caravan
Pilatus PC-12
Those seeking real innovation may have been encouraged by a press conference with Brazilian manufacturer, Embraer. Also in attendance was Embraer customer and Widerøe boss Stein Nilsen, who described a future in which dramatic new electric and hybrid propulsion technologies might make it unnecessary to extend Norway’s numerous short runways to accommodate larger aircraft.
Embraer jet in Widerøe colours, but could electric aircraft follow?
“We have to look at alternative ways of propulsion,” said Martyn Holmes, Embraer Vice-President Europe and Middle East. “Embraer sees itself as a very innovative company – we are specifically looking at disruptive technologies that could provide power in the future.” He concluded enigmatically: “Watch this space!”

Given such potential innovation, I was more han a little disappointed at the Airline of the Year Bronze Award going to SAS. SAS is not a regional airline – it's a legacy carrier and a large one at that. OK, so the award was in recognition of SAS's use of a number of smaller regional carriers to provide its feeder services, but to me that is not in any way in the spirit of the award. Furthermore, SAS is currently engaged in a predatory war with my own client, Atlantic Airways, in the Faroe Islands. In future, let's reward the lion, not the lion-tamer!

This year's Gold went to TAP Express – the regional arm of Portugese legacy carrier, TAP. The Sliver, however, was earned by Blue Air – the largest airline in Romania, one of the fastest growing economies in Europe. The company was bought from its previous owners by four Romanian investors a few years ago. For me, this reflects better the ethos of the regional airline.