2013 Are European ReJLRQDOV· Successful Days Numbered? Copyright @ 2013 PROLOGIS AG & ch-aviation GmbH Authors: All rights reserved. This study or any portion thereof may not be reproduced or used in any manner whatsoever Hanna Schaal (PROLOGIS) without the express written permission of the publisher [email protected] except for the use of brief quotations embodied in critical Max Oldorf (ch-aviatIon) reviews and certain other noncommercial uses permitted by [email protected] copyright law. $UH (XURSHDQ 5HJLRQDOV· Successful Days Numbered? 33.33% of all regional carriers in Europe went out of business between 2008 and today, nearly one fourth of the employees lost their jobs. PROLOGIS and ch- Figure 1 DYLDWLRQKDYHVFUXWLQL]HG(XURSH·V regional airline market. 'RHVQ·W LW VRPHWLPHV IHHO OLNH (XURSH·V UHJLRQDO DLUOLQHV· PDUNHW H[LWV DUH as FRPPRQ DV WKHLU HQWULHV" 'RQ·W \RX occasIonally wonder If thIs Industry still bears any potential? In order to gaIn clarIty In thIs matter, PROLOGIS and ch- Figure 2 aviation conducted a study of the European regIonal market, comparIng The Affiliates ² Dwindling data from 2008 with data from 2013. Partnerships The results are quIte frIghtenIng: 44 new It all started In the early days with the aIrlInes were founded from 2008 on, 22 traditional regIonal carrIer model, whIch of them have already vanIshed. The Is still very popular today. AffIlIated overall mortalIty rate was 33.33% (see DLUOLQHV VXSSO\ RU ¶IHHG· ODUJH QHWZRUN Figure 1). But the most concernIng FDUULHUV· KXEV ZLWK SDVVHQJHUV IURP number Is probably a job loss rate of 23 small, nearby regIonal aIrports. In many % between 2008 and today, whIch cases, the relationshIp between network means that almost every fourth aIrlInes and the subcontractors Is based employee lost hIs job (see Figure 2). It on a parent-subsidIary model, with the VHHPV OLNH UHJLRQDO FDUULHUV· VXFFHVVIXO affIlIates operatIng either under their days are hIstory. own brands or a regIonal brand. Lufthansa, for example, currently has four regIonal partners (AIr DolomIti, CityLIne, EurowIngs and Augsburg March 19, 2013 Page | 1 AIrways), all 100% subsidIarIes wIth the All three major European carrIer groups exception of Augsburg AIrways that not only face Increasing pressure from together form Lufthansa RegIonal. still fast growIng low-cost carrIers for Nevertheless, the Augsburg AIrways traffIc withIn Europe. They also feel regIonal partnershIp will be termInated competItIon from expanding DW WKH HQG RI /XIWKDQVD·V VXPPHU International carrIers, IncreasIngly schedule 2013 after 16 years due to the serving smaller European markets, from *HUPDQ OHJDF\ FDUULHU·V UHVWUXFWXULQJ hubs In the MIddle East for example. SURJUDP¶6FRUH·.1 Along with the prevIous These factors have led to lower yIelds for termInatIon of the equally longstandIng poInt-to-poInt regIonal traffIc and lower partnershIp wIth Contact AIr In October demand for hub and spoke traffIc wIthIn 2012, the German aIrlIne will have Europe as well as for Intercontinental parted from two regIonal partners withIn flIghts. ThIs makes It dIffIcult to contInue only a year. profItable regIonal operations with small aIrcraft. A simIlar decrease In regIonal affIlIated partnershIps can be observed at AIr The Independents ² Decreasing France-KLM and IAG (InternatIonal Profits? AIrlInes Group, holdIng company of BrItish AIrways & IberIa). To cut costs, Flybe. ² the keyword that remInds us AIr France will be mergIng the three that when we talk about regIonal regIonals AIrlInaIr, BrIt AIr and RégIonal carrIers, we are not only referrIng to XQGHUDVLQJOHQHZEUDQGFDOOHG¶+RS·DV affIlIates. SInce the mId-1990s, there of March 31, 2013, that will operate most have been a growing number of totally non-hub routes wIth a low-cost carrIer Independent carrIers that offer poInt-to- lIke product offerIng.2 BrItish AIrways poInt service to both small regIonal and already sold Its regIonal BA Connect to large International aIrports, operating BrItish regIonal Flybe. In March 2007, as under their own brands and with no ties the management did ´QRW VHH DQ\ to large network carrIers. SInce the prospect of profitability in its current acquisItIon of BA Connect In 2007 we IRUPµ3 anymore. MXVW PHQWLRQHG )O\EH LV (XURSH·V 3 U.S. SecuritIes and Exchange Commission (2006) 1 ch-aviatIon (2012) 2 ch-aviatIon (2013a) March 19, 2013 Page | 2 largest regIonal carrIer In general. For RUGHU WR DQDO\]H (XURSH·V UHJLRQDO the six months until 30 September 2012, carrIer market and Its development however, the group that Includes Flybe. withIn the last fIve years, we compared Nordic (a joInt venture with FinnaIr) airlIne and fleet data from January 1, reported a pre-WD[ORVVRI P ½P 2008, with current data (date of data Flybe. blamed the results on fuel prIces analysIs: February 17, 2013). Regionally, at record hIghs and a decrease In the scope of the study Includes all EU passenger numbers In the UK domestIc member states plus AlbanIa, BosnIa- aviation market.4 The NorwegIan HerzegovIna, Croatia, the Faroe Islands, regIonal WIderøe, that Is still fully owned Iceland, Kosovo, MacedonIa, by SAS (wIth a sale expected thIs year5), Montenegro, Norway, Serbia and but operating faIrly Independently, was SwItzerland. The underlyIng data for the selected European AIrlIne of the Year study Is based on a combination of the 2012 by the ERA (European RegIonal ch-avIation aIrlIne knowledge base, jp AIrlIne AssocIation). Yet, the award airlIne-fleets and manual research by FDQQRW KLGH WKH IDFW WKDW WKH FDUULHU·V ch-avIation. operating profIt decreased by 59.8% DurIng the tIme perIod we observed a between December 2011 and October total of 195 regIonal aIrlInes have 2012. Other European Independents operated In the countrIes under must deal wIth fInancIal results sImIlar consideratIon, of whIch only 130 carrIers WR)O\EH·VDQG:LGHU¡H·V are still active today. ThIs means a loss Regionals in Europe: Overall of 65 regIonal aIrlInes over the last fIve years, reflectIng a signIfIcant mortalIty Analysis Results rate of 33.33% (see Table 1). ThIs rate Is How did we obtaIn our results and what even more alarming when we only look at do they look lIke In greater detail? In the carrIers enterIng the market between Active before 2008 FoundeD from 2008 on active in 2013 went out of active in 2013 went out of TOTAL Percent business betw . business betw . 2008 anD 2013 2008 anD 2013 Airlines 108 43 22 22 195 100.00% Mortality 0 43 0 22 65 33.33% Active in 2013 108 - 22 - 130 66.67% Table 1, RegIonal AirlIne Development in Europe (2008-2013) 4 Flybe.com (2012) 5 ch-aviatIon (2013b) March 19, 2013 Page | 3 2008 and today: Every second newly Independents (= 74.87%) amountIng to a founded carrIer was unable to survIve. ratio of 1:3 (see Figure 4). The numbers look a bit better for the aIrlInes that already exIsted before 2008. Of all 151 regIonals that exIsted before 2008, 108 (71.52%) are still operatIng. They represent more than three quarters (83.0 RIWRGD\·VDFWLYHFDUULHUV To sum thIngs up, there has been a major aIrlIne declIne over the last few Figure 3 years. The regIonal market In Europe In particular does not seem promIsing to start-ups. Moreover, It should be mentioned that the declIne of regIonal aIrlInes has a negative effect on secondary aIrports, frequently the bases of regIonals. The cessation of a carrIer can result In a drastic reduction In aIrport busIness volume, making Its future uncertaIn. Figure 4, * Total of all aIrlInes that have been operatIng in 2008 & were founded from 2008 on (IncludIng aIrlInes Affiliates versus Independents: that have gone out of business). Converging Ratio WIth regard to affIlIates and network carrIers wIth their own regIonal The distinct analysis of operations, alterations have been affIlIated/network aIrlInes and comparably low over the last fIve years. Independent carrIers revealed a current Only two new aIrlInes were founded 1:2 ratio (42 affIlIates/network carrIers between then and now that fall In thIs with regIonal operatIons = 32.31%, 88 category, Cimber whIch launched In independents = 67.69%; see FIgure 3). 2012 and Olympic AIr In 2008. Both ThIs ratio has converged. In total, ZHUHQ·W QHZ PDUNHW SDUWLFLSDQWV LQ WKH between 2008 and 2013, there were 49 proper sense, but rather successors: affIlIates/network carrIers wIth regIonal Cimber evolved from the Insolvent operations (= 25.13%) and 146 March 19, 2013 Page | 4 Cimber SterlIng (and works closely with thIs category from their contracts wIth SAS) and Olympic AIr from Olympic regIonal partners very proactively, AIrlInes. moving to hIgher capacity regIonal DLUFUDIW /XIWKDQVD·V UHJLRQDO DIILOLDWHV 14.29% of the affIlIates withdrew from have retIred 60 50-seat aIrcraft In five the market. In contrast, 39.73% of the years, as Lufthansa has decIded to drop Independents have gone out of busIness. all of these aIrcraft and now to also drop ConsiderIng only Independents, the all 70 seat turboprops by the end of hIghest mortalIty rate could be observed 2013. between the years: A total of 42 carrIers were founded from 2008 on, yet 55% of them have faIled. Fleet Development How have fleets changed over the past fIve years? In 2008, 706 aIrcraft with 20- 50 seats were operated by European Figure 5 regIonals. WIthIn fIve years, thIs number decreased by 53.26% to 330. There was And yet, It was small regIonal jets lIke also a decrease In the number of aIrcraft %RPEDUGLHU·V &5-- RU (PEUDHU·V with less than 19 seats (by 13.79%). ERJ-145 that replaced turboprops In the Only the amount of 50-100 seaters mid-nIneties. They made flyIng both Increased by 3.37% from 682 to 705 (see short and long routes with just a few Figure 5).