Final day of the conference, Porto, Portugal
Day 2 Report
Thursday 19th April 2012
Regional Operations: the Challenges
Marco Balbo, sales director of SuperJet International, opened the second day of ERA's Regional Airline Conference in Porto - as the chair of Session 3, by introducing senior executives from three ERA member airlines who are the embodiment of the 'regional carrier' in Europe - Antonio de Menezes, president of SATA (the airline of the Azores); Panos Nicolaidis, ground operations director of Greece's Aegean Airlines; and Lars Kobberstad, CEO of Norway's Widerøe. These airlines, said Balbo, would provide insight into the challenges inherent in remote regional operations in the far West, South and North of Europe - this being designed to illustrate, not least to legislators and policy-makers, the burdens airlines already face before being further burdened with ill-suited, biased EU legislation and cumbersome bureaucracy.
West: SATA of the Azores
De Menezes said, "remoteness has been leading to complexity but we still remain a very nimble organisation." (SATA was profiled in the April issue of Regional International, which was the official publication of RAC 2012). He explained how hard the aircraft and crews work to serve the communities in the nine Azores islands using a fleet of Bombardier Dash 8 Q200s and Q400s - 15 of the routes being under PSO (Public Service Obligation) contracts which were subject to strict criteria - which de Menezes often made viability difficult to maintain. He added that the best yields were on SATA International's Airbus A330 services to Boston and Toronto, which many "loyal" Azoreans use, mainly for "visiting friends and relatives" [so-called VFR traffic].
De Menezes' key point was that in being an effective, efficient and dedicated regional carrier, SATA has been a central component in driving GDP growth so that the Azores has gone from being one of Portugal's poorest regions to being its third or fourth wealthiest. "And it is not the other way around," he said - meaning that it has not been GDP growth driving the airline's growth, which is usually the case with the airline industry. "There is a strong, clear and robust connection between traffic and GDP
growth," he said, adding, "the causality running from air services to GDP growth and not the other way around." So states the young economics professor who now heads one of the most respected airlines in Europe.
South: Aegean Airlines
Aegean's Nicolaidis said that Greece has around 6,000 islands and islets. Some 227 are inhabited and represent one fifth of the country's land area. There are 28 airports on islands and only 11 on the mainland. Ten of the 39 airports are "short takeoff and landing ones which can only be served by aircraft with 50 seats or less," he said.
Although 50 percent of the passengers are handled by the two main airports of Athens and Heraklion, the various more remote airports are vital to their communities - and to bring tourists in particular to and from those areas. Greece attracts around 16 million tourists a year. Nevertheless, those airports are rarely economically viable on a standalone basis, admitted Nicolaidis, while the airline services include 26 PSO routes. A challenge for airlines is a lack of infrastructure at many airports (Aircraft parking areas, suitable terminal buildings and ground handling services), he added.
Recently Aegean has been working hard to thrive despite the country's economic troubles, and part of this has been to introduce air links direct to islands from international destinations - rather than using the main hubs all the time. It is now connecting from Thessaloniki and has, according to Nicolaidis, "created a new way of connecting to the islands." This has led to significant growth figures in terms of passenger numbers - e.g. 37 percent on flights to Rhodes.
The airline is also aiming to apply "more appropriate equipment" than Airbus A320 family aircraft in its PSO routes. At present it has a "homogenous" fleet of these aircraft, which has cost-efficiency benefits overall but the types are simply too big and heavy for routes such as the PSO ones. Olympic Air is another ERA member airline, and it operates a Bombardier turboprop fleet alongside its Airbus narrowbody jets.
Aegean's main competition is from passenger shipping because "it is perceived as cheaper and you can take your car, and doesn't have complications such as taxes and security," said Nicolaidis. However aircraft offer faster services. As a significant European carrier, Nicolaidis stated: "We wish to convey the message that despite the situation [in Greece] we refuse to be downgraded on an international basis and we aim to increase access to Greece."
North: Widerøe
Widerøe CEO Kobberstad said: "Norway is a small but long country and has only 5 million inhabitants but last year we had 16 million air passengers - so the whole society depends on air transportation." The airline serves 42 airports with 350 daily flights in total, and achieved a margin of 11 percent before tax in 2011 - making it "one of the most profitable in Europe last year," he said. Of the 42 domestic airports, 21 have short runways (800 metres), three have a 1,199m runway and 18 are 'ordinary' airports - five of which can be described as 'international'.
Kobberstad pointed out, "Regional air transport keeps Norway populated - as with high mountains and long Fjords, ground transportation is not an option." He added that there was a strong inverse correlation between areas with population growth and their times to travel to airports for air services.
PSO routes in Norway (covering 38 airports, and transporting around 1.25 million passengers a year) are offered fewer than 20 separate tenders to attract competition (the total being €85 million) but Widerøe has a clear advantage, along with other carriers, which are used to the sometimes-harsh operating environment. The government sets the minimum aircraft size (some are min 30 seats and other min 15), frequency, network and maximum price and then the passenger revenue and all costs of the services are at the risk of the operator "But," he added, "you define your own profit with an exclusive right to operate". This is not the same for all European carriers - for example SATA's de Menezes said that the Azorean government directs the subsidy direct to passengers, and the airline has to meet stipulated conditions in order to be the exclusive carrier on the route, for example.
Kobberstad summarised his presentation by saying operating conditions in Norway are "very specialised, with short runways, terrain, steep approaches, contaminated runways and satellite-based precision approaches." He suggested that "it takes years" for an airline to become sufficiently experienced with all this to operate safely and efficiently.
A debate (Q&A session) followed where various issues were discussed, such as the difficulty in planning to predict costs on a route when PSO contracts were only for 3-5 years, typically, especially with highly volatile (but consistently high now) fuel prices. De Menezes also said that PSO minimum aircraft size criteria meant that some aircraft operate almost empty so he suggested such contracts could be "fine-tuned... otherwise we have excess quality and someone has to pay the bill - and the airline may run out of efficiency [in other areas] to make up for the cost."
Another issue discussed was the lack of a new, modern sub-50 seat turboprop to replace all the ageing and out-of-production Dash 8s, Fokkers, Saabs, etc in the current fleet, which are gradually running out of allowable hours and cycles (in Norway Wideroe's aircraft are doing up to 26 landings a day per aircraft). At present there is no ideal replacement aircraft on the horizon even at the smaller 19-seat end of the market. Kobberstad said: "It's going to be a problem - we are communicating with the manufacturers as we are looking for a smaller turboprop that is able to operate on the smaller runways."
ATM Improvements Vital
In the last session of the RAC conference the speaker panel focussed on other aspects which are central to the viability of future air operations to Europe's regions: first, how the hoped-for ATM improvements might be achieved through the Single European Sky project; and, second, the role of regional airports.
Ricardo Génova, director of flight operations at Iberia and formerly of ERA member airline Binter Canarias (of the Canary Islands), understands the challenges involved in regional operations all too well. He is currently heavily involved in the Single European Sky ATM Research (SESAR) project as a member of the European Commission's Performance Review Board (PRB). He started out by outlining the economic value of air transport to Europe - €370 million per annum, representing around 4% of GDP. In addition he pointed out that "each airside job created 6-7 non-airside jobs."
"A lot needs to be done to complete the EU internal market," said Génova. "There are lots of bottlenecks and legislation is a major concern... Europe has a 60% potential capacity increase so only twice the volume of 2003 can be accommodated by 2025 - and the prediction in 2003 was 2.5 times the size... Delays are already costing European airlines around €5 billion a year - and it is particularly an issue for smaller airlines who can't just put bigger aircraft into place, and they have competition from rail and road transport."
Génova then outlined how the PRB has identified 14 Key Performance Indicators (KPIs) for ATM improvements, divided into the categories of safety, capacity/environment and cost efficiency. These are an attempt to monitor and feed back progress and ensure that action can be taken by the EC to keep SESAR on track - although many critics would say it is already well off the pace hoped for by airlines.
Regional Airports Grow
Next speaker was Jonny Rayner, business development manager of London Southend Airport, which has been modernised recently by Stobart Group, a trucking and transportation company. He explained: "You need infrastructure, a buoyant local catchment [area] with high propensity to travel, and connectivity [e.g. rail links]."
Rayner said, "there is real excitement in Southend now as the as the airport grows - an airport they can be proud of." He added that regional airports are "a good thing" for larger airports. "Regional airports feed hubs and reduce their congestion. We'd argue that we area already relieving pressure on London hubs [e.g. Heathrow] and we'd be delighted to serve other European destinations." Rayner concluded: "[Europe] needs the right mix of hub and regional airports - and in the right places."
Airport Challenges
Morgan Foulkes, director of policy at ACI Europe, which represents 405 airports in 46 cities, said that the Association's Regional Airports Forum has 359 airport members and 159 operator members.
Opening his address, Foulkes said that while the European high-speed rail network covered 98 city pairs with a potential total of around 300 city pairs, regional airports offered a potential 150,000 city pairs. "There are very few alternatives to air transportation in many areas of Europe, so the regional airports play a key role," he said. "Regional airports have seen very significant growth over the past 10 years - between 2001 and 2010 there was a 60% increase in traffic at regional airports, and they now handle 500 million passengers a year - more than the entire population of the EU." He added that the development of international traffic at such airports had been even higher, at 84 percent.
However, he highlighted that "regional airports struggle to reach profitability, and this is particularly problematic for airports below one million passengers a year... so many rely on public funding. It is hard to achieve economies of scale, and opportunities for revenue diversification for such airports are often limited, especially in remote regions."
Foulkes said that regional airlines were often looked upon more favourably than low-cost carriers by regional airports, because the LCCs sometimes "disappear before [the airport] can recoup their investment" in infrastructure etc. "Regional airports appreciate the stability that many regional airlines can provide." He added that capital costs represented 31% of total airport costs in 2010, and further noted: "The cost of regulatory compliance can be disproportionately high for small airports." Airline related
charges represent on average only 16% of airport revenues, said Foulkes, who also noted that one challenge for airports was "to keep the total visiting costs down" for airlines - including ground handling and navigation charges from third-parties. "Aviation taxes are also very unhelpful and can lead to steep declines in traffic - in the UK, for example, APD has created a 14% decline in traffic at regional airports since 2008," claimed Foulkes.
He had two further points to make - concerning the EC's current Airport Package of proposed legislation, and possible further market liberalisation: "We [ACI Europe] believe that more capacity is required at bigger hubs to ensure access for regional airlines. [Otherwise] slots will go to the highest bidders]. We [also] believe that the next step should be further liberalisation of traffic rights to expand them to all the EU's neighbouring countries - a pan European-Mediterranean are with 58 countries and one billion consumers."
Who Will Pay for Passenger Rights?
A short Q&A session followed the last presentation of the conference. Malcolm Hart, managing director of Aurigny Air Services of the Channel Islands, asked Morgan Foulkes whether airports would accept the costs of meeting passenger rights legislation which had been met by airlines but where the airport was somehow at fault, e.g. for a flight delay or cancellation. This was with respect to the current EC review of passenger rights legislation (centrally the controversial and, for airlines, costly Regulation 261/2004). Foulkes replied: "We are concerned about the [possible]
transfer or responsibility." He added: "Hololei [of the EC] said yesterday that they wouldn't go backwards" in terms of passengers' rights, and concluded by saying: "It is quite different according to [EU] member states and the terms of use at airports. Service level agreement penalties are more common, and airports would not want to be penalised twice... and we'd be concerned if the EU law were to change to be different from international aviation conventions [Montreal Convention etc]."
Foulkes also said that airports currently had little control over the quality of services provided by third-party ground handlers, for example they could not require a minimum level of de-icing fluid.
A Successful RAC...
Closing the conference, ERA Director General Mike Ambrose thanked the various sponsors and the speakers/panel members. Turning to the theme he said: "Why regions at risk? There is a tendency to focus on the core areas of Europe. Air transport operates in an environment where it faces enormous adverse discrimination. We need to work together and ERA is a good vehicle for doing that... and we must [get across] the enormous value of our services - and, for example, as we have heard here, its potential to mitigate population decline."
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Speaker presentations are available on the ERA website. A full conference report will appear in the May issue of ERA's journal, Regional International.
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