RAA Convention 2006: Regionals fine-tune cost strategies in wake of European recovery

Aviation International News » May 2006
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September 19, 2006, 11:48 AM

The time has come to forget industry recovery and talk instead of progress, said European Regions Airline Association (ERA) president Antonis Simigdalas in his opening remarks during the group’s March conference in Copenhagen. Perhaps the one area in which operators seek progress more than any other involves their reaction to high fuel costs.

Almost 250 delegates heard Skyways Express president Jan Palmer chair a discussion in which he pointed out that not everybody had been hit equally hard. “It is not a crisis for the oil companies,” he remarked.

Citing trends in oil prices that have put great pressure on the airlines, Lufthansa fuel department head Helmut Fredrich said that prices had peaked at more than $80 a barrel following Hurricane Katrina and now hover around $75 per barrel, compared with less than $30 barrel before the U.S./UK invasion of Iraq in early 2003. “The geophysical situation and speculation have kept the [first quarter 2006] crude oil price high. Lufthansa does not expect relief in kerosene prices,” Fredrich told ERA delegates.

He recommended that regional airlines aim to smooth the influence of market fuel prices on operating margins, rather than concentrate exclusively on actual hedging results. Such a strategy aims to allow the core business to adapt to market conditions. “Part of your overall position is [understanding] how the market is behaving and whether that allows you to accept the trend,” he said. Successful hedging requires a forecast of the situation 24 months ahead of time, he added.

So how would emissions trading affect fuel hedging? “Emissions rights have nothing to do with fuel hedging; they are two different issues,” said Fredrich. “We will have to trade in emissions rights and that will add costs. We hedge fuel whether the price is high or not.”

Fredrich speculated that even though oil probably would not run out for another 100 years, it might take 10 years for prices to return to the $40-a-barrel [at current values] level.

Pointing out that fuel prices are “essentially the same for everyone,” Cees Gresnigt, International Air Transport Association (IATA) safety, operations and infrastructure director for Europe, North Atlantic and North America, said airlines needed to concentrate on cutting operations costs, particularly those involving suppliers such as airports and air navigation service providers.

He emphasized the importance of airlines establishing clearly accountable fuel-conservation programs, with one individual responsible for the entire fuel budget. Since manufacturers say that narrowbody aircraft generally show fleet-wide fuel efficiency some 1 to 2 percent above design criteria, regional airlines should ask themselves whether or not they achieve that level of efficiency in their operations. He said that IATA surveys since last August of 17 airlines operating between six and 150 aircraft had shown potential fuel savings of 2 to 12 percent, equating to an overall saving of some $250 million per year.

Gresnigt identified several areas of flight operations that contribute to costs and that airlines should examine for possible savings, including APU and air-conditioning use, fuel additives, pilot technique, low-noise/low-drag approaches, optimal flap settings, engine-out taxiing, fuel-conservation awareness training and crew proficiency monitoring.

The surveys also showed that aircraft flew heavier than necessary (for example, carrying too much water) and that reserve fuel calculations were too conservative. Furthermore, significant variations in fuel-consumption calculations exist and operators showed limited knowledge of fuel savings that could accrue from additional maintenance, according to the survey.

Acknowledging a returning interest in more fuel-efficient turboprop aircraft, General Electric Commercial Aviation Services regional jet programs senior vice president Todd Freeman argued that 50-seat RJs can still compete “because they are readily available and therefore their [lease] costs are lower.” Remarkably, he asserted that used 50-seat jets “are now competitive with new turboprops down to 200-nm sectors.

“There has been a temporary dislocation, but I think we will see prices stabilize,” added Freeman. “There has been a lot of entrepreneurial activity lately, so I think rates will come back.”

Freeman further challenged conventional wisdom by asserting that on 300-nm European sectors with 3,000-hour annual utilization and with no overhead burden, used 50-seat RJs run “close to 70-seat jets on unit costs [and] can be more profitable over a wider range of demand.” He said his estimates take into account “the power of frequency,” but that the phenomenon applied more to North America than Europe.

Freeman claimed that 100-passenger regional jets could compete effectively against larger equipment–such as the 124-seat Airbus A319–especially where equipment was downsized (perhaps on off-peak services) or where secondary markets were being exploited. He concluded that regional airlines must plan on continued high fuel costs, while lower overall costs were “absolutely critical to increased market growth.”

Industry-Government Alliance

Of course, the problems plaguing European regionals are not confined to airline operations. They extend to the political front, and ERA officials believe recent air transport consultation with the European Commission (EC) could build a more competitive industry.

If the EC accepts the challenge, this year might mark a turning point in relations with European regional airlines, ERA air-transport policy director Andrew Clarke told AIN. The EC has promised to withdraw “stalled” proposals for new rules and directives and has sought nominations of existing regulations that inhibit business, he said.

Recognizing the need for industry to support EC efforts to make good laws, the ERA has proposed five regulations covering fares, slot allocation, insurance, passenger compensation, and computerized reservations systems (CRSs)–for modification, if not outright deletion from the statute book.

Clarke bases his argument for changes to pricing rules on the premise that generic European law already provides for protection against predatory pricing or fare fixing. Furthermore, he argues, if airlines were given freedom to set fares under other legislation, the EC should do away with the rules completely.

The ERA also seeks simplification of slot-allocation rules, driven by EC perceptions that the industry’s own procedures require improvement. Clarke said that regulators should allow the market, community needs and airport capacity to resolve any conflicts organically, rather than try to stimulate route competition through interference. “The IATA worldwide rules work,” said Clarke.

European requirements mandating continuous minimum insurance coverage (against claims arising from accidents or incidents) impose more unnecessary costs, according to the ERA. Rather, it would prefer that regulations be modified to reduce costs while ensuring protection. “The EC must work with member states to ensure that insurance is available when the commercial market withdraws coverage,” said Clarke.

Regional operators continue to call for complete removal of regulations governing computerized reservations systems. “The market has now changed, with divestment of CRSs and the proliferation of Internet sales,” said Clarke. Airlines are also concerned that if the regulations remain the EC might try to revise CRS requirements while ignoring developments on the World Wide Web. The ERA believes that competition law should provide protection of Internet sales.

Meanwhile, the association continues its fight against passenger-compensation requirements, which airlines say discriminate against air transport compared with other modes. They particularly want to see the removal of certain obligations following delays or cancellations beyond their control. “Why should airlines provide compensation because of the effects of, say, fog and snow?” asked Clarke.

The subject turned Clarke’s attention to the ERA’s request for major revision of the transport policy white paper now under review by the EC. He said the EC justifies passenger compensation legislation only by its inclusion in the document, which contains perceived flaws that airlines challenged in 2001 and 2004.

The ERA says the revision should include recognition of the industry’s economic and social benefits; confirmation of its achievement in meeting European employment, productivity and competitiveness goals; an integrated transport policy that includes a clearly defined role for airlines; and strategies to ensure regulations stood subject to “better governance” principles so the region’s air transport industry can compete globally.

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