British European is now Flybe, and has a new yield strategy
To fly BE or to Flybe is the question that may confuse UK regional airline passengers, since British European Airlines announced on July 18 its plans to rebrand its services. With directors struggling to resuscitate BE during a third year of losses, the airline has changed livery, adopted “Flybe” (from its www.flybe.com Web address) as a corporate identity, abolished overbooking and announced reduced fares intended to tempt traffic away from low-fare carriers.
As it introduces “deeply discounted” one-way fares from £29 ($44) and late-booking £50 ($75) round-trip fares (available 12 hr or less before takeoff), Flybe said it is “the first scheduled airline” to abandon overbooking.
The airline, which claims to be Europe’s largest independent regional, said discerning travelers would “more likely” find a low fare with Flybe at a local airport. Through its network, and franchise and code-share operations on behalf of Air France, Flybe flies from four London airports, eight British regional airports, and nine other airports in the Channel Islands, Ireland, Isle of Man, Northern Ireland and Scotland. It also serves 10 points in Belgium, France and the Netherlands.
The move, designed to challenge any perception that bargains are available only from low-cost operators, comes from a carrier with an established reputation for opportunism. Announcing plans in March last year to acquire up to 20 new BAE Avro RJX regional jets worth some $600 million, then-chief executive Barry Perrott characterized Flybe as “optimistic by nature.” Consistent “25 to 30 percent” compound annual growth over the previous 10 years supported that analysis: the airline was flying 17 BAe 146s, nine de Havilland Dash 8s (with four more soon to be delivered), four Bombardier CRJs and a Shorts 360; its 1,100 weekly services carried 60,000 passengers to 24 domestic and foreign destinations from bases in London, Belfast, Birmingham and the Channel Islands. Within weeks, Perrott outlined possible needs for larger aircraft under a code-share with Delta Air Lines.
Since 1992, Perrott’s strategy centered on opportunism, and if that trend had continued the airline would need the extra flexibility available from the RJX-100s. “We can take the 12 RJX-100s, and/or convert the options, and/or replace the 146s,” Perrott said last year. There were 100-seat charter opportunities, and Perrott had to service myriad partnerships, including franchise, wet lease, code share and alliance arrangements with Air France. Recognizing the need to grow in international markets, Perrott had previously overseen rebranding from Jersey European Airways (still its registered legal identity) under the ownership of the private Walker Aviation Group.
But a dark cloud appeared as the industry flew into recession. In June last year, after reduced Flybe profits in 1999 and 2000 and a loss in the following two years continued into a third, Perrott resigned. By November the bell also had tolled for the Avro RJX, canceled by BAE as reduced demand evaporated even further following last September 11.
COO Jim French was appointed managing director and immediately reviewed the airline’s “over complex” operations. He told employees: “Our results are not as good as budgeted. The shortfall is measured in a few percentage points, [which are] soon translated into [an unacceptable] loss to shareholders.” French’s brief was to return the airline to profitability so that the airline could develop further when markets improved. The route structure, planned long-term investment, and “wherever possible” service frequency and runway slots all would be retained, but capacity would be cut. The airline also decided to confirm RJX-100 orders, replace the Shorts 360 with a Dash 8-300, proceed with a new maintenance hangar at Exeter and focus on Birmingham and London City hub operations.
An early decision was to replace the CRJs with four more Dash 8-400s. The CRJs had been acquired to develop Air France franchise routes to Paris, before the French carrier bought several domestic regionals that resulted in too much 50-seat capacity. French could not find new routes for the CRJs, which were uneconomic on short UK domestic services. He had been encouraged by improved dispatch reliability from the Dash 8-400, which offered “seat costs below [those] of a Boeing 737 with speed similar to the BAe 146.”
The key requirement in French’s review was to establish greater stability and less opportunism, following the death of BE owner Jack Walker. “[Walker’s approach] has been replaced by normal shareholder practice. We need a longer-term strategy [and] must balance [any] new venture against the risk,” said French.
Now as Flybe, the airline will be driven by demand, not capacity. “There is a lesson from having replaced five Fokker F27s with nine Dash 8s, then adding CRJs and more 146s. That meant two new types and a significant increase in fleet size [which] forces you into taking more risk than normal,” said French. The “over complex” structure that evolved under Perrott had also upset employees, he added, with changes of routine for mechanics and “roster turbulence” generating a high attrition rate among pilots, many of whom had been assigned to different bases.
The present structure sees groups of pilots based at Belfast City, Birmingham, Edinburgh, Exeter, London Gatwick, Guernsey and Jersey, and in France at Paris-Charles de Gaulle, Toulouse and Lyons, said flight operations director Mike Wood. “Essentially everywhere an aircraft night-stops, we base pilots and cabin crew to minimize costs and to improve staff ‘lifestyle,’” he said. “Our bases are up to establishment, although the current UK airline recession has reduced turnover, making that more difficult.”
Performance in fiscal year 2001 to 2002 resulted in “a significant loss,” bigger than the £10 million ($15 million) thought to have been lost the year before. This year French aims to achieve “cash neutrality–a small loss, but with enough cash to obviate the need for investment.” Commercial director Martin Saxton believes September 11 had “not much long-term effect; there is not a large proportion of our traffic driven by such mainline markets.” He said advanced bookings have not been as strong as in the past two years and that while seat sales can stimulate demand, “there is a very real risk that they will become an expectation, or people will not travel.”
Director of strategy Malcolm Naylor, a UK regional-airline veteran who has been managing director of Brymon Airways and finance director of Guernsey Airlines, said the past 12 months have “probably been the most difficult ever experienced in this industry [and] a return to profitability is essential.” This can be achieved “by working assets harder, using enhanced revenue-management techniques and embarking on a deep cost-cutting program.”
French hopes “passenger numbers will be 20 percent up as routes mature,” albeit at the expense of lower yield. Additional utilization is being sought through more charter work. Saxton expects little growth this year and assumes that next year will be “flat or slightly down.” Some aircraft might be released: “Where there is an opportunity to return an aircraft, we’ll need a good argument not to.”
BE’s move to become “flybe” is a response to the low-cost operators that “have persuaded people that only they offer low fares,” said French. According to Naylor, the threats posed by budget airlines required a response: “BE is the only regional to offer fares comparable to no-frills airlines. [This] has been fundamental in [increasing] market share at Birmingham, where we compete with British Airways and have doubled our market share [to] Scotland in the past 12 months and out-carry BA [to] Belfast by 2 to 1. We believe the ‘flybe’ brand illustrates our approach to selling in previously more traditional regional markets.”
Since fares are now an important determinant, Flybe must have “a high marketing profile,” said French. “Everything is totally driven by price,” according to Saxton. “Because low fares have a high profile, expectations are that travel will be cheaper–even on regional routes.”
To cut costs Flybe has introduced Internet booking, which now accounts for 20 percent of sales, and examined computerized-reservations and travel agency fees, as well as airport charges and on-board service costs. Saxton wants to see Internet sales grow to 50 percent by the end of next year. Flybe has been unable to account for marked variations in Internet bookings between routes: “There appears to be a cultural rather than business factor.”
The airline’s partnership with Air France has been “extremely successful” and has been enhanced since last year’s failure of Newcastle, UK-based regional Gill Airways, said French. The airline took over Gill’s Paris route, operating three-times-daily BAe 146 service to Charles de Gaulle. And Flybe provides code-share to Air France and Delta Air Lines on traffic into Brussels. The regional also has proved the value of its hub at Birmingham, where “in three months we have had more international feed on to Emirates Airline’s Middle East services than in 12 months at Gatwick.”
While it has taken over Gill’s routes, Flybe has also abandoned others: Having replaced 146 service with Dash 8 equipment between London City and Aberdeen, the airline passed the route to Dornier 328 operator Scot Airways, which in turn has dropped competing flights to Edinburgh.
Currently, 27 percent of Flybe traffic is derived through code-share operations, and 32 percent is connecting, rather than point-to-point, traffic. Aspirations to offer code shares to North America remain a dream for the moment: Flybe would like to offer service to a major gateway not covered by the UK/U.S. bilateral air-service agreement. French is convinced that Flybe could feed traffic that “no other independent airline can offer” into international operations at Birmingham. That independence is important “because we can be friends with everyone,” he said. “Our business is multi-niche, with 10 regional points [serving] markets with needs that other operators do not meet.”
To better match traffic, Flybe has reduced capacity. “We are reducing production by withdrawing about 270 seats this year,” said French. A BAe 146-100 and a -200 and two Dash 8-300s were to be withdrawn by this month just as the fourth Dash 8-400 arrives. Flybe no longer requires the flexibility inherent in its selection of the Avro RJX. “The big difference is that we are now extremely cautious on fleet growth.” Eventually, French would like to see the Dash 8-400 fleet expand to replace older Dash 8s or 146s.
Flybe received undisclosed compensation after BAe canceled the Avro RJX, which Naylor said “has forced us to look again at fleet development, “but no decisions have been taken.” Saxton said there was “nothing to say we need bigger capacity” than the 110 seats offered by the 146-300. The regional’s heaviest traffic is on Gatwick services to the Channel Islands (from which British Airways withdrew Heathrow flights) and to Belfast.
The plan to release the CRJ fleet was overtaken by September 11, which led to airline failures flooding the aircraft market and bankers declining aircraft transactions. The RJs are being used on ex-Sabena routes (such as Brussels to Birmingham, Edinburgh and Newcastle), as well as Air France to Paris-Newcastle service. Wood said the CRJ has been “remarkably” reliable. “Seat costs are high, [but] it can be operated successfully in Europe provided the correct routes are flown.”
Turboprops Still Count
Would Flybe become all jet? “There is no compelling reason,” according to Naylor. “The Dash 8-400 has demonstrated that a turboprop can compete with jets; it depends on the overall economics versus the required operational capability.” Flybe fleet policy is “to maintain a mix between leased and owned [aircraft],” said Naylor. “There seems no reason to change this for the foreseeable future.”
Wood offered a pragmatic view of the industry’s recent pre-occupation with small regional jets: “Despite the RJ fever, we operate CRJs and know what they cost.” He acknowledged the jump in traffic claimed by other regionals introducing such equipment, “but that does not seem to have materialized on our routes. Maybe that is because we are a unique niche operator or because of the advanced nature of high-speed turboprops with quiet cabins.” Reliability of the Dash 8-400 has been “excellent” on Birmingham services to Scotland, the Channel Islands and Belfast, he said, despite the type’s rather rocky service introduction with earlier customers such as SAS Commuter, Horizon Air and Tyrolean Airlines.
Flybe has insisted that the airplanes arrive from Bombardier with the “latest” mods. The -400 has faced problems related to flight-deck software, passenger doors, noise suppression and oil fumes in the cabin, all of which have required attention from Bombardier engineers. Meanwhile, BE’s “Dash 8-200/300s are tough, resilient and well liked by customers,” added Wood. Dispatch reliability has been 99.2 percent. The lone Shorts 360 was withdrawn last November.
Flybe’s past philosophy of opportunism has been reflected in its network development. “In the past couple of years, London City service to the Isle of Man, Jersey and Belfast have been added,” said Saxton. “Leeds and Aberdeen came and went–you only find out by doing; in both cases evaluation suggested they could be reasonably successful. We also dropped the Shorts 360 flights between Exeter and Birmingham. One factor was the start of Go’s low-fare flights from Bristol.”
Flights as an Air France franchisee are operated to Flybe operational procedures and Air France customer-service requirements, said Wood. “Some [Flybe] procedures have been adapted so that they are standard.”
As far as possible, Flybe conducts training in-house and sells spare capacity, according to training manager Andy McLean. “We have a lot of strings to our bow and train flight crew, engineers and apprentices,” he said.
European JAR training approvals cover the BAe 146, Avro RJ, de Havilland Dash 8-200/300/400, Bombardier CRJ, ATR 42 and 72 and Fokker F27. (Although pilot training is not offered on turboprops, and CRJ tuition is provided by Bombardier.)
Flybe, which has 64 training pilots, is an approved type-rating training organization for Dash 8 and 146 flight-crew training. Recurrent training on all types and some engineering training is provided at Birmingham Airport. The airline offers Dash 8-400 conversion training for Series 200 and 300 pilots for whom it is regarded as the same type, although the -400 is deemed a different type for mechanics. Third-party training is provided for apprentice mechanics, and Flybe is considering such tuition for 146 and Dash 8 flight crew. The volume of outside work is driven by capacity, not in-house demand, according to McLean, who operates the department as a profit center.
In a traditionally cyclical business, McLean has seen type training drop since September 11, but other pilot activity has increased, mainly on Dash 8s as Flybe increases its use of the type. “We have to be very flexible, especially our instructors who can teach pilots, apprentice and type courses.”
Like many regionals, Flybe has suffered high pilot turnover rates as crewmembers move to bigger operators, though this rate has stabilized since September (McLean recognizes this as “a passing trend”). Many BAe146 pilots have left to fly larger aircraft, and turboprop crews have moved up. Said Wood: “There is always a throughput, but having flexible staff and good portfolio of training approvals allows flexibility.” He noted that pilot turnover pre-September last year was 7.8 percent, which he expects will have fallen to 5 percent in the year to next month: “Both figures are excellent for a carrier of our size.”
Pilots come to Flybe with a commercial pilot license following experience in general aviation or the military, or from flight centers such Oxford Air training school or Flybe’s own ab-initio scheme organization Cabair. Up to 10 maintenance technicians a year go through Flybe apprentice training, while others come from the industry and the military. Pilots leaving Flybe go mainly to UK charter operators or British Airways, said Wood.
While Flybe contracts simulator time from other providers and has no flight-training devices, it uses aircraft for some training, said McLean. The airline has several classrooms and extensive computer-based multimedia presentations, as well as “a lot of ‘chalk and talk.’ You can’t beat having knowledgeable instructors who can answer questions,” said McLean.
Using aircraft for training provides “all the dangers and all the feel of the real thing.” Maintenance technicians use the aircraft to see how to install equipment, while “pilots like to climb around and see the panels removed,” said McLean. Flybe has standard recurrent training for pilots–over the past two years it has developed an annual course to include all mandatory ground training.
Pilots number around 300 (having grown from about 140 over the past five years) and Wood said there is no current shortage, although experienced turboprop captains “are always difficult to recruit.” New-hire pilots, who require at least a “frozen” UK/European joint Aviation Authorities (JAA) air-transport pilot license with multi-engine instrument rating, start with net pay of roughly £22,000 (about $33,000). Senior jet training pilots earn well over £60,000 ($90,000).
Typically, pilots start in the right seat of the Dash 8. Flight crewmembers log an average of 500 to 600 hr per year, but this can rise as high as 850 hr. Some Flybe pilots have become jet captains with as little as 3,000 hr TT.
Flybe conducts its own base maintenance, including “C” and structural checks, as well as component repair and overhaul, said engineering commercial director Andrew Strong. No airframe work is outsourced, but the airline does contract out landing gear, APU and avionics repair–predominantly to original equipment manufacturers.
A major income source is third-party maintenance, offered for the BAe 146, CRJ and Dash 8 that comprise its current fleet, as well as earlier types Flybe has operated, such as the Shorts 360, Fokker F-27 and ATR. This business generates 65 percent of engineering revenue. In addition, Flybe provides technical record support, component procurement and a design capability. Also available is ATR cargo modification, including a reinforced floor and cargo interior.
Some 450 maintenance technicians are employed, mostly at Exeter. There is little current recruiting, but Strong expects that more jobs will arise when a planned new hangar comes online. There is no mechanic shortage, as the UK regional operates an in-house training program that provides enough graduates to meet demand.
Currently, about 30 technicians (including about 20 employed by other companies) are in training with an annual intake of about four or five. The students are recruited from both civil and military backgrounds, but Flybe will have trained most licensed personnel. Strong said that when a new type is introduced, training is provided by OEMs for about a year. Current training is focused very much on the Dash 8 and CRJ airframer, said Strong. (The airline is the first recognized Bombardier regional aircraft service facility after the manufacturer’s own, in West Virginia.)
Flybe has four hangar bays available for heavy checks at Exeter, and two more at Birmingham for line maintenance and “unscheduled recovery.” By next year the airline plans to double Exeter’s capacity, which will permit more third-party work and expansion of its existing regional capability.
Following French’s review, the separate maintenance division has been consolidated into the main business, leading to immediate improvements in dispatch reliability and punctuality, and a closer relationship among maintenance, flight operations, line maintenance and ground handling, according to Strong.
He conceded that the recession-reduced utilization has led to some maintenance being delayed. But this is offset by new third-party opportunities as operators move to more subcontractors, which the airline acknowledged as becoming more of a competitive market. Flybe is aiming not to over-commit itself, but to provide “good quality and efficient service” and to focus on turn time. “If we complete a check in five days instead of seven, that can save wet-lease or charter costs for a critical-path operator,” said Strong.
Strong reports an established relationship with Bombardier after a learning curve during which Flybe became familiar with the OEM’s engineering drawings and procedures for handling spares or performing repairs. He said that new Dash 8 operators “need to get a grip on line and A checks, work planning and management of spares call-up.” It is also important “to communicate with crews about technology, understanding system characteristics, especially the -400, which has different fault-diagnosis procedures.” There is little commonality between Dash 8s and CRJs, but Strong said Bombardier has been working to provide single points of contact for operators.
Flybe is pleased with the CRJ, which has “good build quality, dispatch reliability and engine reliability.” Strong concedes that four aircraft is “probably the minimum” viable number of a single type.
Simplicity Is a Virtue
Flybe has also been enjoying improved ALF502 engine reliability from its 16 BAe 146s, he said. “Honeywell has provided good modifications; we are getting more time on the wing, and the aircraft is working more consistently.” With its own fleet and additional third-party maintenance, the airline has established a good relationship with BAE Systems. Strong said the 146-100/200/300 variants offer “reasonable commonality–engine power-by-the-hour is the same and most components are common.” Five Flybe 146s feature electronic flight-instrument systems, while the balance of the fleet uses analog equipment.
What does Flybe look for in next-generation equipment? “It would be nice to have OEMs revert to ‘simplicity by design,’” said Wood. “Many faults are due to over-complexity. Simplicity and reliability are the requisites of regional operators looking [to provide] on-time performance and low ticket price.” He is pleased with some progress: “One area of avionics complexity that is laudable is in Category III operations–albeit autoland or head-up guidance systems. [The latter] is preferred because of the low cost and wide range of sensors that in the future might satisfy the landing requirement.”
Flybe managers identified several major challenges facing European regionals. Saxton sees both domestic and international issues: “In the UK the issue is the proliferation of low-cost operators, which draw passengers away from [our] Birmingham [hub]. It is becoming difficult to keep market share, but I don’t see Ryanair and EasyJet being here in a few years’ time. In Europe the challenge is competition from high-speed trains, but it is not so great an issue.”
Strategy director Naylor said Flybe must “continue our policy of building market share through delivering a quality, affordable product. The regionals face mutual challenges–congested airways, rising infrastructure costs and access to hub airports.” Maintenance of safe operations during market turbulence is of great concern to Wood, whether “the cause is air traffic control, pilot turnover or introduction of new aircraft. Safety of aircraft, passengers and crew remain top priority.”
Having negotiated treacherous recessionary rapids in the past two years, Flybe knows that it is not yet in calm water. The major review in the past year has allowed it to introduce many changes to improve efficiency, but as one senior director pointed out, ultimately the industry is at the mercy of fickle travelers. Asked about likely growth during 2002 and 2003, he replied cautiously: “I am not optimistic; I do not expect much growth, except at the expense of yield.”