Finnair-Flybe pact: A sign of regional airline deals to come?

In what appears to be a fairly unusual 'damp-lease' arrangement Finnair is seeking to guarantee to its customers important feeder routes in the coming winter season in the midst of what it calls "the changing feeder traffic business." Finnish cabin crew will work the routes but not the cockpit crew, who will be Flybe's. It appears rather that the modern and 'green' fleet used by Flybe is the main attraction.

Initially the agreement involves only three aircraft, but "is expected to grow beyond (that) in the summer of 2011."

Finncomm's and goes

Finnair has a history of regional airline focus. This includes a 12-year long feeder agreement with Finncomm (Finnish Commuter Airlines Oy), an independent privately owned regional airline and the largest domestic air carrier in Finland in terms of number of flights. Finncomm operates Embraer ER-170 and ATR 42/72-500s in a fleet of 14 with four more ATR72-500s on order. Those additional four aircraft will make Finncomm the largest ATR72-500 operator in Europe.

With no known financial problems, a good punctuality record and politically correct adherence to the needs of the environment, Finncomm's match with Finnair was one made in heaven. But this was spoilt by the arrival on the scene of Latvia's aggressive airBaltic, which announced in mid Jul-2010 that it was interested in acquiring Finncomm in order to implant its operations in Finland and establish a hub there. airBaltic plans to double its operations in Finland in 2011 through a focus on regional markets, and has identified regional airports Oulu, Tampere and Turku as preferred locations for its hub. Were the Finncomm deal to fall through, airBaltic has stated it may establish its own commuter airline - a little carrot and stick for the negotiations.

Of these three Finnish cities Tampere and Turku form, with Helsinki, a triangle with sides approximately 100 miles long, in which much of the country's industry (especially hi-tech industry) is situated, while Oulu is in an isolated position over 400 miles to the north of Helsinki on the Gulf of Bothnia and closer to the Swedish border.

airBaltic dominating the regional marketplace

airBaltic is fast becoming a regional rival to Finnair and its ambitious long-haul service expansion into Asia. Its existing hubs are at Riga (the principal one), Vilnius (Lithuania) and Tallinn (Estonia). Adding Helsinki to the mix will further strengthen its position in the Baltic region. It already has a 73-city network from Riga and is establishing a presence in Middle East and CIS markets.

It is examining an idea put forward by the Transportation Ministers of Latvia, Lithuania and Estonia to evaluate the establishment of a single airline for all three Baltic States. AirBaltic is fast outgrowing Estonian Air in the Baltic aviation market, an airline in which SAS will sell its stake. Currently airBaltic's aircraft are all short-to-medium haul variants, the largest being the B757-200, but it is evaluating a purchase of up to 30 Airbus or Boeing models and a decision is due in Oct-2010. It is not known whether they will include aircraft more suited to long haul routes.

In an article published on 21-Jul-2010 by CAPA, it was revealed that Flybe has entered into a "substantial" agreement with Embraer to purchase up to 140 88-seat E175 and E-family aircraft, with the first delivery (of the firm orders) scheduled for Sep-2011 through Mar-2017. The question was then raised as to how these aircraft would be deployed, given a declining demand for domestic air travel in the UK and the dearth of promising but uncontested routes in mainland Europe.

It is unlikely that the use of Flybe aircraft in a domestic environment in Finland had been planned; rather that an opportunity arose unexpectedly that was too good to miss. Could it be replicated? There are certainly opprtunities elsewhere in the Nordic region, where dominant airline SAS has become much less influential since it trimmed back to a core operation and has seen the contribution of its remaining subsidiaries shrink faster than that of the main SAS airline.

An evolving model for cooperation with regionals?

Flybe is not the only airline to be assisting other airlines in this manner.

Ireland's Aer Arran, which sought new investors last year to raise up to EUR10 million in fresh funding, while cutting its workforce amid a downturn in demand, has since reached an agreement with Aer Lingus to establish a franchise arrangement between the two airlines. Under the agreement, Aer Arann began to operate 12 routes from Dublin and Cork under the brand name Aer Lingus Regional on 28-Mar-2010. At one stage it had considered becoming a wet-lease charter operator only.

It is also believed that at least one small Spanish regional airline has investigated the possibility of flying thinner domestic routes on behalf of bigger competitors such as Vueling or Air Nostrum.

But in both those cases the carriers are from the same country. The Finnair-Flybe arrangement may not be unique but it is definitely groundbreaking in the European context.

A possibly critical move for Finnair

As for Finnair, it has put most of its eggs into the basket of expansion into Asia, where it currently operates to Delhi, Beijing, Tokyo, Hong Kong, Bangkok, Nagoya, Osaka, Seoul, Singapore and Shanghai as well as New York, offering 'the fastest route' from and to many major cities in Europe. At the end of Jul-2010 it announced it would acquire two A340 wide body aircraft from ILFC to meet increasing demand on Asian services. The aircraft will commence operation early 2011 when its long-haul Airbus fleet will grow to 15.

However, for all that expansion its finances are not improving and the carrier sees local feed as the weak link in its strategy so far.

In the six months ended 30-Jun-2010, while operating revenues increased by 1.3% and load factor by 3.2 ppts, and despite labour and fuel costs both falling by more than 13%, Finnair made an operating loss of EUR59.2 million (previous year -EUR52.9 million) and a net loss of EUR49.5 million (previous year -EUR41.7 million). Yield per passenger fell by 3.5%.

And for Flybe a new horizon beckons?

The threat of growing competition from airBaltic, especially since it got its foot in Finnair's door, will be unwelcome.

But for the unaligned Flybe, it is an opportunity to cooperate with a solid alliance member (oneworld) to the potential benefit of both.

This "outsourcing" of regional airline operations has become the norm in domestic US operations - although their role and effectiveness are currently under scrutiny. And, as unaligned low cost airlines look to diversify out of the commoditised hole they find themselves in, they are looking to leverage their own strengths by connecting into long-haul, legacy operations. Thus JetBlue (with Lufthansa) and WestJet (with SkyTeam members and others) are finding new life in connectivity with full service, long-haul operations.

Flybe has carved out an increasingly valuable niche for itself and is now able to offer a unique feeder service for certain airlines. This new subcontracting role provides a platform for a potentially expanded strategy, with lots of upside and apparently limited risk. Not bad positioning in today's airline market.