03-Oct-2012 6:35 PM

Switzerland's SkyWork Airlines is hoping to prove that small is beautiful

Analysis

In less than two years, SkyWork Airlines has built a strong presence at its home base in Bern in Switzerland. Its scheduled network has grown to embrace 26 gateways in 12 countries, served by a fleet of seven regional aircraft. The airline is on course to carry over 230,000 passengers (includes both scheduled and charter) in 2012, compared to 88,000 in 2011.

The growth at SkyWork sets it apart from other regional carriers in Europe. European Regions Airline Association (ERA) members reported a 4.8% average scheduled passenger growth in 2011 and a 2.9% decline in 1H2012. Small and streamlined is part of CEO Tomislav Lang's "best cost" strategy for SkyWork Airlines, but the carrier's vision and that of the airport's on how to shore up and support the next growth phase seem to be increasingly unaligned.

SkyWork's owners and management remain confident that the airline will reach breakeven in 2013. But while its achievements thus far are remarkable, troubles are brewing because of opposing visions between the airline and Bern Belp Airport, CAPA has learned.

Summary

SkyWork Airlines has experienced rapid growth, with its scheduled network expanding to 26 gateways in 12 countries.
The airline is on track to carry over 230,000 passengers in 2012, compared to 88,000 in 2011.
SkyWork Airlines follows a "best cost" strategy, targeting niche markets where passengers are willing to pay a realistic price for a quality product.
The airline is considering moving its operations to another airport, potentially in Germany, due to disagreements with Bern Belp Airport.
SkyWork Airlines is appraising the rising costs of its London City Airport route and exploring codeshare and connection options with other operators.
The airline plans to expand its presence in Croatia, with a new route to Zagreb and plans to add more destinations and increase capacity in the country.

These troubles could jeopardise the young regional carrier's success, but more so reverse the growth curve of Bern Airport. SkyWork is the dominant operator at this small capital city airport and as Mr Lang points out: "We are an airline. Our operations are mobile and we can easily transfer operations to another airport."

SkyWork could move base to neighbouring Germany

If the discord comes to a head, SkyWork Airlines might, for example, set up shop at EuroAirport Basel-Mulhouse-Freiburg. The regional airline is looking into other options as well. Moving its operations into Germany could also benefit its cost base and lower overhead costs by as much as 50%.

SkyWork Airlines is also appraising the rising costs of its most prolific route, London City Airport. Crucial to ongoing success is the need to start exploring codeshares and connections with other operators there.

Next year, SkyWork as a name and an AOC holder will mark its official 30th anniversary and as such it is older than most of its Swiss counterparts including SWISS International Airlines, Edelweiss Air and Darwin. However, in its current form, as provider of mainly scheduled services on a regional network offering a full-service product, SkyWork will celebrate its second anniversary on 20-Oct-2012.

The company was founded in 1983 as a flight training school in Bern and moved into private business jet operations in 1989, then into charter flights to popular holiday destinations in cooperation with tour operators in 2003, which nearly caused its bankruptcy in 2010. The airline secured a new private investor and re-launched commercial operations with CHF25 million (EUR20.7 million) in working capital and a new business plan.

Speaking to CAPA at the recent ERA General Assembly in Dublin in Sep-2012, Mr Lang expressed confidence in the company's future and said: "We're on a good path and will never have to talk about bankruptcy again."

SkyWork is Europe's first 'best cost' airline

SkyWork Airlines sees itself as a new generation regional airline unifying high service standards with fair and transparent fares. The company bases its "best cost" philosophy on its belief that the regional airline market in Europe can be revived by targeting niche markets where passengers are willing to pay a realistic price for a quality product.

The carrier's CEO is very adamant that the low-cost model "where everybody sells airline tickets at levels you can hardly survive at" is not an option, because Mr Lang says: "I do not want that pressure. I do not want to be at a survival stage every day of my life". Equally, SkyWork does not want to revert to the old pre-market liberalisation times and position itself as a very expensive exclusive airline that almost nobody can afford.

The result is what the airline calls a "best cost" approach and what in reality is a well marketed blend of the LCC and full service models with a free checked baggage allowance of 15kg to 20kg. SkyWork Airlines introduced a four-band fare structure in the beginning of 2012 - SkySaver, SkySurfer, SkyWorker and SkyExecutive - each offering enhanced flexibility on bookings and changes of reservations as well as optional extras such as catering requirements, on-board iPads, lounge access and earphones. Bookings can be made over the company's website, but all fares are also bookable through the Amadeus and Galileo GDSs following the selection of the Mercator reservations system Avantik.

Pathfinding routes with the Dornier 328 turboprop

The new SkyWork Airlines started with four scheduled routes from Bern Airport aboard 31-seat Dornier 328 turboprop aircraft. While the economics of operating the Dorniers at this stage of the airline's life might not add up, the aircraft which are also known as the "Mercedes of the skies" proved to be the right choice to support SkyWork's initial start-up phase combining quality interiors with high dispatch reliability and a low seat density to test the viability of the thin routes from Bern. "It was the smallest risk we could take and still have something that services our quality needs," Mr Lang noted.

The company at present operates four Dornier 328 turboprops and three 72-seat Bombardier Dash 8-Q400s.

The company in May-2012 purchased the only European based Dornier 328 full flight simulator (FFS), enabling SkyWork Airlines to build up its own type rating training oganisation and offer the FFS for third-party training. The FFS is based in Amsterdam and is maintained by CAE.

SkyWork Airlines fleet as of 02-Oct-2012

Aircraft	Quantity
Bombardier Dash 8-Q400	4
Dornier 328	3
Total	7

SkyWork Airlines Dash 8-Q400

Rapid network expansion at Bern Airport

In the northern summer schedule 2012 SkyWork Airlines operates to 26 scheduled passenger destinations from its home airport Bern Belp. The large majority of these routes have been launched this year. About half of the routes are seasonal and services to the typical summer leisure destinations such as Olbia, Catania, Elba, Cagliari, Nice and Figari will be suspended for the winter months. On the large majority of its routes, SkyWork is the sole operator with a competitor (Helvetic Airways) only on routes to Catania, Olbia and Palma de Mallorca.

The airline is the dominant operator at Bern Belp airport, accounting for approximately 81% of the scheduled weekly seat capacity at Bern, according to schedules in Innovata for the week of 01-Oct-2012 to 07-Oct-2012. The remaining capacity is provided by Air France, which operates about 1100 weekly seats to/from Paris Orly Airport with ATR 42-500s, and Helvetic Airways. Paris Orly is the airport's largest route in terms of weekly seat capacity.

Bern Belp Airport capacity by carrier (% of seats): 01-Oct-2012 to 07-Oct-2012

In terms of frequencies, SkyWork accounts for an 87% share of the Bern market, Air France has an 8% share and Helvetic 4%. SkyWork operates some 232 weekly frequencies to/from Bern offering almost 9000 weekly seats. Up to 88% of its weekly capacity in terms of seats is deployed in western Europe and the remainder is offered on its growing network to eastern Europe, based on schedules in Innovata for the week of 01-Oct-2012 to 07-Oct-2012.

Passenger traffic at Bern Airport has grown exponentially in 2011, up 82% year-over-year. Much of this growth can be attributed to the high growth of SkyWork Airlines. The expansion in passenger throughput continued in 2012, with passenger numbers rising 53% year-over-year to 105,773, which set a record, according to data from the airport operator. The airport's runway was recently extended to 1,730 metres.

Bern Airport traffic figures: 2007 to 2011

SkyWork and Bern Airport have seemingly differing views

SkyWork Airlines sees a potential of at least 750,000 passengers out of Bern Airport annually. About 1.7 million passengers living or working in the canton of Bern fly from Zurich Airport per year and "if I can capture a 10% share of this I have already 170,000 passengers", Mr Lang reasons. The carrier's CEO also believes he can divert travellers from Basel or Geneva Airport using SkyWork and boarding at Bern-Belp Airport, which is a small, convenient and uncrowded facility.

SkyWork in Jul-2012 commenced its next expansion phase and started offering connecting service, initially on 16 flights. The aircraft's compact size, fast check-in and speedy security checks allow for a connecting time of 20 minutes.

Small and streamlined is part of Mr Lang's "best cost" strategy for SkyWork Airlines, but the carrier's vision and Bern Airport's view on how to exploit the airline's growth phase seem far apart. Mr Lang is threatening to leave the airport and potentially move the airline's operations somewhere else.

"In the history of this airport there was never an airline serving 26 destinations, there was never an airline with a real visibility in the market and there was never an airline that grew the business that fast, but we want to work together with an airport that is willing to understand our concept. Our concept is that not big is beautiful but that small is beautiful. The problem is that our airport does not understand that", Mr Lang explained to CAPA.

Spats between airports and airlines are more common than occasional and it seems unlikely that SkyWork will abandon the airport where it is growing so successfully. But other regional airports would be very willing to attract and accommodate a rapidly growing regional carrier.

Route changes due to weak Spanish and Italian demand

Bern-Barcelona is SkyWork's largest route in terms of weekly seats, but the service will see a reduction in capacity in the northern winter schedule commencing 28-Oct-2012 owing to a marked fall in demand as the recession in Spain deepens. The route is currently served daily but will be trimmed down to three times weekly. Bern-Barcelona was the second route SkyWork commenced as part of its re-birth as a scheduled regional carrier.

The collapse in inbound demand in the Spanish and Italian markets will affect capacity on a further two year-round routes in the SkyWork network this winter, Rome Fiumicino and Madrid. The latter will not feature in the airline's schedule from 28-Oct-2012 and the destination will most likely not be served in summer 2012 either. The carrier launched the Bern-Madrid service in Oct-2011.

SkyWork Airlines top 10 international routes (seats): 01-Oct-2012 to 07-Oct-2012

SkyWork Airlines top 10 international routes Bern (by frequency): 01-Oct-2012 to 07-Oct-2012

London City could see changes

SkyWork Airlines is also appraising the rising costs of its highest profile route, London City Airport. Crucial to ongoing success is the need to start exploring codeshare and connections with other operators there. The airport's second largest operator, CityJet, is likely to be one of the options.

Mr Lang said London City is a popular airport and the route has grown strongly since its launch in Apr-2011, but it is expensive to operate to/from with the current mix of Dornier 328s and Q400s supporting the current 12 weekly frequencies. The carrier needs to move to an all Q400 operation with an average 70% load factor at a good cost structure to make the Bern-London City route sustainable.

"It is no secret other London airports have been courting us and we are compelled to start an evaluation," Mr Lang conceded. London City is presently SkyWork's only route to the UK.

Mr Lang's assessment of London City mirrors remarks by CityJet CEO Christine Ourmières, who told CAPA in Jun-2012 that the small London Docklands airport is one of the most expensive airports in the world to operate to/from. Additional constraints are the weather related delays (London City is surrounded by water and thus suffers from fog) and the limited opening hours. The airport has a strict night curfew (operations are permitted between 06:30 and 22:00 hours on weekdays) and an even stricter weekend regime: flights are only permitted between 06:30 and 12:30 on Saturdays and between 12:30 and 22:00 on Sundays.

The fully-owned Air France subsidiary, CityJet, operates around 500 weekly frequencies to/from 18 scheduled passenger destinations to/from London City, according to schedules in Innovata for the week of 01-Oct-2012 to 07-Oct-2012. It has an approximate 31% share of total seat capacity deployed to/from the airport. SkyWorks accounts for less than 1% of capacity at London City.

London City Airport capacity by carrier (% of seats): 01-Oct-2012 to 07-Oct-2012

New route to support Croatia ambitions

SkyWork Airlines will launch a new twice weekly service from Bern to Zagreb on 28-Oct-2012. Mr Lang, who was born in Zagreb, said he is aiming to position SkyWork as the preferred airline between Switzerland and Croatia, and build this into one of its core markets.

SkyWork currently operates to two destinations in Croatia, a twice weekly service from Bern to Split and a once weekly service to Rijeka with Dornier 328s. Both routes have performed well and have achieved high load factors, according to Mr Lang. SkyWork plans to expand at Rijeka and Split with additional seat capacity and frequencies in the summer schedule 2013. At the same time the airline plans to add a fourth destination in Croatia, Zadar.

Croatia Airlines has a leading market position on the Switzerland-Croatia market accounting for a 75% share of seat capacity, according to schedules in Innovata for the week of 01-Oct-2012 to 07-Oct-2012. SkyWork now has a 4% share of capacity in the Switzerland-Croatia market but this will grow as it adds two more destinations and expands capacity to its two existing destinations in the country.

Switzerland to Croatia capacity by carrier (seats per week, one way): 19-Sep-2011 to 24-Mar-2013

Management is confident in SkyWork's long term future

Mr Lang has no doubt that SkyWork has found the perfect "best cost" model to thrive as a regional airline in central Europe. The carrier has a niche market in Bern, which was one of the world's very few capital city airports without a home airline and a market before SkyWork Airlines expanded there. It would be an embarrassment for Bern Belp Airport if the disagreement with its main operator would culminate in SkyWork moving to a competing airport, for instance EuroAirport on the border of Switzerland, France and Germany.

For SkyWork Airlines, EuroAirport seems a rational option. The airline is targeting to expand its model into Germany, which is one of the few countries in Europe where the economic environment is encouraging and where the travelling public is willing to pay for a quality product. Crossair had its origins at Basel-Mulhouse-Freiburg airport and, not coincidentally, Mr Lang has great respect and esteem for Crossair's founder and ERA honorary chairman Moritz Suter.

The energetic airline is still in its start-up phase and profitability is not a given. But management has a tight grip on costs and says it is on target to reduce operating losses during 2012 to well below the projected CHF38 million (EUR31.4 million/USD40.4 million).

SkyWork CEO Tomislav Lang (right) with Crossair founder and ERA Honorary Chairman Moritz Suter

This is the third in a series of analysis articles on some of Europe's regional carriers, based on interviews at the European Regions Airlines Association (ERA) general assembly in Dublin on 20-Sep-2012. Click on the following links to read the first two articles in this series: