22-Dec-2016 8:50 PM

Flybe at Heathrow: Europe's largest regional airline enters Europe's largest airport, gets new CEO

Analysis

On 20-Dec-2016 Flybe announced its first ever routes from London Heathrow and the appointment of a new chief executive. Europe's largest regional airline will launch Heathrow to Aberdeen and Edinburgh at the start of summer 2017. Former CityJet head, Christine Ourmieres-Widener, will become CEO of Flybe from 16-Jan-2017, replacing Saad Hammad, who left on 26-Oct-2016.

Flybe already operates to the two Scottish cities from London City in competition with British Airways. Its Heathrow turboprop services will compete directly with BA's narrowbody jets, and there is also competition from Ryanair and easyJet from other London airports on the city pairs. Flybe has previously baulked at Heathrow's high charges, but has now changed its mind.

Flybe's new Heathrow services will use slots previously used by Virgin Atlantic's Little Red on the same routes. Little Red failed to fill its aircraft and ceased operating after two years. Flybe will be hoping that its smaller aircraft and lower frequencies will be easier to fill. Extending its codeshare agreements with its long haul partners to include Heathrow routes would help. It will also do Flybe no harm that it already participates in the Avios loyalty scheme owned by IAG, the parent of Heathrow's largest airline British Airways.

Flybe's LHR routes to Aberdeen and Edinburgh to sit alongside LCY routes

Flybe's new routes from Heathrow will operate alongside its existing flights to Aberdeen and Edinburgh from London City, which it entered in 2014.

In the current winter schedule Flybe operates 12 weekly flights from LCY to Aberdeen and 30 from LCY to Edinburgh, on which latter route its summer schedule offered up to 40 weekly flights, according to data from OAG.

The airline's website, which is already offering bookings for the routes, indicates that it will operate 25 weekly flights from Heathrow to Edinburgh (four daily on weekdays, two on Saturdays and three on Sundays) and 18 weekly from Heathrow to Aberdeen (three daily on weekdays, one on Saturdays and two on Sundays).

It seems from the seating plan offered that it will deploy Bombardier Dash 8 turboprop aircraft on the routes.

BA is only other LHR operator to Edinburgh and Aberdeen

The only current operator between Heathrow and the two Scottish airports is British Airways. However, in addition to the presence of Flybe the Edinburgh-London route features competition from all of the three largest airlines in London (BA, Ryanair and easyJet) and the London-Aberdeen city pair features two of them (BA and easyJet).

BA also operates from LCY to Edinburgh with more than twice Flybe's weekly capacity, and it operated a single weekly flight from LCY to Aberdeen in summer 2016.

On the Edinburgh-London city pair BA also operates to Gatwick; easyJet operates to Luton, Gatwick and Stansted; and Ryanair to Stansted. On Aberdeen-London easyJet also operates to Gatwick and Luton.

London (all airports) to Edinburgh weekly one way seat capacity: 19-Sep-2011 to 29-May-2017

London (all airports) to Aberdeen weekly one way seat capacity: 19-Sep-2011 to 29-May-2017

Flybe to use slots previously used by Virgin's Little Red

Flybe will operate its new routes with Heathrow slots that became available as a result of remedies imposed on British Airways by the European Commission after the acquisition of BMI by BA's parent IAG. Flybe is not required to pay for the slots, but obviously must pay Heathrow airport charges.

The slots had been used by Virgin Atlantic's Little Red, which gave them up in Sep-2015 after a failed experiment in short haul flying to provide domestic feed. Little Red operated from Heathrow to Aberdeen and Edinburgh from Apr-2013 to Sep-2015 (and to Manchester from Apr-2013 to Apr-2015), but withdrew due to the poor performance of the routes.

Virgin outsourced this operation to Aer Lingus under a wet-lease contract, deploying 174-seat A320 aircraft operating three times daily to Aberdeen and six times daily to Edinburgh (four times daily to Manchester). Little Red's load factor in the 12 months to Jun-2014 was less than 42%, so it was no surprise when in 2014 Virgin decided that it would close the operation the following year.

Flybe will deploy smaller aircraft on the two routes and its Edinburgh schedule will be less frequent than Little Red's was (four times daily versus six times), so it may have a better chance of achieving more satisfactory load factors.

Flybe LHR services to Edinburgh and Aberdeen will be slower than BA's

However, Flybe's turboprop service will be slower than BA's rival narrowbody jet operations from Heathrow.

According to the schedules on Flybe's website its Edinburgh service will have a 1h 40min duration and its Aberdeen service will be 2h. These figures compare with BA's flights of between 1h 20min and 1h 30min for Edinburgh and 1h 30 min to 1h 40 min for Aberdeen.

Flybe can build on commercial partnerships

Flybe will mainly need to try to compete on price (its one-way fares start from GBP39.99), although one of the attractions of Heathrow is that it is a high-yield market (it is also high cost).

In addition, Flybe also has the opportunity to build on its existing commercial partnerships that are based on operations elsewhere to offer onward connectivity from Heathrow, thereby stimulating demand for its Heathrow routes.

Flybe has many codeshare agreements that do not currently cover its new Heathrow routes, but 10 of its 11 codeshare partners operate from the airport and this points to potential for the future.

Flybe will be using Heathrow’s Terminal 2, which is also used by two of its codeshare partners, Aer Lingus and Singapore Airlines. Flybe also codeshares with Air France, Air India, British Airways, Cathay Pacific, Emirates Airline, Etihad Airways, Finnair, Virgin Atlantic and – its only partner not to operate from Heathrow – airberlin.

Flybe’s Executive Chairman, Simon Laffin, has said: “The new routes to Heathrow […] will benefit our business customers and customers in Scotland who want to connect with our long haul codeshare partners".

Currently this is just talk, but an extension of Flybe's codeshare agreements to include its carrying the code of a long haul partner or partners on its two Heathrow routes would enhance the global connectivity it could offer.

Singapore Airlines is Flybe's most recent codeshare partner

Flybe's most recent addition to its list of codeshare partners was the Star Alliance member Singapore Airlines, in an agreement announced on 30-Nov-2016. Codeshare routes operated by Flybe and carrying the SQ code include services from Duesseldorf to Birmingham and Manchester; from Manchester to Aberdeen, Belfast City and Southampton; and from Paris CDG to Birmingham and Manchester.

This means that regional customers of Flybe can book onward flights to Singapore Airlines’ long haul destinations in Asia Pacific, and Houston in the US via Manchester, under a single booking. Flybe is the largest scheduled airline by air traffic movements at Manchester and number three by seats, while Singapore Airlines is its longest serving long haul international airline (according to Flybe).

Flybe passengers can also connect to Singapore Airlines' long haul destinations via Duesseldorf and Paris CDG. Duesseldorf is to become Flybe's first base in continental Europe on 1-Feb-2017.

Flybe started to codeshare with Virgin Atlantic in Apr-2016

In Apr-2016 Flybe formed a codeshare agreement with Virgin Atlantic covering 19 short haul routes operated by Flybe, both domestic UK and international. These connect into 15 Virgin long haul routes from the UK to the US and Caribbean at Manchester, Glasgow and Gatwick.

This deal helps to address Virgin's lack of short haul feed, albeit in a different way from the defunct Little Red operation that only brought domestic traffic into Heathrow. The codeshare also offers Flybe the potential for additional demand from passengers connecting to long haul leisure destinations.

Virgin Atlantic is Heathrow's second largest airline after British Airways. The Virgin Atlantic-Flybe codeshare does not include Heathrow routes of either partner, but an extension of the partnership to reflect Flybe's new Heathrow presence would be beneficial to both.

Flybe also has a commercial relationship with BA and IAG

Interestingly, Flybe also has a codeshare relationship with British Airways – Heathrow's largest airline presence.

However, this relationship is rather oblique as it consists mainly of Flybe's carrying the BA code on a number of small Scottish regional domestic routes operated for Flybe under franchise by Loganair. The Loganair franchise is to end in Aug-2017, although the airline may continue to codeshare with Flybe.

Flybe also carries the BA code on its London Gatwick-Newquay service. A more important commercial relationship with British Airways exists in the form of Flybe's participation in Avios, the loyalty scheme owned by BA parent IAG.

IAG sold its previously held 14.6% stake in Flybe in 2014.

Flybe could expand further from Heathrow

Flybe is interested in expanding the range of domestic destinations that it can offer from Heathrow. In Oct-2016 Flybe said that it was considering 12 possible routes from Heathrow: Carlisle Lake District, Dundee, Humberside, Liverpool, Londonderry, Norwich, Prestwick, Durham Tees, Doncaster Sheffield, Isle of Man, Jersey and Guernsey.

Neither Aberdeen nor Edinburgh was included on this list at the time.

Flybe's decision to open its Heathrow operations with routes to these two Scottish cities follows lobbying of the aviation industry by the Scottish government for additional connectivity from Scotland to Heathrow, from where long haul connections are greater than at any other UK airport.

Flybe had considered Heathrow as too expensive for its business model and the airline was also influenced by the airport's move, announced in Oct-2016, to reduce domestic passenger charges by GBP10.

Flybe's decision has been given political visibility by both the Scottish and UK governments. The Scottish government applauded the enhanced connectivity that it will bring to Scotland, while the UK government used it to reiterate the argument for expanding Heathrow.

Heathrow has sought to encourage regional airlines

On 25-Oct-2016 the UK government announced its support for a new runway at London Heathrow Airport, but there is still a lengthy set of processes to be observed before a new runway at Heathrow can finally be built. Moreover, opponents are likely to fight a fierce battle to try to prevent it. Even Heathrow Airport does not expect the runway to open before 2025.

At that time Flybe argued that any final decision on airport expansion at Heathrow must incorporate assurances that it becomes a hub for the whole of the UK, and it called on the government to ensure that some of the new capacity is reserved for operators of regional aircraft at affordable prices.

In Oct-2015 Flybe also welcomed measures by Heathrow that it considered would support regional flights before the construction of a third runway. Heathrow proposed to fast-track extra capacity within four years, with an extra 25,000 new flight movements by 2021 on existing runways.

It would reserve this capacity solely for domestic flights, extend until 2037 a GBP10 discount for every domestic UK departing passenger, and bring forward a GBP10 million route development fund to 2021.

Flybe also continued to press the Government to allow scheduled commercial operations at the military airbase at RAF Northolt, only a few miles from Heathrow, pending the new runway at Heathrow.

But Flybe had previously suspended plans to operate from LHR due to high charges

In spite of the measures taken by Heathrow to encourage regional operators, it is not totally clear what has really persuaded Flybe. In Jul-2016 Flybe said that it had suspended plans to take up available slots at Heathrow that could have enabled it to operate a number of selected Scottish routes from the end of Oct-2016.

Flybe said in Jul-2016 that it wanted to "provide relevant stakeholders additional time to explore ways to reduce to an affordable level the proposed costs to regional airline operators striving to provide broader access for domestic UK travellers to the Britain’s largest international hub airport".

Clearly aimed mainly at Heathrow, this was Flybe's attempt to extract "appropriate concessions and support", according to the airline's then CEO Saad Hammad. Mr Hammad called the allocation of Heathrow slots to domestic regional operators "futile" without adjustments to "the airport’s rigid charging regime" to accommodate smaller aircraft.

While welcoming Heathrow's GBP10 per passenger discount for domestic routes, Mr Hammad said that this was not enough. "Flybe is keen to give Heathrow and other stakeholders time for a rethink.”

Even as recently as Nov-2016, Flybe executive chairman Simon Laffin called Heathrow "an expensive place to go into" (pressandjournal.co.uk, 10-Nov-2016). Mr Laffin said then that Flybe was in talks with Heathrow on acquiring slots, but added that operating from Heathrow was contingent on economic feasibility.

It is not obvious that the economics of operating from Heathrow have changed since Mr Laffin made those remarks. Perhaps, on reflection, it is taking a longer-term view and looking to build a Heathrow presence so that it is established to take advantage of new capacity when it becomes available.

An indirect benefit of having a presence in Heathrow might be to raise Flybe's profile in the very large London market, in particular among business travellers, thereby gaining greater recognition for its whole network.

Nevertheless, Heathrow's high costs must be a concern.

Another shift in stance towards London from UK's largest regional airline

This also marks another shift in Flybe's stance towards the London market. In 2014 Flybe all but withdrew entirely from London Gatwick, leaving only its PSO route to Newquay in Cornwall.

It prided itself on being the UK's largest regional airline (based on traffic excluding the London market), but entered London City shortly afterwards. Also in 2014, Flybe entered London Southend using Stobart Air to operate on its behalf under a franchise agreement.

Flybe has come through a three-year restructuring, but is suffering falling unit revenue

During the three-year tenure of former CEO Saad Hammad Flybe underwent significant change. Its restructuring included raising fresh capital; a brand relaunch; exiting its Finland joint venture; reducing legacy fleet orders; recruiting new management; and seeking unit cost reductions. Flybe returned to profit in FY2016 (year to Mar-2016), albeit on a still-slim margin.

In FY2017 Flybe is accelerating its capacity growth at a time when market conditions are producing very soft yields. Indeed, Flybe is Europe's fastest-growing airline group among the top 20 in Europe by seat numbers this winter, with an increase of 19%, according to OAG data.

On most of its network Flybe has no airline competition, yet unit revenues have been falling and this is not helped by rapid capacity growth.

In 1H2017 (six months to Sep-2016), Flybe's seat capacity grew by 13.5%, but load factor fell by 4.3ppts to 72.0% and its revenue per seat fell by 6.9%. Its adjusted profit before tax fell by GBP5.2 million to GBP15.9 million in 1H2017.

Its outlook into 3Q2017 (quarter to end Dec-2016) said that passenger revenue per seat would be down by c9%.

Fleet capacity to peak in FY2017

To a large extent Flybe's capacity growth has been the result of its last remaining legacy issue – namely, the residual capacity growth from an order (dating from its IPO in 2010) for 24 new Embraer jets.

In 2014 Flybe managed to swap 20 of these jet aircraft orders into 24 smaller used ex-Republic Bombardier Q400s, with lower costs and capacity growth. Earlier in 2016 Flybe agreed with the lessor NAC to cancel nine of the 24 Q400 deliveries. The 15 remaining Q400s have now been received by Flybe.

Nevertheless, in spite of reducing the size of its legacy aircraft order Flybe acknowledged in its 1H2017 results statement that it "still has significant capacity growth in a market with slower growth in consumer demand". It has grown capacity where doing so would make a contribution to fixed costs, and grounded some surplus aircraft in 2014-2016.

However, "new routes and increased frequencies are targeted to cover their marginal costs in the early years of operation, but do not contribute significantly to overall profitability". Moreover, the airline has said that shortages of trained pilots are putting further strain on its ability to grow its network.

In the next six months Flybe will take delivery of the remaining eight ex-Republic Q400s, after which its fleet will peak at 80 aircraft in FY2017. No more aircraft deliveries are planned in 2017/18, but instead aircraft could be returned to lessors as they come to the end of their leases.

Flybe fleet numbers: outlook to FY2020*

Flybe to "move from being supply-driven to demand-driven"

Flybe's 1H2017 results statement in Nov-2016 said that over the next 12 months it will be able to control its own capacity growth for the first time since its IPO in 2010. Flybe "will be able to move from being supply-driven to demand-driven".

Flybe said that its focus would be progressively switched to serving customers better; improving route profitability; enhancing implementation and operations; consolidating network strength; and profit and cash generation.

Incoming CEO will have a full in-tray

Incoming CEO Christine Ourmieres-Widener is an experienced aviation and travel industry executive. She certainly knows and understands this market.

She started her career at Air France and spent five years as CEO of the regional airline CityJet – which operated as an Air France franchise mainly based at London City, including the period when it was sold by Air France-KLM. Most recently Ms Ourmieres-Widener has been chief global sales officer for American Express Global Business Travel.

Perhaps Ms Ourmieres-Widener influenced Flybe's thinking with regard to Heathrow. She will undoubtedly have a full in-tray when she arrives on 16-Jan-2017.