24-May-2012 6:09 PM

Changes in Northern Europe: Finnair outsources European routes to Flybe; Skyways & City Airline fold

Analysis

The North European market underwent another shock wave this week with the grounding of Skyways Express and its subsidiary City Airline and the announcement that Finnair is moving ahead with its plans to outsource its short-haul operations to a much lower-cost airline through forging an agreement with Flybe Nordic that covers one third of its European network and 12 Embraer aircraft. The two events are unrelated though are indicative of a market undergoing a fundamental structural change spelling the evaporation of small, independent regional airlines and the disbanding of the traditional operating model of the legacy carriers in Europe, although Finnair still has to demonstrate how its JV with Flybe will bring its short-haul operation back to profitability.

Stockholm-Arlanda Airport, Sweden-based Skyways Express and Gothenburg, Sweden-based City Airline have cancelled all flights and stopped all payments with immediate effect (22-May-2012) after the owners of the company decided not to provide any further funds.

Summary

Skyways Express and its subsidiary City Airline have grounded all flights and stopped all payments due to lack of funds.
The bankruptcy of Skyways Express and City Airline follows the bankruptcy of Denmark's Cimber Sterling, both owned by Ukrainian entrepreneur Igor Kolomoisky.
The bankruptcy of Skyways Express and City Airline causes a loss of regional feed for SAS, which had codeshared with the two airlines.
Sverigeflyg is seizing the opportunity to increase its presence at Stockholm Arlanda Airport and will increase frequencies on its routes and launch new routes.
Finnair has announced plans to outsource one third of its European operations to Flybe Nordic in an effort to improve profitability.
Flybe Nordic will operate Finnair's Embraer 190 aircraft and will expand its contract flying operations.

The demise of Skyways Express and City Airline follow on the bankruptcy of Denmark's Cimber Sterling a couple of weeks before. The two Swedish regional carriers and Cimber Sterling are owned by the Ukrainian entrepreneur Igor Kolomoisky through his Cypriot-based asset investment company Mansvell Enterprises Ltd.

Mansvell initially bought Skyways Express and City Airline at the end of 2010 and added Cimber Sterling one year later aiming to create a strong Nordic regional airline group. City Airline operated under the Skyways brand since Nov-2011.

"It's incredibly sad that this happens, both for us and for our passengers who are affected directly. It's also sad for our personnel who may lose their jobs. We have come a long way in our work to turn around the company's development, but after Cimber's bankruptcy, it has been difficult to manage our activities," Skyways and City Airline's CEO Mikael Wångdahl said in a statement cited by the Göteborg Daily.

In the weeks prior to its bankruptcy Skyways launched several new routes, including three routes that were previously operated by Cimber Sterling: Stockholm Bromma-Visby on 02-May-2012, Norrkoping-Copenhagen on 07-May-2012 and Stockholm Arlanda-Billund, which it commenced on 21-May-2012.

SAS once again will lose regional feed

In its last week of operations Skyways served 12 destinations in Sweden and four international airports (Norway's Bergen Flesland and Stavanger Sola Airport and Denmark's Billund and Copenhagen Airport), according to Innovata. Its largest base was at Stockholm Arlanda with 330 weekly flights and a weekly capacity of approximately 15,000 seats. It operated a fleet of 15 aircraft comprised mainly of Fokker 50s whereas its Gothenburg-based sister airline operated just one domestic route, to Lulea Kallax Airport, and four international routes to Lyon Saint-Exupery Airport, Zurich, Manchester and Prague.

The bankruptcy of Skyways Express and City Airline causes another headache for embattled SAS, as SAS codeshared on the two and received regional feed from them into its hubs at Arlanda, Gothenburg and Copenhagen. It lost essential regional feed into its Copenhagen hub with the collapse of Cimber Sterling on 03-May-2012. Regional feed was one distinct advantage SAS had over Norwegian Air Shuttle, the LCC whose incredible success has been to SAS' detriment, forcing a significant restructure at the legacy carrier.

City Airline was the sole operator on its five routes whereas Skyways was the sole operator on seven of its ten largest routes.

City Airline scheduled operations: 21-May-2012 to 27-May-2012

Route	Weekly frequency	Weekly seat capacity	Competitor
GOT - MAN	22	1,078	-
GOT - ZRH	22	882	-
GOT - LYS	18	862	-
GOT - LLA	18	834	-
GOT - PRG	12	558	-

Skyways Express scheduled operations: 21-May-2012 to 27-May-2012

Route	Weekly frequency	Weekly seat capacity	Competitor
ARN -HAD	58	2,900	NextJet
ARN - JKG	50	2,500	-
ARN - VBY	48	2,400	NextJet
ARN - VXO	42	2,100	-
KSD - ARN	38	1,850	-
ARN - KID	32	1,600	-
BLL - ARN	32	1,600	-
BMA - VBY	30	1,500	GoldenAir
ARN - OSK	30	480	-
GOT - SDL	26	1,300	-

Sverigeflyg already stepping in

Skyways and City Airline are small and most of their routes are suitable only to regional airlines operating small capacity aircraft. SAS and Norwegian offer seasonal capacity on the Arlanda to Visby (VBY) route in the peak summer season and easyJet used to operate Gothenburg to Manchester, but pulled out.

29% of Sweden's weekly seat capacity is deployed on domestic routes and Skyways held an 8% share of the domestic market in the week of its grounding. It was the largest regional operator at Stockholm Arlanda, the country's largest airport, with the second largest regional airline NextJet (which operates under the Sverigeflyg brand) holding less than half of Skyways' market share measured in seat capacity.

Sverigeflyg is seizing the opportunity to enlarge its presence at Arlanda and will increase frequencies on its routes from Visby and Halmstad and launch Arlanda-Växjö and Arlanda-Karlstad 28-May-2012.

Stockholm Arlanda Airport domestic capacity per carrier (% of seats): 21-May-2012 to 27-May-2012.

Sverigeflyg is the main brand for six local airlines - Blekingfly, Flysmaland, Gotlandsflyg, Kalmarfly, Kullafly and Sundsvallsflyg - and flights are operated by two carriers, NextJet and Golden Air. Together they account for 15% of Sweden's domestic capacity measured in weekly seats. They also operate on several regional routes subsidised by the Swedish government; NextJet in Feb-2012 won the tender to continue operating to Sweden's northern destinations of Hemavan, Vilhelmina, Arvidsjaur Lycksele and Gällivare from Stockholm Arlanda. The allocation is until Oct-2015.

Sweden domestic capacity share by carrier (% of seats): 21-May-2012 to 27-May-2012

Other regional airlines are also swiftly picking up routes left unserved by Skyways' collapse: Flyglinjen has announced that it will commence a 15 times weekly from its base at Jönköping to Stockholm Arlanda from 24-May-2012 and Direktflyg will take over the route between Oskarshamn and Stockholm Arlanda and will launch 10 weekly flights between Gothenburg and Sundsvall on 4-Jun-2012.

Finnair clinches deal with FlybeNordic for European operations

In the eastern part of Scandinavia a different kind of deal was concluded, with Finnair outsourcing one third of its European operations to Flybe Nordic from 28-Oct-2012 as part of its strategy to bring the company back to profitability and improve the competitiveness of its short-haul traffic that is under tremendous pressure from LCCs. Finnair announced in Feb-2012 its intention to have a JV partner take over its short and medium-haul network after having reviewed all options and deciding against setting up a hybrid carrier. "The starting point has to be a ruthlessly low-cost production capability. Then you can add back, but if you try to do a hybrid model from the start, if you try to compromise, that's not the right approach," CEO Mika Vehviläinen told CAPA earlier this year.

When Finnair first announced its proposal to outsource its short-haul network, Finnair specifically stated it was not in discussions with Flybe despite Flybe separately stating it saw room to take over legacy short-haul operations and was in discussions with airlines about that. Nonetheless, under the terms of the MOU, Finnair will transfer 12 100-seat Embraer 190s including traffic and crew to Flybe Nordic. Finnair CEO Mika Vehviläinen described the deal as a "logical extension of our co-operation with Flybe. Flybe offers us a cost efficient platform for operating this traffic and enables us to continue to offer the wide network and frequencies to both our regional customers as well as our customers flying between Europe and Finnair's Asian destinations."

The agreement covers approximately one third of Finnair's European flights as the remainder are operated with Airbus A320 family aircraft. Mr Vehviläinen said Finnair is in talks with other potential partners to cover other short-haul routes in Europe serviced by its A320 family fleet. "We are still reviewing our options in terms of the rest of the short-haul European flights that are now done by the Airbus fleet and those reviews are still very much on the table," Mr Vehviläinen said.

The agreement foresees that with the 12 E-190s 250 pilots and flight attendants will transfer to Flybe Nordic. Mr Vehviläinen said negotiations on cost savings between Finnair and the Finnish Airline Pilots' Association have proceeded in a "constructive manner" during the spring and if the savings agreement under preparation is completed, pilots transferring to operate Flybe flights would return to Finnair in stages to be trained as Airbus pilots for Finnair's growing Asian traffic.

Finnair has adopted a strategy of linking Europe, as well as North America, with Asia. Its Helsinki hub has the geographic advantage of offering some of the shortest flights between Europe and Asia, and North Asia in particular. It operates non-stop passenger flights to 11 destinations in Finland, 38 destinations in Europe and 11 gateways in Asia, and recently added four weekly flights to Chongqing as its fourth destination in mainland China, becoming the first European passenger carrier to fly to Chongqing. Long-haul flights are operated on Airbus A330s or A340s.

Unions however were less upbeat about the agreement and the Finnish Airline Pilots' Association has voiced opposition to Finnair's decision to shift flights and personnel to Flybe, Yle.fi reported.

86% of Finnair's international seats and 37% of international available seat kilometres are within Europe.

Finnair international capacity by region (% of seats): 21-May-2012 to 27-May-2012

Finnair will have to prove its model that seems to offer few advantages

However, Finnair has yet to demonstrate how this new venture will bring its short-haul model to profitability. Flybe will be operating the same aircraft as Finnair with the same traffic and staff, although pay revisions are an on-going discussion with Finnair's pilots. Finnair will still assume responsibility for marketing, distribution and customer support. While Finnair is loss-making and Flybe profitable, it is unclear what Flybe can bring to Finnair since the majority of the operations will still be handled by Finnair.

Where other changes have occurred in European short-haul flying, the profitability increase is evident. Iberia Express is operating a stricter LCC operation with a denser aircraft configuration, fewer frills and employee wage changes. Air France-KLM is evaluating how to use its Transavia subsidiary, which has a lower cost base than Air France or KLM, while Lufthansa has been evaluating a few options, all of which would see a structural change - unlike at Finnair where the changes are not yet evident.

Finnair Fleet Summary: as at 23-May-2012

Flybe looks to expand contract flying

Flybe Nordic will operate the Finnair E190s on behalf of Finnair and Flybe Group Chairman and CEO Jim French said that the extension of its existing contract flying operations for Finnair "is a key part of Flybe Nordic's strategy, adding substantial scale whilst balancing Flybe Group's overall risk. With this deal, 25% of the fleet under Flybe Group's management will be deployed under contract flying arrangements. We believe there are many more similar opportunities to develop this side of the business."

Flybe's eagerness to expand contract flying is the opposite of the situation in America, where regional airlines are struggling under old contracts no longer reflective of the current operating environment. While the market may now be at an all time low, Flybe will want to ensure it can insulate itself against market changes - such as fuel costs - that have pained US regional carriers.

Flybe Nordic route map: Nov-2011

Finnair and Flybe last year created Flybe Nordic with Flybe holding 60% in the new venture and Finnair 40%. The JV bought Finnish Commuter Airlines (FCA), which provided regional feed to Finnair but had threatened to stop the cooperation. Since then, Flybe Nordic has expanded its operations from Finland to Denmark, Estonia, Norway and Sweden. In Sweden it established a growing presence at Stockholm's city airport Bromma. The new agreement will lift the number of aircraft flown by Flybe Nordic to 28 of which 20 will be flying under contract for Finnair, Flybe said.

Flybe Nordic Fleet Summary: as at 23-May-2012

The new agreement with Finnair will see Flybe's footprint cover the gap between its Nordic operation and continental route from Europe.

Flybe route map: Nov-2011

At Finnair and elsewhere, staff yet to realise changing world

The protest of the unions is not surprising; in all parts of Europe unions seem to fail to see the changed reality for the legacy airlines. Europe's network airlines are taking on a - long overdue - spring clean of their unsustainably unprofitable short and medium-haul networks and are looking increasingly to transfer these operations to a lower-cost operator. This is a must for survival. Unions will have to accept this or more carriers will follow the fate of Skyways Express, City Airline, Cimber Sterling, Spanair, Malev, and bmibaby.

Background Information:

City Airline Fleet Summary: as at 23-May-2012