Finnair

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

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.

Finnair’s new short-haul model has to be ‘ruthlessly’ low-cost, says CEO Vehviläinen

This is the year of Europe’s legacy carriers finally addressing their unsustainably unprofitable short-haul networks, and the answers so far have primarily been to strip costs out of existing models to make the carriers competitive against low-cost rivals. But Finnair’s decision to outsource its short-haul flying to a joint-venture partner suggests hybrid models can only achieve so much savings, while the structure of legacy carriers has inherent higher costs that cannot be taken out. Starting afresh becomes another, better, solution.

And a tabula rasa today in Europe, or at least Scandinavia, cannot be used to launch a hybrid carrier, Finnair CEO Mika Vehviläinen tells CAPA. Rather, when Finnair’s new short-haul operation commences in 1H2013, it must be “ruthlessly” low-cost, Mr Vehviläinen said. Yet this poses quandaries for Finnair’s business model of efficiently linking Europe with Asia as long-haul passengers, premium in particular, will be subject to LCC-style service on onward connections.

Conversely, lower-cost feeder flights could make Finnair’s long-haul services more price competitive.

Finnair to increase focus on Asia as JV partner takes over short-haul operation

Finnair has entered into discussions with potential partners to form a joint venture which would take over part of its unprofitable short-haul operation. The new JV would be a major component of a restructuring and could allow Finnair to increase its presence in the Nordic region under a lower and more competitive cost base. Finnair is seeking to use the new joint venture to open new bases in the region in line with its Nordic Champion strategy but has embarked on a restructuring of its own mainline operation to become competitive and restore profitability.

By establishing the JV, Finnair hopes to reduce costs on its regional network and free up capital to invest in further expanding its Asian network. The Europe-Asia market has been the major focus for Finnair in recent years with the carrier exploiting its geographic advantage to offer convenient connections to a growing number of Asian cities.

In announcing its 2011 results and revised strategy on 09-Feb-2012, Finnair CEO Mika Vehviläinen explained that "the potential joint venture would expand our home base to cover the entire Nordic region" and would "support our Asian strategy through increased feeder traffic for our Asian destinations and better presence in key cities throughout the Nordic region". Mr Vehviläinen said the arrangement is unlikely to include network carriers and should not require any equity tie-up.

An agreement is aimed to be signed in mid-2012, with the new joint venture operation expected to commence in 1H2013. Finland’s Government, which owns a 55.8% stake in Finnair, has said it may consider selling its stake to enable the company to form a joint venture in Europe.

European airlines post healthy traffic gains in Jul-2010. Will the summer be strong enough?

European airlines have been quite liberal with their capacity in 2011, even in the face of economic uncertainty and high fuel prices. The trend continued this summer and carriers have, on the whole, enjoyed strong traffic and load factor gains. But will it convert into profitability?