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One to one: CEO, BMI Regional

Written by  Martin Rivers Tuesday, 03 September 2013 00:00

Martin Rivers talks to Cathal O’Connell, CEO of BMI Regional, about how the airline has emerged from BMI ownership.

When International Airlines Group (IAG) acquired rival British carrier, BMI, in 2012, its CEO, Willie Walsh, was unequivocal that he had no interest in retaining its two loss-making subsidiaries. That meant the end of the road for bmibaby, the airline’s troubled low-cost unit. But BMI Regional lived on after an £8m ($12.2m) buyout by Sector Aviation Holdings, an Aberdeen-based consortium funded by aviation entrepreneurs Stephen and Peter Bond.

Times are a-changin’

The airline’s new CEO, Cathal O’Connell, is leading the charge to re-define BMI Regional in the absence of its former Star Alliance partners. In doing so, he is exploring new paradigms for Europe’s beleaguered regional airlines, whose smaller fleets have been hardest hit by the rampant fuel price hikes of the past decade.

“The opportunities for regional carriers are changing,” O’Connell tells AFM. “We’re seeing in pretty much all European markets that the majors – the carriers that require feed traffic into their hubs – have been changing their strategies. There is a different dynamic evolving in the major carrier market.”

He cites examples such as Lufthansa’s transferal of short-haul routes to low-cost carrier Germanwings, and SAS’s decision to divest Widerøe. In both cases, the network carriers “appear to be focusing on their long- and medium-haul businesses,” he says, which in turn creates new opportunities for regional airlines. As the major carriers streamline their operations and refine their focus, smaller operators can step in to provide hubs with still-vital regional links.

“Regional carriers are positioned to deliver that feed, whether by replacing existing services or putting new direct services into new markets,” he affirms, adding that expansion by the sixth-freedom Gulf carriers has driven much of the re-alignment in Europe.

However, in tandem with these new market opportunities, two major challenges have emerged for regional carriers. First, the worsening economics of 50-seater aircraft is placing pressure on small airlines to source larger units, which may be incompatible with their niche markets. Second, the scramble to sign partnerships with medium- and long-haul operators has left some regional airlines out in the cold.

O’Connell makes no bones about BMI Regional’s exposure to both pitfalls. The airline’s fleet of 14 ERJ-145s and four ERJ-135s – seating 49 and 37 passengers, respectively – is under review because of its high seat cost, although any changes will only come after meticulous studies. “We would look at 100-seater aircraft – that’s the market that we would see ourselves developing into over time,” he affirms. “But we need to make sure that we have clear justification. At the moment we’re understanding the economics that aircraft of that size would bring. 

“Whatever way we bring the business forward, it has to be done in a very carefully assessed and calculated way. I don’t want to take larger units just to be able to say we have larger units.” 

Fleeting thoughts

Asked whether 50-seater aircraft are becoming obsolete, O’Connell admits that smaller units are disproportionately exposed to fuel price rises. However, he says each market must be looked at individually. “The operating economics of the E145 and E135 work for us right now,” he explains, reiterating that BMI Regional’s business model does not involve competing directly with the low-cost carriers. “But yes, for longer-term network development, potentially a larger unit type would make life easier.”

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He also draws attention to the “complications and higher costs” associated with switching to a mixed fleet, noting that the addition of one unfamiliar unit necessitates “a separate pool of pilots, a separate engineering strategy. It does introduce potential inefficiencies that you need to assess”.

With 14 of the 18 units owned by the airline, and with no imminent orders on the horizon, BMI Regional’s strategy has been to diversify usage of the fleet beyond scheduled operations. The airline’s core focus remains linking secondary UK cities to major European hubs, but its transition to a fully independent carrier has been accompanied by a sharp rise in ad hoc and series charter operations. 

Noting that seven aircraft were returned from wet leases immediately after the closure of BMI in October 2012, O’Connell says he quickly decided to “de-risk” the fleet with non-traditional services. “BMI Regional had historically had a significant presence in the ad hoc charter market, but it had never been exploited to the point of developing it as a business unit. So we allocated some of the returning aircraft into the non-scheduled market,” he recalls. “In January 2013 alone we sold more charters than in all of 2012.”

Sports teams account for a significant proportion of BMI Regional’s ad hoc charter clients, with the carrier transporting 16 of the 20 Premier League football teams during the latest season. It also recently dedicated one aircraft to a 12-week pop tour around Europe, as well as operating a thrice weekly service for a company engaged in oil exploration. 

Indeed, the energy market is a significant bulwark for BMI Regional, with former charters on the Aberdeen–Kristiansand route evolving into a new scheduled service that begins this summer. The airline is also holding “advanced stage discussions” for a longer-term aircraft, crew, maintenance and insurance (ACMI) wet lease, while two aircraft are currently allocated on a corporate series charter. But scheduled operations remain the backbone of the business, and the limitations of operating a 50-seater fleet has forced O’Connell to engage in analysis of individual markets.

Recalling the strategic overhaul that followed BMI Regional’s separation from the Star Alliance, he says the airline quickly recognised that certain routes “didn’t have a long-term future with us”. The domestic network had already been contracting for several years, and in its place O’Connell set about identifying new opportunities.

“We evaluated with a lot of airports what their hit list of new routes would be,” he explained. “For our Bristol base, we identified the key companies that were travelling over London or Paris or Brussels or other hubs. We met with those companies, and we assessed their weekly travel needs. We had to identify which direct services would be supported by a significant number of local businesses.”

The result was a series of route launches geared towards business traffic, but with some supporting leisure footfall. Bremen–Toulouse is one new connection frequented by Airbus employees. The route was announced within two weeks of previous operator OLT Express Germany’s collapse, O’Connell notes, adding: “It showed the industry how nimble we could be as an independent carrier.” Bristol–Frankfurt and Bristol–Milan also have strong aerospace demand, while Bristol–Munich is popular among automotive professionals. 

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Balancing act

This bottom-up approach to assessing markets underscores the complexity faced by regional carriers when crafting a niche. But efforts to identify commercially sustainable routes are further constrained by BMI Regional’s ongoing desire to rekindle its partnerships.

“We are very well advanced right now in relation to re-establishing a number of the partnerships that existed under the previous ownership,” O’Connell says. “What we’re developing is a series of markets which deliver connectivity from regional UK cities into Europe and beyond – to provide the connectivity for feeding into hubs – but we’re providing that on routes which are self-sustaining with point-to-point traffic.” 

In effect, BMI Regional is engaged in a balancing act. Management must ensure that the airline can deliver profitability as an independent operator, while always keeping its eye on the bigger prize of linking up with Europe’s network carriers. O’Connell already has interline deals in place with British Airways, SAS and Lufthansa. Predicting that deeper partnerships will be announced by this autumn, he confirms: “We are targeting codeshare agreements that work from the hubs we serve in Europe.”

Other regional players face similar challenges. Exeter-based Flybe, which lost £40.7m ($62m) last year, is pinning its hopes on subsidiary Flybe Nordic – a joint venture launched with Finnair in 2011. Like BMI Regional, Flybe is no longer expanding domestically in the UK, and about 25 per cent of its business is now contract flying. The deferral of 16 ordered E175s suggests a low-risk approach for the near-term.

But BMI Regional has also faced unique challenges since the dissolution of its mainline parent. The former subsidiary went from being a “fully integrated part of Star Alliance” to an independent operator in just five months. During this time, it was forced to develop its own IT, financing, reservation and revenue management systems from scratch. It even had to change its flight code.

“Everything that you would use within an airline to run the company was provided by BMI mainline [prior to October 2012],” O’Connell recalls. “We basically had to set up our own independent airline infrastructure as if we were a start-up. So we set up our own organisation in East Midlands, which effectively became the nucleus of the commercial, finance and IT functions… There was so much going on in parallel. We started the project without having the platform onto which we were going to migrate those systems.”

Likening the process to “doing an engine change inflight”, O’Connell is justifiably pleased with BMI Regional’s performance to date. The airline carried more than 500,000 passengers in its first year of independence. But amid uncertainty in the wider regional market, it remains to be seen whether BMI Regional has the right formula for profitability.

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