Loganair vs Eastern Airways – Will the Scottish Islands be Aviation’s Next Bloodbath?

On the 1st of September 2017, the Scottish regional airline Loganair will cease its franchise agreement with Flybe and begin operating as a wholly independent airline for the first time in nearly 25 years. Flybe, seemingly upset by this decision, has announced a partnership with Eastern Airways to operate half a dozen competing routes with Loganair. These are thin routes designed primarily to provide “lifeline” links to remote communities – they surely cannot support two competing airlines, and an awful lot of money will be lost in the process of finding that out.

What’s changing?

With the exception of some inter-island services within the Orkney Islands, all Loganair routes are currently operated under the Flybe franchise agreement. However this will all change on the 1st September. The maps below show the sheer scale of route network expansion for the Loganair brand.

Loganair non-franchised Routes, July v September 2017

Map of Loganair non-franchised Routes, July v September 2017

Source: RDCApex.com

This has the reverse impact on Flybe, who are losing a significant proportion of their presence in Scotland, especially the Highlands and Islands. This is true even with the Eastern Airways routes, as can be seen below.

Flybe (inc. Franchise) routes, July v September 2017

Map of Flybe (inc. Franchise) routes, July v September 2017

Source: RDCApex.com

Eastern will operate six competing routes as part of its agreement with Flybe – three connections to Sumburgh in the Shetland Islands, one each to Kirkwall (Orkney) and Stornoway (Outer Hebrides), plus the connection from Glasgow to Manchester. The map below shows these routes.

Competing routes operated by Loganair and Eastern in Q4 2017

Map of Competing routes operated by Loganair and Eastern in Q4 2017

Source: RDCApex.com

Capacity Increases

The chart below shows planned capacity across the six routes for both of the airlines in the fourth quarter of 2017. We can see that two of the routes will have more than double the capacity of last year, and all are experiencing at least a 75% increase.

Q4 capacity comparison on Loganair and Eastern competing routes

Bar chart of Q4 capacity on Loganair and Eastern competing routes

Source: RDCApex.com

It should be noted that these are total seats and not frequencies. While Loganair typically operates 34-seat Saab 340 aircraft on most of its routes, Eastern will be employing an 80-seat Embraer 170 for the Sumburgh and Kirkwall services (while GLA-MAN and GLA-SYY will be a 29-seat Jetstream 41). This means that for these routes Eastern will generally be operating at a lower frequency than Loganair, even though it may have more seat capacity in the market.

The capacity on services to Sumburgh in particular look to be completely unsustainable. The chart below shows the capacity on these three routes from Jan-15 to Dec-17 (planned). With only a small amount of variation up until the entry of Eastern, suddenly the capacity is set to double overnight. Clearly, if the market existed to support such a significant capacity upgrade, Loganair would have experimented with it a long time ago.

Capacity on routes from Sumburgh to Edinburgh/Glasgow/Aberdeen

Stacked bar chart showing Capacity on routes from Sumburgh to Edinburgh/Glasgow/Aberdeen

Source: RDCApex.com

Profitability

However, it may be that Eastern aren’t looking at the market in terms of volume. After all, these Island routes are low-volume/high-yield. The chart below shows a plot of Flybe route profitability, with any services above the black dashed line making a profit. The red circle loosely covers Loganair’s routes within these – it may be this margin that Eastern believe they can target.

Profitability plot of Flybe network (bubble size = annual passengers)

Profitability plot of Flybe network (bubble siz = annual passengers)

Source: RDCApex.com

However, as loads decrease, the required yield per passenger carried must rise significantly. The chart below shows a breakeven cost curve for a Loganair Saab 340 and an Eastern Airways Embraer 170, operated at frequencies representative of the Aberdeen-Sumburgh route.

Breakeven cost curve comparison for Laganair and Eastern operations on LSI-ABZ

Chart showing Breakeven cost curve comparison for Laganair and Eastern operations on LSI-ABZ

Source: RDCApex.com

The dashed line shows how the breakeven yield for Loganair would change if, in the new competitive situation each airline takes 50% of the existing market (and we assume no market stimulation). This shows that Loganair’s breakeven fare would rise by £55 to around £140. However it will be more damaging to Eastern Airways, whose breakeven yield would rise by £61 to around £150, compared to if they had the market to themselves.

Will Loganair strike back?

Eastern Airways opening up these routes within Loganair’s “patch” will surely have not gone down well with the newly independent airline. It is not out of the realms of possibility that Logan will attempt to hit back at Eastern or Flybe and target some of their routes. Will Loganair target Eastern’s 1x daily Stornoway-Aberdeen? Loganair has already announced a competing oil trunk route up the east coast of the UK (Norwich – Humberside – Aberdeen), perhaps other oil markets will be targeted next such as Newcastle?

Short-term, Loganair’s operations from Manchester (and particularly Manchester-Norwich) do not look sustainable without the Flybe feed. This could free up some spare capacity to strike back with.

Eastern is bringing the fight to Loganair with its Embraer 170 jet aircraft, and it may be that in order to compete long-term Loganair will need an update of its aging prop fleet. There are few manufacturers worldwide still making 30-seat aircraft - could we see Loganair upgrade to ATR or even Dash-8 airframes? If this proves to be the case, Flybe will have shot themselves in the foot by inadvertently creating a direct competitor to themselves in terms of aircraft size, and further competition on routes could be next.

Loganair is owned by the same organisation as BMI Regional, so it may be that the latter uses its jet fleet to attempt to provide a superior service on routes currently served by turboprops. BMI has also leased in a Sukhoi Superjet from CityJet for some Bristol operations – this would be a significant step up in capacity and comfort if applied to the Scottish market.

So who will win?

Loganair have cunningly allied themselves with British Airways by announcing a continuation of the codeshare that previously existed under the Flybe franchise operation (Loganair also have BMI Regional jet capacity if needed). However Eastern Airways bring their own brand to the table, which will be well known to the oil industry, especially in Aberdeen. And so two great alliances in UK regional aviation are about to go toe-to-toe in a way that has not been seen before in recent memory.

The market will not sustain the volumes required to maintain the margins Loganair has enjoyed over the years. Furthermore, in the chase to gain volume these two giants are likely to engage in a fare war. Both know they could probably scrape by and be better off by simply holding fares high and taking a hit on the volumes, but the risk of being undercut by their competitor is going to create a spiral of lower and lower fares – leading to lower margins and greater losses. There may be an optimal solution, but this cannot be reached without breaking rules on collusion and anti-competitiveness.

As the newly independent airline, Loganair would seem at greatest risk of “losing” this fare war. However with Flybe’s drive to rationalise capacity and reduce losses, it may not take long for the head office to lose their appetite and move on to something else. It’s who blinks first.

By Dan Irvine / Connect on LinkedInImage of Dan Irvine