Air Nostrum attempts to get back on the path to profitability
The past few years have not been kind to Air Nostrum. The regional airline, which has been operating under a franchise contract with since 1997, is struggling with the fallout of Spain's relentless economic downturn and an onslaught of low-cost carriers in the country. Iberia's downsizing and social unrest is making matters worse.
Air Nostrum's challenging situation is indicative of the Spanish air transport market, which has seen the bankruptcy of Spanair and Air Madrid, but also of Europe's regional segment. Passenger traffic and associated revenue passenger kilometers flown by regional airlines in Europe have gradually declined over the past decade. Enplanements of member airlines of the European Regions Airline Association (ERA) fell to 60.9 million last year from 84.4 million in 2002.
The Valencia-based regional realized in 2009 that yields would never return to the levels of old and management outlined a drastic plan to cut loss-making routes and reduce unit costs. In 2009, the company posted its first loss following 13 consecutive years of profits. The red ink was still present in last year's accounts and Air Nostrum is now following a more draconian strategy to return to profitability by 2015.
The airline's restructuring plan includes a further cutback of its network, lowering salaries and increasing productivity, but the main focus in on its fleet. Air Nostrum will phase out its completefleet and postpone deliveries of new CRJ1000 and 600-series aircraft, says CEO Carlos Bertomeu, who co-founded the airline in 1994.
The CRJ200 fleet is responsible for most of Air Nostrum's losses, which amounted to €21.1 million ($28.13 million) in 2012 on revenue of €465 million. The high fuel prices, decreasing yields and rising airport charges in Spain make the cost per seat of the CRJ200 uneconomical, confirms Bertomeu. The airline started upgrading its fleet with larger-capacity aircraft several years ago, and in 2010 introduced its CRJ1000s. Air Nostrum has 10 CRJ1000s in service and 25 on order, according to AWIN's commercial fleets database. The Air Nostrum CRJ1000s have 100 seats in a one-class configuration. The airline was the launch customer for the aircraft.
“The CRJ1000s would gradually substitute our CRJ200 and CRJ900 fleets. The plan was well designed, unfortunately the dramatic worsening of the economic crisis in South Europe has forced us to speed up the process to phase out the CRJ200 fleet,” he sighs.
Air Nostrum redelivered already 10 50-seat CRJ200s to lessors when the leases matured (two in 2011, three in 2012 and five in 2013). Of the 25 CRJ200s that remain in its fleet, 17 are leased and eight are owned.
The airline, which operates as Iberia Regional, is working with the different lessors to obtain early termination of the CRJ200 leases. “To facilitate an early termination we cooperate with the lessors on the sale of the  aircraft that are younger than 10 years and therefore are suitable for certain markets that require more modern fleets, for example the Russian market,” notes Bertomeu.
For the three aircraft of an older vintage, Air Nostrum is working with the lessors to place the aircraft with a new customer. “We have been placing some of our CRJ200 spare capacity with third parties under sub-lease agreements and we are using these contacts to facilitate the direct relationship between lessor and lessee,” says Bertomeu.
Of the eight CRJ200s on its balance sheet, two are used in Air Nostrum's scheduled operations in niche markets, two are regularly used for charter operations and one is under a wet lease with Binter Canarias. The remaining three are part of what it calls “flexible operations” whereby the airline replaces a larger-capacity aircraft with a CRJ200 on any pair of flights on which fewer than 50 seats have been sold on both legs. By doing this, it achieves savings on airport charges and fuel.
Air Nostrum is looking for opportunities to lease these owned CRJ200s out, because “it is more efficient for the company to have a complete phase-out of the fleet as opposed to having an additional small fleet in operation,” asserts Bertomeu.
Negotiations are ongoing with Argentinean SOL Lineas Aereas to place up to six of its owned CRJ200s. Air Nostrum is also working on two other projects in the region. Bertomeu says these Latin-American endeavors are “in very advanced conversations but nothing has materialized just yet.”
The airline also reached agreement with Bombardier and ATR to postpone short-term deliveries of the CRJ1000 and-600 on order. The current weakness of demand in the market does not favor taking on additional capacity, Bertomeu says. He vows Air Nostrum is still fully committed to take delivery of all the aircraft and expects to be able to resume the deliveries in 2016. “We expect to make good progress into having an airline based on two fleets, the CRJ900/1000 and ATR 72-600 with a cost-per-seat and a fleet size well adapted to meet the current market constraints,” he explains.
Air Nostrum placed an order for 10 ATR 72-600s and a further 10 options at the Paris air show in June 2009. It has five -600s series in service.