Air France has just revealed its new regional division with great fanfare. But it could be its last attempt to retain a serious presence in that segment. Experience in other parts of Europe has shown that matters could become much worse in the sector.

A combination of macroeconomic factors such as little or no growth combined with high fuel prices, rampant taxes and pressure on yields is threatening a growing number of Europe's regional carriers. Those under the umbrella of a larger group have some certainty of survival at least in the short to medium term. But the number of regional airline collapses is also on the rise, particularly in Germany. And even large and formerly successful regionals such as Flybe are forced to launch restructuring programs while stretching the business model to include contract flying.

The latest figures released by the European Regions Airline Association (ERA) show a contracting industry. Demand as measured in passenger miles was down by a massive 6.1% in the first nine months of 2012, the number of passengers carried decreased by 4%. The only good news is that overall the industry reacted aggressively in cutting capacity by 8.1%, thus managing to at least keep load factors in the high 60% range.

Airlines also tried to counteract the trend by using significantly larger aircraft. The average aircraft size including turboprops rose to 86 seats from 78 within a year, reflecting the broader use of types such as the Embraer 190 and Bombardier CRJ900. But even though there has been some fleet renewal activity, a more fundamental replacement cycle is nearing, particularly for turboprops: Their average age has now reached 15.8 years. But given the dire overall situation: How will airlines fund the investment?

Air France, struggling to reduce losses in its short-haul network, is trying a fundamental relaunch of its three regional French airlines under a single management and one brand, HOP! The merger of Regional Compagnie Aerienne Europeenne (Regional), Brit Air and Airlinair will result in the loss of 190 jobs. Lionel Guerin, formerly CEO of Transavia.com France and Airlinair, has been appointed CEO of HOP!

The group's Irish regional subsidiary, CityJet is not part of HOP! “because its main operating base is outside of France, at London City Airport, and the airline is proceeding with its own restructuring program,” Air France Chairman/CEO Alexandre de Juniac tells Aviation Week. But he adds that “we are still considering all options for CityJet.” Options include a possible sale.

HOP! will take to the skies on March 31, with a fleet of 98 regional aircraft operating 530 daily flights on 104 routes across France and Europe. It will also operate 32 routes to Paris Charles de Gaulle Airport under a wet-lease ACMI (aircraft, crew, maintenance and insurance) contract for Air France. The three airlines will retain their air operating certificates, but HOP! flights will appear in the reservation systems with a single IATA designator code—that of the current Airlinair's A5 code.

Air France decided against a full merger of the three airlines as “too complex and with no benefit for the customer.” Synergies are expected from combining sales, purchase, marketing and head office functions. Coinciding with the new structure and branding, Air France is further reducing the fleet and network. Between 2011-14 approximately 37 routes will be trimmed and the fleet will be reduced by 21 aircraft. ATR aircraft will probably remain, but Bombardier CRJ100s and most Embraer ERJ 135/145s will be phased out.

Airlinair operates 24 ATR 42/72s, Regional operates Embraer aircraft of various types (ERJ 135/145, E-170 and E-190), and Brit Air's fleet comprises Bombardier CRJ100/700/1000s.

“The business plan of HOP! identifies the need for a larger regional aircraft than we currently deploy. But this will not be before 2016,” de Juniac says. Brit Air's CRJ1000s and Regional's E-190s are configured with 100 seats.

The new HOP! structure and branding exercise is part of the Air France KLM Group's Transform 2015 restructuring plan, which seeks to restore profitability and reduce expenses by €2 billion ($271 billion). The plan includes repositioning Air France's heavily loss-making short- and medium-haul operations into three units—Air France mainline, Transavia.com and HOP!

Transavia.com France caters specifically to the leisure segment and offers low-cost flights. Earlier this month, Air France announced a revamp of the pricing structure and service offering of the short- and medium-haul Air France flights from/to Paris Orly and its provincial bases at Marseille, Nice and Toulouse. HOP! will have a similar fare structure and the lowest-fare class offers no free frequent-flier miles or complimentary checked baggage.

Air France will simultaneously become the sole shareholder of Airlinair and acquire the 60% stake held by Financiere Linair, the company controlled by Lionel Guerin who founded the airline in 1998. Air France's wholly owned subsidiary Brit Air holds 40% of Airlinair.

At the same time, more and more independent regionals are disappearing. OLT Express halted flight operations Jan. 27 after a last-ditch effort to finance a turnaround plan failed. OLT stated that its new owner, Panta Holdings, did not accept a restructuring strategy that management and employees had agreed on.

OLT is the latest victim in the moribund German regional airlines sector and at least one more carrier is expected to exit the scene later this year. Cirrus Airlines was the first to declare bankruptcy last year. Eurowings, a Lufthansa subsidiary, was forced to seriously downsize its fleet. Similar steps were taken at Lufthansa CityLine. Later, Stuttgart-based Contact Air lost its wet-lease flying for Lufthansa and was close to being shut down, only to be picked up by OLT Express late last year.

OLT Express itself was formerly a small carrier serving the German islands in the North Sea with small aircraft, but later turned into a regional carrier. It was bought by a Polish private equity firm in 2012, which collapsed subsequently, and was rescued by Dutch investor Panta Holdings soon after.

The airline was managed by Joachim Klein, a former Eurowings executive. He tried to build an independent regional network based on markets that have been neglected by other regionals and low-fare airlines. But the takeover of Contact Air and the start-up losses on new routes, many of them between Germany and Austria, proved too much of a financial burden. OLT closed down several of its newly launched routes in December.

Panta not only owns OLT, but also Dutch ad-hoc charter carrier Denim Air and Mass Jet Lease, which owns most of OLT's fleet. The carrier operated 10 Fokker 100s, three Saab 2000s and one Saab 340. The carrier's problems had been aggravated by the loss of its last wet-lease contract (for two Fokker 100s that it operated for Swiss).

Augsburg Airways is another German regional carrier that is facing a potential closing. The airline has been operating as part of Lufthansa's regional network, but the group decided not to renew a contract that will expire next fall. Augsburg's owner has indicated he is likely to shut down the carrier and has already ruled out continuing operations as an independent carrier.

Even Flybe, one of the more successful regional airlines of late, has been forced to make draconian cuts. The airline decided to go ahead with a two-year restructuring program that includes a steep reduction in staff: 300 positions or around 10% of the U.K.-based jobs, mainly in Exeter, Manchester and Newcastle, are lost. The airline plans to focus on U.K. scheduled flying and contract business such as the Embraer 190 operation for Finnair that has been placed into the Flybe Nordic joint venture. Flybe posted a £4.9 million ($7.7 million) loss in 2011-12 and has also been in the red a year earlier. Flybe Chief Executive Jim French cites the U.K. air passenger duty (APD) as a key component of its troubles. Eighteen percent of ticket revenues now flow through to the government in the form of APD. According to French, that number is at around 6% for other British carriers with less U.K.-originating traffic.