With only a short reprieve in 2011, European regional airlines have been in crisis mode ever since. The trend continues, but industry officials speak of a renewed sense of optimism, even though figures and individual airline cases hardly justify that mood.

When airline executives spoke of better fortunes waiting just around the corner at the recent European Regions Airline Association (ERA) general assembly, they were showing indirectly how desperate their situation has become. In the first half of 2013, the European regional airline industry continued to shrink. Passenger numbers across the 50 ERA members declined by 7.2%, and the number of seats offered was down by 10.1%. In the second half of the year, the contraction was expected to be smaller, but Europe's regionals are still far from a growth mode.

Nevertheless, ERA Director General Simon McNamara says, “I'd like to think things will improve next year. I don't think we are going to go back to easy sailing, but at least it will be a smoother ride.” Mark Lamidey, formerly CEO of Brit Air and now a board member at French regional conglomerate HOP!, says that while growth was still limited to Eastern Europe in 2013, that trend will spread nearly continent-wide in 2014.

But airlines are coming to the realization that methods are changing. “The old model of independently operating regional routes is going away,” McNamara says. Those are either taken over by mainline legacy or low-cost carriers. On the other hand, “you are already seeing the new model,” he points out. In his opinion, European regional airlines must be less dependent on a single source of income. Instead, they should spread the risk across several streams. The three pillars regionals can count on in the future include: niche point-to-point markets that are too small for low-cost and mainline carriers; ACMI (aircraft, crew, maintenance, insurance) work for major airlines; and ad-hoc charters, particularly in the 50-seat segment.

However, those niches appear to be far smaller than the sector of the market the carriers had grown into since the 1990s, when the 50-seat aircraft revolution changed European air transport almost as much as it did the U.S. market. Even supplying ACMI services for the majors is by no means an assured way forward, simply because the majors themselves are increasingly centering their own networks and hubs around the use of larger aircraft. Lufthansa alone has terminated agreements with Cirrus Airlines, Contact Air and Augsburg Airways over the past year. Cirrus and Contact are now in bankruptcy proceedings, and Augsburg will cease flying by the end of the month. And even when the larger airlines do tap regionals for some routes, they execute cost-saving contracts that do not provide much profit.

Other high-profile restructuring cases include the quasi-merger of Air France regional affiliates into the HOP! unit, which some industry analysts say is a matter of not going far enough. The ongoing problems at Iberia's regional feeders, Air Nostrum and Flybe, show that even large carriers (Flybe is the largest independent regional in Europe) face the same issues as their smaller peers. “The most damaging factor for us is the economy,” McNamara says, referring to the general weakness of intra-European traffic.

Operationally, the airlines have already changed significantly. The combined load factor is 10 percentage points higher than in 2002, and has improved every year.

On the fleet side, regional airlines continue to dispose of their 50-seat models, while the 70- 90-seat segment is becoming the core. The average aircraft size is now at 83 seats.

Also, many ERA members are reverting to turboprops to reap the benefits of the type's superior economics, rather than relying on jets as much as they have in the past. The French-Italian turboprop manufacturer ATR has been benefiting from that trend far more than Canada's Bombardier, which offers a single type, the Q400. Turboprops now make up more than 40% of the ERA fleet of 700-plus aircraft.

Danish leasing specialist Nordic Aviation Capital (NAC) is pushing ATR hard to develop a proposed 90-seat turboprop. “Filippo [ATR CEO Filippo Bagnato] is understating the demand for the 90-seater,” NAC Chairman Martin Moeller said at the ERA event in Salzburg. “When we talk to airlines, we see a lot of demand (for such an aircraft). It is about time.” The question is how much of that demand would come from Europe, given that recent large deals have been driven by growth in Southeast Asia.

Bagnato's colleagues at Embraer are convinced that in spite of the economic downturn in large parts of Europe, “there is still an awful lot of markets to be tapped,” as Simon Newitt, the Brazilian aircraft manufacturer's vice president for Europe puts it. “We are paying a lot of attention to Eastern Europe and the Commonwealth of Independent States region, where there are a lot of pioneering airlines.” Therefore, Embraer sees Europe as being “far from a mature market.”

Some airlines, like BMI Regional, are forced by unusual circumstances to undergo a complete revamp in the midst of the economic crisis. Parent BMI was sold to International Airlines Group (IAG) and was folded into IAG unit British Airways—without the regional division. Chief Executive Cathal O'Connell says the regional unit was the “crown jewel” in the BMI Group, but independent of whether that is true, the airline had to reinvent itself within a few months. It rebuilt its network and even entered the Swedish domestic market in an effort to find new and prosperous niches. But the fact that it is also seeking more charter work reveals a lot about how the fleet is used. Also, BMI operates Embraer ERJ 135s and 145s, which have a serious unit cost disadvantage over larger jets.

Many other regional airlines have been forced into painful restructuring programs, but the bright side is that a few are showing some encouraging improvements.

Adria Airways not only anticipates turning a profit soon, but it is also looking at strong growth over the next seven years. To achieve this, it must move beyond current boundaries. The airline hopes to double the number of passengers to 2 million between now and 2020. Strengthening its share in the inbound tourism market and developing secondary bases in the region are the core pillars of Adria's strategy, says CEO Mark Anzur. The two-prong plan is being developed as the Slovenian government is trying to peddle the airline as part of a broader package of state companies that are to be privatized. According to local media reports, China Southern has shown an interest in acquiring a stake.

The airline and the Slovenian government are still under investigation by the European Commission over whether a €70 million ($94.6 million) recapitalization in 2011 constituted illegal state aid. While that process continues, the airline has been reducing losses from €67 million in 2011, to €10 million last year. Anzur anticipates Adria Airways will break even by year-end. The airline expects revenues of €150 million this year.

As part of the turn-around effort, the Star Alliance member has reduced its number of Bombardier CRJ200s from six to four and plans to phase out the type by 2015. The airline will increase the CRJ900 fleet to six from four and intends to stick to that model until at least 2018. In addition, Adria has two Airbus A319s and one A320. The larger A320 is dedicated to charter runs—both longer-term arrangements for tour operators and for ad-hoc flying.

In spite of the high fuel prices, Adria is not inclined to buy turboprops.

The carrier has historically only operated from its home base in Slovenia's capital, Ljubljana, but it is expanding its home market. “It is Southern Austria, Eastern Italy and Slovenia,” Anzur says. While catching as much of the growing inbound traffic as possible, the airline also plans to open two secondary bases. One of Adria's CRJ900s will be based in Tirana, Albania, next year and will operate one daily flight to Frankfurt. The airline is taking advantage of an open skies agreement between Albania and the European Union, of which the country is not a member.

Also, Adria is establishing a base in Verona, Italy, using one of its CRJ200s. The airline plans to introduce services to Zurich, Vienna and Brussels next year from the Northern Italian city.

Another long-struggling carrier, Air Malta, says it is on track to break even next year. The airline, which was on the brink of collapse before being rescued by another government loan, expects to close the 2012-13 financial year ending in March 2014 with only a small loss of around €3 million. That comes after losses of €13 million and €30 million in the previous years. When its current CEO, Peter Davies, joined the airline two and a half years ago, Air Malta had just posted a €40 million loss (on €220 million in revenues) and was projected to lose another €55 million in the following year.

Davies says the Maltese government has left him a free hand to restructure and operate the airline without political interference. The carrier shed 500 of 1,300 jobs and reduced capacity as part of the European Commission approval for the restructuring, in which the government provided a €52 million rescue loan. The total program was planned to raise €238 million in improvements with the airline itself providing half of that amount. The airline decided to sell almost all of its ancillary assets, which included hotels, a travel agency and acreage.

Air Malta currently operates a fleet of four A319s and six A320s. Davies says the A321 would make sense for European trunk routes such as Brussels, London and Frankfurt, and as a tool to compete more effectively against Ryanair, thanks to the aircraft's lower unit costs. Ryanair has based two aircraft in Malta and controls around 30% of the market. Air Malta's market share is around 50%. Davies believes it is feasible in principle for smaller European airlines to be profitable, provided the right cost structure is in place.