SAS and KLM Cityhopper are taking different approaches to regional flying, but both are investing heavily in Embraer E195-E2s. Maarten Koopmans, KLM Cityhopper managing director, and Mikael Wångdahl, SAS group VP for airline operations and external production, discuss how the regional market is changing, the balance between in-house and outsourced capacity, and the potential impact of Air France-KLM increasing its SAS stake.
Thank you to our sponsor 1PointFive. Learn more about Carbon Dioxide Removal (CDR) credits from 1PointFive at: 1pointfive.com/aviation
Subscribe Now
Don't miss a single episode. Subscribe to Aviation Week's Window Seat Podcast in Apple Podcasts, Spotify or wherever you get podcasts.
Discover all of our podcasts at aviationweek.com/podcasts
AI-Generated Transcript
Victoria Moores (00:10):
Hello everyone, and thank you for joining us for Window Seat, our Aviation Week air transport podcast. I'm Air Transport World, Europe and Africa bureau chief Victoria Moores, and I'm delighted to welcome you on board. This week we're at the European Regions Airline Association General Assembly in Belfast, Northern Ireland. Now, ERAA is a body that represents 58 European airlines and more than 150 companies involved in European aviation. And today I'm joined by two of those airlines, so representatives of KLM Cityhopper and also SAS. So specifically coming from SAS Group, I've got VP for airline operations and external production, Mikael Wångdahl, and also KLM Cityhopper managing director Maarten Koopmans. Welcome.
Maarten Koopmans (00:59):
Thank you very much.
Mikael Wångdahl (01:00):
Thank you.
Victoria Moores (01:01):
So, thank you very much for joining me today for this episode of Window Seat. We just had a couple of very busy days hearing about the state of the European regional airline industry. Obviously, there's a lot of pressures out there, particularly cost pressures and regulatory pressures. I'm wondering to each of you, maybe starting with Mikael, did you hear anything that surprised you during the discussions here in Belfast?
Mikael Wångdahl (01:27):
I think most of the things that have been discussed are also the topics that we experience today. And I think one thing that makes you maybe more concerned year on year is the aging fleet and especially on the smaller aircraft and also serving the smaller routes or the regions out in the outskirts of Europe. And the challenge there where they have really, really high... There's a very long utilized aircraft that have been utilized for many, many years and there is not really any replacements and the discussions on how to solve that is starting to be more and more of a concern in my reflection.
Victoria Moores (02:13):
And one of the things that we also heard coming into the conference is this idea of obviously regional routes could be used as a bit of a technology test bed for new entrants, new technologies. However, regional airlines, they don't really have the capacity to take that new-technology risk. And is that really fitting into the kind of segment that you're looking at for the replacement? Is that still too small at this stage?
Mikael Wångdahl (02:38):
Yeah, I think what you look at is that you can look at the operating cost and the new technology, how that will develop and the footprint on the emission, which is of course very important, but the investment into the new technology is the burden for the smaller carriers and how do you want to solve that capitalization of those investments?
Victoria Moores (03:00):
Yeah, absolutely. How about you, Martin? What have you been hearing at the event?
Maarten Koopmans (03:04):
Well, I'm positively surprised that although we are in tough times and everybody is focusing on survival, that there's still the will to drive the way to sustainability. So, you saw at the conference there was still a lot of focus on it. A couple of years ago, it was all about sustainability, then we get into more tough times and we focus on survival, but I'm happy to see that we don't keep our eyes closed for the future. We are here and we as smaller airlines will be the first to carry that new technology. And yes, it's not there yet, but I'm very happy to see that we still have that focus together.
Victoria Moores (03:42):
Yeah. And like you say, despite the headwinds, because I mean times are challenging right now for regional airlines in particular, but despite that, there has been a real sense of how are we going to fix this problem, how are we going to move forward, and how are we going to do that in both an environmentally and financially sustainable way to maintain the essential air links that you guys provide?
Maarten Koopmans (04:05):
Yeah, because we as KLM City Hopper want to lead the path, but we need to run a business. If it's unviable, then it won't happen. So, we need help there as well.
Victoria Moores (04:18):
Yeah. You mentioned about running the business there. It really strikes me that each of you has a very different model for your airline operations within your regional sectors. So, for KLM City Hopper, you've got all of your own fleets. It's basically an all-Embraer E-jet fleet. And over at SAS Link, you are much more dependent on outsourcing of the model. You've got your own internal Embraer operations and then also you go to a lot of wet-lease providers. So, I'm wondering what are the specific challenges right now within each of those different models? Again, maybe starting with Mikael.
Mikael Wångdahl (04:55):
I think for us, we have SAS mainline, SAS Scandinavia, which is the airline that is wet leasing capacity from different sources. And that is SAS Connect and it's also SAS Link, the Embraer operator within SAS. So, we have internal wet leasing, so we don't run our own, how do you say, branch or sales, it's one sale. In addition, we also use capacity providers such as CityJet and BRA [Braathens Regional Airways] and JetTime and DAT and other airlines that fit our seasonality needs, but also specific size of aircraft where we see that working with partners really specialized in those segments makes sense. So, where we have the smaller volume in the traffic, we use partners that are specialized in working under those conditions.
Victoria Moores (05:57):
And it strikes me that some of those partners have also been under pressure as well, the capacity providers within Europe. So, we've seen a lot of regional airlines diversify their business into doing schedule flying plus wet lease work that companies like Braathens have been through, that's BRA, one of the companies you mentioned, have been through some very tough times themselves. And I imagine that that really impacts the relationship between you and your capacity providers.
Mikael Wångdahl (06:23):
Yeah, it does. And I think several of these smaller providers, the one big problem is that they can't really expand their brand outside their local region and they are dependent on working together with larger brands and through co-chairs, interline agreements and so on and so on. But still, it's difficult for them to reach out and expand on that. So, for instance, BRA found out that they wanted to change their business model completely and become a full service ACMI provider instead. So, one part of them entering out of their difficulties was to do exactly that. And then we started to work with them with the strategy of them serving our ATR capacity through our network.
Victoria Moores (07:18):
Okay. Moving along to more of the fully in-house model, what are the main challenges that you face with that, with having your own insourced fleet?
Maarten Koopmans (07:28):
Well, I think it gives you a lot of control, but you have to account for the seasonality as Mikael is saying as well. So, we are the capacity provider for KLM. We fly more than half of KLM's European network, but we also have some parties that we lease in as well. So, most of it we do ourselves. And then for seasonality reasons, we also are able to get a few wet lease partners in. But we have a large fleet, almost 60 aircraft. We have a fleet of E1s and E2s, the same fleet, which means that you can optimize. If you have such a large fleet, you can optimize your own production, your own maintenance, those kind of things. So, I think being this size gives you the opportunity to do more yourselves and be more efficient.
Mikael Wångdahl (08:20):
And I think one of the differences between us is the geographical location. So, we're in the outskirts of Europe, so in the domestic parts of our regions, it's quite small passenger volumes. And to serve those, we need to have a longer or a wider range of seat capacity or seat alternatives for the fleet to make these routes profitable.
Maarten Koopmans (08:46):
Yeah, because we can do with the 88, 100 and 136 seats, we cover the whole network. And, of course, every flight is a connecting flight. So, one flight from Shiping [China] or one flight from a smaller airport in the UK brings you to Schiphol and then the whole world. So that also feeds into a lot of extra traffic, and we are very happy to do with the fleet we have.
Victoria Moores (09:11):
Sticking with that theme of fleet, seems though you are both pretty good customers for Embraer. So, SAS has placed an order for 45 E2s. You already have 25 E2s and you've got 25 options, which you're currently considering whether or not you're going to go ahead with firming them. I'm wondering about that fleet development on the Embraer side. So, what kind of a difference is that going to make to your activities as SAS?
Mikael Wångdahl (09:41):
Well, today we have the turboprops serving the shorter destinations, we have 80 ATR72s and then we have CRJ 900s, 90-seaters for our regional operation, the longer sectors, but still lower density airports. The difference it makes is that we can expand our business from the CRJ to a slightly bigger aircraft, being the E2. We can match that more effectively also with the Airbus A320 where we might also be able to do some down gauging where we can move the A320 capacity to other places where we can make more use of it. And the combination of the large- and the mid-size aircraft on European routes makes a higher flexibility to secure frequencies and also the range of the E2 and the capacity of carrying baggage and so on compared to a smaller regional jets.
Victoria Moores (10:44):
You already mentioned that obviously you've got a very diverse network. You need to serve different routes with different capacities, which is why you've gone for that wet leasing model plus the Embraers. Could you see the Embraers replacing any of the capacity that you're already wet leasing in or perhaps replacing some of the A320 needs that you might have?
Mikael Wångdahl (11:05):
Yeah, and it does. Today we have 16 Embraer E1s and so they will also be part of the fleet rollover into the E2s. But at one stage we had almost 25 CRJs, and from this winter we have 11. So yes, we are replacing the fleet with a midsize over time. If it's completely going to be a one-to-one later on where we eventually remove the CRJ, it's still open to see because there is still a market in that segment where the E2 might be too big. The question is what will be that replacement capacity? Is that a CRJ or is it something else? Because the CRJ is also out of production, so it's getting older and the supply chain around that aircraft is different. And as a network carrier we are utilizing these aircraft quite a lot compared to smaller regional operations because we are combining them with the short and the long sectors and can put them into our network in other means to keep the production up and therefore the quality of the equipment is so important so that it can keep the performance.
Victoria Moores (12:34):
Moving back to KLM Cityhopper, obviously you've got this fleet decision coming up. I understand that you are looking to move to an all E2 fleet, all E2 195s. Yeah. How would that then impact you in terms of the diversity of the fleet because you would lose the different capacity gauges?
Maarten Koopmans (12:53):
True. So currently we have an 88-seater, a 100-seater and a 136-seater. From an operational perspective, you would like to have one aircraft only, one type. It helps in every aspect. Rebooking, it's just changing three letters, that's it. Equipment, training, everything. So yes, but then you lose the variety. So, we're thinking of smart solutions for that. I cannot explain exactly what we're planning to do, but we might combine the two in a way.
Victoria Moores (13:26):
Combine the two in what way?
Maarten Koopmans (13:29):
Having one aircraft and still offer different sizes. It sounds a bit strange, but give me some time. Maybe in a couple of months or a year or so, I can tell you what our plan is.
Victoria Moores (13:41):
I can tell I'm not going to get anything further out of you on that one.
Maarten Koopmans (13:44):
We're not that far along yet.
Maarten Koopmans (13:46):
From an operational perspective, it's really helpful to have the least types that you can have. It simplifies your operation so much. When you see the complexity of the airline industry at this moment, it's really necessary, especially at Schiphol, to simplify, simplify, and simplify. And it all starts with the fleet.
Victoria Moores (14:04):
Because you are operating in a constrained home hub.
Maarten Koopmans (14:09):
Highly constrained home hub.
Victoria Moores (14:10):
That must make things challenging. You've just been recognized by ERAA for your technology leadership. What would you say is your flagship technology project that you're working on within City Hopper that perhaps other airlines aren't necessarily as engaged with at this point?
Maarten Koopmans (14:29):
Well, I think there's a few things. It's never just one, two, but let's keep to a few things. I think what we're doing with AI and predictive maintenance is we're quite ahead and we've saved over five million in the first year we have introduced AI into predictive maintenance. So that helps a lot. We have done a lot of change to our pilot training. Pilot training is quite expensive, and we are able to do that right now with VR [virtual reality]. So that saves on actual flights, but also on simulator training. So that's an important one. But there's also other innovations. And I think in the beginning we talked about sustainability. We need to push also the demand for SAF [sustainable aviation fuel]. So, we have decided also to sell 100% SAF tickets to see how the market will react.
Victoria Moores (15:21):
Do those 100% SAF tickets actually reflect the actual cost of the SAF or are they a contribution towards the cost of SAF?
Maarten Koopmans (15:29):
No. In this case when we did this, you have to make it real. But the premium at that time, it was the shorter flights. Amsterdam-London, Amsterdam-Hamburg was 27 euros a stretch. But what you see in practice, there's a big say-do gap.
(15:46):
So, a lot of people say they're very involved, but they feel it's our problem to solve. Okay, I understand what you say, but as we already discussed, we are in a very difficult industry, very small margins. So, if we want to use more SAF and we want it, we need help from Europe. Europe needs to start understanding their position with the geopolitical issues we have right now, the enormously high curating prices. This is the moment to step in and come with an alternative and scale after the alternative for us to be affordable because it's not affordable at the moment.
Victoria Moores (16:25):
Yep.
Maarten Koopmans (16:25):
Big scale.
Victoria Moores (16:26):
Okay. You've given me a great link in there. You're mentioning scale. Talking of scale, that brings us onto consolidation in Europe. The two of you are obviously operating as independent businesses right now. You are not able to do anything more than that, but KLM City Hopper's parent company, Air France-KLM, is getting very involved with SAS. They're hoping to increase their stake that's going through competition clearance at the moment. In theory, we're not talking about in terms of you having discussions here, but in theory, where would you see the potential synergies between your two businesses?
Maarten Koopmans (17:02):
Well, given the fact that some of the fleet is the same, I think there are synergies in maintenance, but there will also be synergies. In network probably, as you said, we haven't been able to discuss. Michael and I have been on the board for a while, but you keep what’s really a Chinese wall there, but you can see where we can win together. And I think there are quite some opportunities starting with maintenance and everything fleet involved.
Mikael Wangdahl (17:34):
Yeah, and I agree. And I think if you start with the first immediate part is of course the development of our hubs because there are constrained hubs in Europe and how do we develop that? How do we increase our customer proposition? That is probably the first one that is going to be our focus. But you have a lot of logistics behind an airline. And so, for instance, you have sometimes asked me already today for capacity and so on as we do as two independent businesses and so on. So, there are a lot of areas there where you can actually see synergies. We've talked about when you train a pilot, you have huge investments in simulators and so on, and it's high seasonality and it's also dependent on demand. How can you develop that further and make sure that we become cost effective in areas where we actually can complement each other.
(18:34):
I think there is several areas into this.
Victoria Moores (18:38):
Would you be able to cooperate on things like backup aircraft or would that not be practical?
Mikael Wångdahl (18:44):
You can, yes. I think you have one thing, which is having the backup aircraft on the day when things happen. You want to have that relatively close to your business. So that means that you want to have an aircraft in one of your hubs. So, because you have the crew there, an aircraft breaks down and the crew can go to the next aircraft. But when it comes into a period where you might have a more severe issue, not severe on safety, but severe on you have an engine issue or something, it's going to take you two, three days to solve that one and you might looking for excess capacity from elsewhere. You can use each other’s capacity by wet listening to each other. And that is of course possible already today if we want to.
Maarten Koopmans (19:32):
Right now, it's more complex of course, but in the future that might become much more easy and who knows what will happen with TAP, but in their fleet, the same kind of aircraft. So, I foresee a future where we can really help each other out more intensively than we do today and easily than we do today.
Victoria Moores (19:52):
And will that make a difference?
Maarten Koopmans (19:54):
Absolutely. Because as I said, not only at Schiphol, but everywhere, the walls are coming closer, I would say, in operation. So it's very complex and we have to pay high non-performance costs on every flight that's not flown. So, anything where we can help each other out, it really helps our business. And when you see what we have to pay EU 261 [fines] for problems that we don't want to have, then this kind of help, this extra capacity is something important. Absolutely.
Victoria Moores (20:26):
Just about up for time now. So, in a nutshell, looking forwards through the winter that's just to come with the limited visibility that we've got for next summer, what are you anticipating? What's your immediate outlook for each of your businesses?
Mikael Wångdahl (20:41):
I think not only for SAS, but I'll probably say the obvious, but that's fuel, fuel, fuel. We are under a word of heart on the challenges we have with the fuel prices, how they're rising and how that affects. So even if you have a healthy business, it affects your bottom line severely and your cash exposure and also your strategy on risk because how long will this keep on going? I think that's where we put most of our discussions at the moment.
Maarten Koopmans (21:14):
Absolutely. I think both of us were probably covered by a fuel hedge, but now this last quarter, the prices really kick in. So, it's going to be a tough winter. It's going to be a tough winter. And if the prices of oil don't change, that this might influence our network and might force us to make some choices.
Mikael Wångdahl (21:38):
The difficult choices you're making is because you can start compensating by reducing traffic, but also a challenge is that you normally also prepare for a next season during a winter. So, when you go down, you also have to make sure you can go back up in the summer so the market goes back. So, what is that balance? How much can you compensate and when is it time and how long will this last? If you could help me with answering that, then you would be our senior advisor for life.
Victoria Moores (22:11):
It just sounds like a job opportunity there. Just in terms of a nutshell, capacity, what capacity are you looking to add each of you through winter into next summer, or is that still under evaluation for next summer?
Maarten Koopmans (22:23):
Still under evaluation. And when I look at the fleet, we have quite an optimistic plan to be very honest. And there is growth in that plan, but fuel prices will decide a lot whether we go through with it, yes or no.
Victoria Moores (22:36):
Okay.
Mikael Wångdahl (22:37):
Yeah. And yeah, the same here, echo that. And what we do is also we are looking into, how do you say, since we have a seasonality curve is also how much extra capacity do we bring on and how much risk is that? So that's our concern right now.
Victoria Moores (22:53):
All to be decided. Well, it sounds as though we're going to be signing off with a bit of an uncertainty there about how things are going to develop. Again, it's back to that theme of the challenging cost base right now in the business, but thank you so much for taking the time to speak to me, especially during such a busy conference. I really appreciate you joining us.
Maarten Koopmans (23:11):
Thank you for having us.
Mikael Wångdahl (23:12):
Thank you. Thank you very much.
Victoria Moores (23:13):
Thank you. And also thank you to our producers, Guy Ferneyhough and Cory Hitt. And of course, a huge thank you to our listeners for following Window Seat. Make sure you don't miss us each week by subscribing to the Window Seat podcast on Apple Podcasts or wherever you listen. This is Victoria Moore's disembarking from Window Seat.
Related Content
