Flybe, a low-cost carrier based in Exeter, is Europe's largest regional airline. It operates 70 aircraft from 14 bases in the UK on over 150 routes. It carries more than 7 million passengers annually and employs 2,200 people.
Flybe is not the only airline experiencing financial turbulence and strong head winds. Despite forecasts of an ever-increasing demand for air travel, trading has been depressed by:
- the rising cost of fuel
- high airport taxes (Air Passenger Duty)
- keen pricing and discounting from competitors
- high charges at airports.
During 2012, Flybe initiated a series of cost reduction projects which included commissioning Collinson Grant to work on lowering its costs of operating from UK airports. A total of 17 airports were designated as in-scope.
The cost of using airports is the single largest operating expense after fuel. It is costlier than aircraft ownership charges and staff. Historically, the balance of power between airlines and airports has been reflected in their relative financial strength: with airports producing very healthy returns on capital while airlines make only slim operating margins or, frequently, losses. In the face of one of the deepest recessions experienced in the UK for generations, Flybe resolved to challenge this inequitable trading relationship and secure sustainable reductions in costs.
Collinson Grant undertook a three stage approach to tackling the cost base: appraisal, design of negotiating strategy and tactics, and execution.
Analysis was completed at 17 airports into market share, flight patterns by time of day and day of week, and models were created of commercial revenues and the airport's ancillary income streams. This helped define points of leverage in prospective negotiations. Once data had been analysed, consideration was given to the competitive positioning of Flybe versus other airlines, fleet plan, network development and alternative negotiating strategies.
Collinson Grant worked with Flybe managers in conducting and supporting negotiations. Collinson Grant engaged with airport management by sharing presentations and often led negotiations in meetings. These talks were informed by the modelling of different outcomes between the various rounds of negotiations.
The project succeeded in reducing operating charges at airports and paid for itself within a matter of weeks. Operating costs are lower, and in certain cases savings are secured against future inflation. This has brought immediate benefits as well as helping to create a platform for Flybe to plan the size and scope of its future business in the UK.
Andrew Knuckey, Flybe's Finance Director, said:
"We started the process of trying to reduce our cost base at airports with some cynicism about what external advisers might be able to achieve. Collinson Grant's contribution turned out to be pivotal in changing the dynamic of our relationship at several airports as well as yielding much needed cost savings. We were most impressed by the quality of the analysis and the vigour with which the team focused on securing benefits."