Regional Jet business model seems to pay off as company posts first profits

Regional Jet (and former Estonian Air) chief Jan Palmér.
Regional Jet (and former Estonian Air) chief Jan Palmér. Source: Postimees/Scanpix

Regional Jet, the subsidiary of state-owned airline Nordica, co-owned by Polish airline LOT, says that it expects profits of €3.5 million for 2019, with that figure projected to almost triple within a few years. The subsidiary is one bright spot in Estonian aviation, dogged as it has been with competitiveness issues as first state-owned carrier Estonian Air went bankrupt, then successor airline Nordica became mired with problems as it cut international flights from Tallinn.

Regional Jet's business model involves outsourcing services to other airlines, with the latter selling tickets and shouldering most of the business risk, an arrangement often referred to as wet leasing.

Regional Jet's customers include SAS and LOT itself, with the company hoping to run just under 30 aircraft by year end 2020 under this arrangement.

The aircraft can be liveried in the customer airline's colors where needed, with its flight attendants decked out to match. Regional Jet charges between €1,500 and €2,500 per flight hour under the current arrangement, with 200-350 flight hours per aircraft expected per month (or between €300,000 and €875,000 per aircraft in any given month), ERR's online Estonian news reports.

The planes themselves are rented from state-owned Transpordi Varahaldus, as well as other companies such as Falko Regional Aircraft and Regional One. Flight crews in turn come largely from recruitment agencies. All of this, Regional Jet says, allows it to fully comply with aviation regulations without having to be fully up to speed on them itself (since the outsourced companies should already have thi sin place).

Jan Palmér, head of Regional Jet, remains optimistic about the future of the company. Meeting with journalists on Wednesday, Palmér said the company plans to grow profitably, taking on around six planes a year.

The announcement represents a turnaround on the situation two years ago, where Regional Jet made a loss of €2.5 million on a €37 million turnover. Last year turnover rose to €68 million, which eliminated the losses, and turnover for 2019 is projected at €90 million, facilitating the company operating in the black.

Growing firm in a growing sector

Regional Jet projects this figure to grow to €135 million, with an €8 million profit in 2020, rising to €160 million turnover/€9.5 million profits in 2021, by which time it should be on a par with Air Baltic in operating 60,000 flights with 4 million passengers.

While Nordica, Regional Jet's parent company, has been in difficulties in recent years, having to cancel almost all of its international flights from Tallinn Airport, posting losses of over €5 million for 2018, and seeing a both chief financial officer and CEO departing (in the latter case before even taking up the post), the turnaround for the subsidiary is thanks to changes in the European aviation market, Palmér said.

"I have been waiting 20 years for regional flight outsourcing to grow in Europe. It has been the case in the US, so this was only a matter of time," said Palmér.

In a growing market, Regional Jet is in constant talks with other northern European airlines to find new customers, Palmér said, with a big order possibly turning things around even further.

"If, for example, Lufthansa decided to outsource its regional flights [to us], this would be huge, Palmer said. 

"They might come to us and ask for 30 planes, for example," said the Regional Jet boss. 

"Of course I would always say yes, but it would be quite complicated for us."

The company estimates that it currently enjoys a market share of three to four billion euros, with only one direct competitor in the region, and even that is only subcontracted for regional flights, namely Irish operator City Jet. 

The only risk the Regional Jet sees is in labor supply, as the rapid growth of the market makes finding staff a problem, Palmér said.

Partly to address this issue, Regional Jet plans to support the training of new pilots, he added, not noting any other direct risks on the horizon.

Palmér also pointed out that, in addition to the profitability of the Regional Jet, it might be possible, if need be, to set up a relatively fast airline to provide Estonian connections.

"If there are no connections, the state will die off," Palmér said. "If you have no connections, who will invest here?" he asked, though qualifying this by noting that commercial carriers operating direct lines with profitable ticket sales out of Tallinn was not feasible.

"This is clear. Airlines do not make a profit when flying from Tallinn, but they still fly," Palmér said, adding that a one-way Tallinn-Stockholm ticket should cost around € 120, but is on offer for around half that at present.

"If the number of companies flying out of here falls, prices will surely increase," Palmér added.

Regional Jet was established in 2015 to provide Estonian Air with a post-bankruptcy aviation connection. Immediately after the bankruptcy of Estonian air, Regional Jet started to provide air services to Nordica as well. In 2016, Nordica started the cooperation with LOT Poland which gave LOT a 49 percent holding in Regional Jet.

The company's main customers are SAS and LOT as noted, with smaller customers including Air Serbia, Luxair, Flybe, LoganAir, Smartlynx, TUI Belgium, Great Dane Airlines, Blue Islands (U.K. Channel Islands) and several others.

Flight links to Estonia's two largest islands, Saaremaa and Hiumaa, are currently operated by Lithuanian carrier Transviabaltika.

Editor: Andrew Whyte

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