30-Second Interview – Rob Veron, CEO, Blue Islands
Blue Islands is one of only two scheduled airlines based in the Channel Islands. These are British Crown Dependencies, self-governing islands located in the English Channel, but not part of the UK. Blue Islands has its roots in the former Le Cocq’s Airlink, which began operations in 1999, before changing its name to Rockhopper and then to Blue Islands in 2006. The airline splits its head office functions between Jersey and Guernsey. It operates six scheduled routes in S18 and one of the most significant developments in its recent history was the commencement of a franchise agreement with Flybe in June 2016.
Rob Veron has been CEO of Blue Islands since January 2011. Since that time he has overseen the introduction of the Flybe franchise agreement, the phasing-out of smaller Britten-Norman Trislander and Jetstream 31 aircraft, and a migration to an all ATR-based fleet. Veron has been with the airline since 2004 and served in previous finance roles within the Healthspan Group of companies. Nick Preston flew into Guernsey to meet with Veron and discuss then main challenges and opportunities facing his airline and Channel Islands air links.
Anna.aero: Why did you decide to become a Flybe franchise partner? Is it a long-term arrangement and what benefits has the partnership had from Blue Islands’ perspective?
Rob Veron: “It’s a 10-year agreement. The rationale behind the franchise agreement is basically that we’re small, independent, Blue Islands, so not many people in the UK will have heard of us. In comparison, Flybe is Europe’s largest regional airline and its marketing bandwidth and capability in terms of attracting inbound passengers from the UK to Jersey and Guernsey is so much more significant than our own, given the size of our business. So it’s a combination of that marketing capability, plus the benefits of using Flybe’s sales channels.”
aa: What level of autonomy does Blue Islands have under the franchise agreement in terms of setting fares, operating schedules and identifying and launching new routes?
RV: “Whilst you don’t necessarily see the brand Blue Islands on the face of the transaction anymore, we are absolutely the operator, we still take all of the commercial risk. We pay a franchise fee to Flybe but fundamentally we choose our routes, we choose our schedule, our frequency, our aircraft type, the whole operation is still very much Blue Islands Ltd, trading as a separate business, we’re just effectively selling through Flybe channels and paying them a percentage fee for doing so. It’s 100% our commercial risk and reward. We seek permission from Flybe to deploy their brand assets on a particular route. We have a series of routes which we may operate under the Flybe brand, however that doesn’t prohibit us from operating any routes that we may choose to under the Blue Islands brand. The Franchise agreement is not entirely exclusive in that sense, but if we didn’t operate under the Flybe brand then we wouldn’t get the benefits in terms of the rationale for going into the franchise in the first place.”
aa: Blue Islands and Flybe both operate directly between Guernsey-Jersey and Jersey-Southampton. Do you compete on price on these two routes despite the franchise arrangement?
RV: “We are entirely independent in terms of pricing. We actively compete with them. From our perspective to see an inter-island customer boarding a Flybe aircraft, that comes at a cost to us, so we’re proactive in seeking to acquire as much market share as we can on those routes where we both compete.”
aa: What is Blue Islands current fleet composition? Are there any plans to add to or adjust the current fleet?
RV: “We have three ATR 72-500s, one ATR 42-500 and one ATR 42-320. Over the past few years we’ve been slowly migrating through and increasing the capacity of the business, replacing ATR 42s with ATR 72s. The natural next move would be to replace another of the ATR 42s with an additional ATR 72. Our fleet works well for our network. There’s good commonality between the types. The ATR 42 is perfect for the inter-island Jersey-Guernsey market because it’s about getting enough capacity at the peak times but not having too much capacity during the off-peak. So we can go with frequency on that route without over-deploying capacity, but equally on some of the other routes which are larger, such as the Southampton sectors for example, we can put an ATR 72 on their or intersperse a 42 with a 72 to best meet the needs of the market on any day of the week or month of the year. The two types work well together in that sense.”
aa: Historically the inter-Island Jersey-Guernsey route was operated with high-frequency services by small aircraft like the Britten-Norman Trislander and Jetstream 31. In 2008 Aurigny, Blue Islands and Flybe provided 30-combined daily flights on this airport pair on peak summer weekdays. This year Blue Islands and Flybe will offer six or seven total daily departures with a mix of ATR 42s, 72s and Q400s. Is this the right frequency and capacity mix for the inter-island service or would the route benefit from more frequencies with smaller aircraft?
RV: “There’s always a compromise with the inter-island service. It’s about trying to find the happy medium between the right amount of capacity to adequately serve the market at the peak times, but also not oversupplying capacity during the off-peak. If you then go into a scenario where you mix your fleet you’re getting into a much more stressed cost base. A big part of our being able to self-sustain is the fact that we mitigated losses by operating the right aircraft at the right times. The ATR has got far lower seat costs, if you get linear growth in load factor, than a Jetstream or a Trislander or any of these other aircraft. When we were operating Jetstreams, we found the frequency was a consequence of not being able to deploy enough capacity into the peak periods, typically 08:30 – 09:00 in the morning and 16:30-17:30 in the evening. And what we found was those peaks were stretching from 07:00-10:00, with a similar pattern at the end of the day, because for us to get sufficient capacity into adequately serve the market, we ended up having to operate frequency with smaller aircraft. The high-frequency schedule was a consequence of the aircraft size that we were using.
“Deploying an ATR in those peak times saw our market share move significantly upwards, which confirmed for us that the solution was a larger aircraft that could adequately serve the peaks. I do believe that the ATR 42 is the right aircraft for the route. There are days when an ATR 72 is preferable, so having that ability to blend the two types is really good. It’s about that seat cost. Historically Aurigny and ourselves were both losing in excess of £1.0 million per annum on the route and supplying over 100% surplus capacity. It was not a sustainable situation so we ended up moving into a block-space codeshare agreement [since terminated], which mitigated those losses and we subsequently evolved from that and continued very much with the same schedule and aircraft type and we are where we are today. It’s a declining market, and we have seen decline over the years. It’s a very spikey market in terms of demand. It’s predominantly a business route with leisure demand at the weekends and what we’re seeing is a number of businesses rationalising the amount of travel that they take between the islands, with an increased use of video conferencing. But there is still a need for that business use between the Islands. It’s an interesting market but still very much a primary focus for us.”
aa: Blue Islands offers more routes and capacity from Jersey than from Guernsey. Is there simply more air travel demand to and from Jersey?
RV: “Jersey is significantly larger than Guernsey. You’re looking at a population of 104,000 versus 62,000. All routes, especially regional routes, require an element of both inbound demand, and outbound demand from the inhabitants of the islands. They’re completely co-dependent. Without inbound demand you wouldn’t get the suite of services. The network and direct connections that we have wouldn’t be financially viable if they were just there to serve the outbound market. With inbound demand as well, we get the social benefit in terms of outbound options for the people of the islands too. When you take Guernsey and Jersey and you put them side-by-side it’s that critical mass that makes a huge difference. We’re islands that are micro-economies. They’re completely sub-scale. When you look at a difference of 42,000 people between the islands at sub-scale level, that’s really significant, and that difference is acutely felt in a demographic of such small scale. The inbound demand for Jersey is far greater than the inbound demand for Guernsey, and that’s another reason that we see Jersey having much greater airport throughput. Its markets are bigger, demand is greater and there is more latent demand. We can stimulate demand into Jersey, whereas the price elasticity and demand in terms of travel to Guernsey is more rigid. I couldn’t stress enough how different the market places are.”
aa: Why don’t the Channel Islands have a year-round service to a major European hub? Is a major hub service in your plans moving forward? Would Blue Islands be keen on serving an expanded Heathrow when new slots become available after the third runway is built?
RV: “The scenario that we have is a reliance currently on London Gatwick for serving the real primary routes to and from the islands. The real primary routes are Gatwick to and from Jersey and Guernsey. There are two operators on Gatwick-Jersey and one on Gatwick-Guernsey, and they all operate very high-frequency services. Over the years Gatwick has become a good airport for hubbing through and a lot more long-haul and international destinations are available from there. We’ve tried Paris CDG and Amsterdam from Guernsey and Jersey and we found we weren’t able to deploy enough frequency without over-deploying capacity for those markets to make them viable. There was demand for those routes, but not enough at the frequency we offered, yet if we offered a higher frequency then we’d over-supply the market and lose a fortune. We lost a large sum of money on trying to build those routes over a couple of years. Do you change the behaviours of people using Gatwick for their connections by offering a limited frequency service to an alternate hub? It’s the frequency proposition and the connections over Gatwick. I think typically what a lot of people are doing is going to Gatwick and connecting from there. A smaller number of people using the Gatwick routes are also going on to connect via Heathrow. Would you be able to sustain a direct Heathrow route? I’m not entirely sure that you would whilst the same Gatwick proposition exists. I think a Heathrow link is certainly worthy of further appraisal and we’d certainly look at it, but it’s trying to get a feel for the inter-dependency between any future Heathrow route and the Gatwick services.
aa: Blue Islands ended services from Alderney in 2011, but in recent years there has been press coverage of residents’ dissatisfaction with current air service provision to that island. Can you foresee a situation in which Blue Islands could return to Alderney?
RV: “I think there’s a piece of work which could well be on the horizon, with the States of Guernsey and Alderney looking at applying a PSO-type arrangement to an inter-Island Alderney service. If the invitation to tender comes out for a PSO then we would be minded to have a look at that.”
aa: What are the main challenges for Blue Islands and Channel Islands air services in the near-to-medium term?
RV: “In the Channel Islands there is a real gap in consumer understanding in terms of the difference between Guernsey and Jersey and one of the big challenges for us is to aid the dialogue. Consumers are very much looking at LCC fares to and from Jersey and saying why don’t we have those fares available in Guernsey? It’s about trying to aid the understanding that LCC’s operate in volume markets, they don’t operate in small finite regional markets. Guernsey is extremely sub-scale, yet wants year-round frequency services. The regional operator service provision that’s required has a cost, and regional isn’t as cheap as an LCC that’s operating from a massive demographic to another massive demographic, or a significantly larger demographic. We need to bridge that gap between our Guernsey market’s aspiration and what is economically viable to provide in terms of a service.
“The licencing environment in Guernsey is also very much part of the ongoing dialogue. There’s consideration among politicians of a paper proposing a move towards ‘open skies’ rather than a managed environment with route licencing. I think the recommendations are absent of any real understanding of any implications that those decisions may have. What is also interesting is that it would be seeking to move to an open skies policy for all routes except Gatwick, which is an Aurigny monopoly. The largest route, the most likely route to sustain a good level of competition and to deliver the benefits that competition would typically deliver, in a market that could sustain it, is being safe guarded. As an environment in terms of doing business and providing the services, Guernsey is a real challenge.”
aa: In a recent press release you mention that the seasonal Guernsey-Cardiff service had disappointing load factors during its first year of operation in 2017, but still managed to provide a modest, positive return thanks to a subsidy from the Committee for Economic Development (CfED). Could similar subsidies be a good way to help establish new links to Guernsey and are there any plans to work in conjunction with the CfED to launch more routes?
RV: “The principal of it is good. Seeking route support is a difficult thing, I don’t think we have a government in Guernsey that really understands the sensitivities in terms of new route development. There’s a huge aspiration, but the desirability of product Guernsey doesn’t compete with other like destinations. 40 years ago the Channel Islands were a desirable destination, but over the years, and especially with the advent of low-cost operators, Guernsey’s not there anymore in terms of its position in the market place. The peer group of competing destinations is far different now and includes all those destinations that are served by LCCs that are now more accessible. A review of product Guernsey is really what the guys at CfED need to be doing. Jersey has sustained itself and re-invented its product and continued to invest in its product, so Jersey is a much more vibrant inbound destination. In terms of the desirability for the Islands as inbound destinations, Jersey’s really winning there and Guernsey’s got some ground to make up. We have to consider that when we think about how to deploy our fleet, and what we target as new route development. Yes there are opportunities, but they need to be measured in the wider context which includes the desirability of the product, not just the price elasticity and demand on a particular regional service.”
aa: Your network for S18 includes six scheduled routes. What are some of the main opportunities for Blue Islands moving forward. Are there any specific new destinations or markets you are targeting?
RV: “We’re operating Guernsey-Jersey, Guernsey-Southampton, Jersey-Southampton, Jersey-Bristol, Jersey-London City and Guernsey-Cardiff for the summer season. “We’re doing some series charters, to Zurich and Rotterdam, and we’re doing some ad-hoc ACMI work and yes we are looking at some other routes. We see potential for some small filler opportunities, some inbound leisure routes and some additional London capacity as well. There might potentially be some European routes too. It’s early stages. We’re just at the commercial conversation stage, so it’s something I can’t really expand on just yet. We are looking at route opportunities but they’re not major markets as far as the Channel Islands go, they’re just what we think could be neat additions in terms of schedule optimisation, for some routes where we think there could be some discrete demand.
“We’re a short-haul, high frequency regional turboprop operator. That’s what we do, that’s what we believe we do well. Over the last five years we’ve increased the size of our business by 75%, with annual passenger numbers up from 210,000 to 365,000, and we’re continuing to grow. It’s these small pieces of considered route development that keep us on our path. Small, considered, sustainable growth is the key for us.”