Small Irish airline CityJet is betting on the French connection to underpin its expansion over the next couple of years. Air France, in its first investment since partial flotation earlier this year, has ploughed £2 million (€2.54 million) into CityJet. This is part of an overall investment by three groups which are investing a total of £8 million it was announced this week.

Under the restructuring of CityJet, British-based Air Foyle is making a £4 million investment and becomes the majority shareholder with a 50.l per cent stake. A further £2 million is coming from some of the existing shareholders, which include Yeoman International and Standard Life. A major component of the deal for CityJet is that the Air France involvement brings with it "a huge explosion of work", says the airline's chief executive, Mr Pat Byrne.

The connection will see the loss-making airline's annual turnover rise from £40 million last year to £64 million this year, through a series of new contracts on behalf of Air France.

Mr Byrne says the company's fleet should double within two years and forecasts that it should make a small profit next year. "The deal means we can expand and it gives us some reserves," he says. Some of the monies will be used for deposits on aircraft leases. Typically, he says, lessors demand three months deposit in advance. The Bae-146 aircraft, for example, which CityJet uses on its London route, costs $130,000 (€121,723) per month.

The work with Air France is a mixture of what is known as wet lease and franchise contracts. Wet lease contracts are where an operator such as CityJet flies the route for the airline in that airline's colours and supplies the staff, planes, maintenance etc. In return it gets a guaranteed contract payment. The margin on this type of contract is lower than on other contracts because of its "guaranteed" nature.

Its wet lease contracts on behalf of Air France include Paris-London, Strasbourg-London, Paris-Florence, Nice-Toulouse and Nice-Madrid.

CityJet is also operating flights on a franchise basis for Air France. This includes the Dublin-Paris route, which it flies in Air France colours. Air France sells the seats in return for a marketing and distribution fee.

However, CityJet gets to keep all the revenue and the margins are considerably higher than on wet-lease contracts. That's the upside - the downside is that CityJet takes the hit if passenger numbers fall off.

The airline also operates the Dublin-London City route and Dublin-EastMidlands, Dublin-Malago and Dublin-Faro in its own colours, using a fleet of eight aircraft. Overall about 75 per cent of its work comes through Air France and 25 per cent through its own routes.

Mr Byrne is confident CityJet now has the right mix of work. "It is a safe, conservative approach to development," he says, adding that such contracts "are the envy of many small airlines".

He readily admits that many people reading this article will say "here we go again. More funding for CityJet, another new set of partners. Same old story."

However, he is confident that this deal is "the conclusion of the story". He says when the airline was established in 1994 it flew under Virgin colours. He thought it would give the company credibility in the marketplace. But, he says, Virgin launched Virgin Express, its low-cost carrier shortly afterwards. "What they were trying to do and what we were trying to do was completely incompatible." When they parted company in 1996, he had already been talking to Air France for 18 months.

Turbulent is probably the best way to describe CityJet's history to date. Since its establishment in 1994 the company has lost £17 million. In 1996 it was put into examinership and creditors wrote off £6 million of the £8.4 million debts. Accumulated losses were £13 million.

It also saw the entry of another investor, Swedish airline, Malmo, which exited the following year, following a row over future strategy. The purchase price for Malmo's 43 per cent stake has never been disclosed, but Mr Byrne says it was "cash neutral".

On the face of it, he says, the involvement of Malmo initially seemed like "a marriage made in heaven". They had the same aircraft - Baa-146's, there were obvious synergies and cost savings. However, he says Malmo "for its own reasons" did not want CityJet to pursue the development of its business with Air France. There was a "huge row" and they parted company.

However, his shareholders - Mr Byrne has virtually no stake in the company following its dilution when the company went into examinership - always wanted the company aligned with an airline.

The new investment follows the collapse of a deal earlier this year when an Australian company tried to buy 60 per cent of CityJet. National Jet Systems (NJS) had offered £3.5 million for the stake and had proposed a radical overhaul of the company. This was to include 100 redundancies as well as selling or ceasing operations on the London route and dropping the East Midlands route. However, the CityJet board rejected the offer.

The Australian company would also have had a problem regarding EU regulations which prohibit non-EU nationals from holding a majority stake in an EU airline. However, the current CityJet chairman, Mr Paul Coulson, had written to the Australians suggesting a way to side-step this.

Mr Byrne says he did not agree with the Australian company's radical measures. For example, he says, the London route is very profitable now and has matured well. The slots are a valuable asset and developments such as the Millennium dome and a planned new conference centre in the London docklands, as well as the extension of the Jubilee line, will only serve to enhance the airport as a destination.

Mr Byrne believes it would have been madness to sell or cease operating the route at this stage for these reasons as well as the fact that the company had invested substantial monies in its development.

The Australian company also wanted to shelve the East Midlands route. He says the route lost £2 million in nine months. "I see it as an investment because it has to be developed, the Australians saw it as a huge loss."

Business on the route is growing and Mr Byrne believes it will become profitable. Demand from East Midlands to Dublin is strong but, he says, Irish people do not know where the East Midlands is, so the company has begun marketing the destination through promoting the cities within its reach such as Derby and Nottingham.

Air Foyle, the company's new majority shareholder, would not be known to consumers. Air Foyle is a privately owned company based in Luton and has previously done work for Easyjet, the low-cost airline based in Britain. It operates a fleet of BAe146 freighter aircraft on behalf of worldwide courier company TNT. It is also an air cargo operator transporting outsize loads.

Air Foyle's annual turnover is around £50 million sterling (€76 million) and it is "very profitable" according to a company spokesman. Air Foyle Charter Airlines, a subsidiary, provides wetlease and flight operations managementservices to scheduled and charter operations. Industry sources say the company, although not large, is a well-regarded operator within the aviation sector.

Mr Byrne says Air Foyle, whose founder Mr Christopher Foyle becomes chairman of CityJet, will not be involved in operating routes on behalf of the company. It is an equity investment and the company will of course provide expertise and advice. "Air Foyle have always wanted to get involved in a scheduled passenger airline," he says, "and they like the relationship with Air France because it represents a lower risk."

With Air France, he says, the company will remain a "pro-frills" rather than a "no-frills" airline. It will, he says, continue to have business and economy class, as well as a business economy class for price conscious corporate customers.

Mr Byrne admits he has had a very tough stewardship and that many mistakes have been made along the way. CityJet was under-capitalised from the beginning, he says, pointing out that Ryanair lost £28 million in its first five years of operation. The company also erred badly by targeting only the business market when it was set up. "We realised then, that in order to provide frequency [of flights] you have to have business and leisure passengers."

Despite its chequered history the company now has debts of only around £700,000 in the form of an overdraft. Although, as one cynical financial observer remarked: "That's not surprising `Sure who would have lent them money?' " Yeoman which currently holds 30 per cent and Standard Life (20 per cent) will see its shareholdings diluted. The upside for Yeoman, in particular, is it will continue to gain from providing leasing to finance the aircraft.