Regional Airlines Get Wings Clipped - WSJ.com
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Regional airlines grew and prospered in the years following the 2001 terrorist attacks, taking over routes that cash-strapped major airlines eagerly outsourced to cut costs. Now, the regional carriers are losing their lift as their big-airline clients scale back on flights or pressure their smaller counterparts for better terms.
Complicating their plight, the crash of a commuter turboprop near Buffalo, N.Y., in February has cast a spotlight on regional-airline safety standards and pilot training and recruitment practices at a time when the airline industry as a whole is shrinking to cope with weaker demand.
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.The result is likely to be a shakeout, which could inconvenience travelers used to direct flights from some smaller cities. Michael Boyd, head of aviation forecasting and consulting firm Boyd Group International Inc., said he expects bankruptcies, liquidations and "shotgun mergers" as regional carriers adjust to the new reality.
Jim Ream, chief executive of ExpressJet Holdings Inc., said in an interview earlier this year that money-losing major airlines are playing hard ball with their regional partners to get them to accept lower fees. He described the negotiations as a "nightmare," and added that profit margins have become "slim."
An ExpressJet spokeswoman said Mr. Ream wasn't available for further comment. He is leaving ExpressJet this week to join AMR Corp.'s American Airlines as senior vice president of maintenance and engineering.
Until a little more than a year ago, major airlines were so keen to enlist regional carriers' smaller planes and cheaper crews to help them expand their footprints that they often guaranteed the regional carriers double-digit profit margins while the majors bought the fuel, set the schedules and sold the tickets. The regionals snapped up new planes—mostly 50-seater jets—to meet the demand.
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.The major airlines now think those deals too generous, according to people familiar with the carriers' thinking, and want their regional partners to shoulder more risk or at least share some of the sacrifice as the majors lose money.
Some of the big airlines are risking lawsuits to terminate those contracts or are putting smaller amounts of new work up for bid on tougher terms.
Others are capitalizing on the competition for their business by wresting loans and other concessions from their smaller partners.
Even regional airlines that are owned by the major carriers aren't immune from the pressures: US Airways Group Inc. recently said it will drop the service its Piedmont Airlines unit provides to 26 destinations from New York's La Guardia Airport, at a cost of some 300 Piedmont jobs.
Some regional airlines are responding by trying to reduce their reliance on the major airlines. In July, Indianapolis-based Republic Airways Holdings Inc., the No. 3 regional carrier by passengers, acquired ailing Midwest Airlines, and in October bought Frontier Airlines, which was in bankruptcy court. That has made Republic the operator of two free-standing airlines, in direct competition with some of its largest airline clients.
"It's hard to see a lot of organic growth in our core business," Bryan Bedford, Republic's CEO, said over the summer. "We have a need to grow and diversify our revenue stream."
Some analysts question Republic's strategy, given the competition its acquisitions face from discount carriers. Raymond James & Associates in a research note this month, said it expects both Midwest and Frontier to lose money in the near term.
A Republic spokesman said the carrier doesn't expect its new properties to be profitable in the first half of 2010, but sees them contributing to earnings and cash flow for the full year.