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Interesting Perspective:

Collapse Of The U.S. Regional Airline Industry Is A Real Concern
by Darren Shannon at Aviation Week blog
2/14/2012

There are worrying signals that a significant part of the airline industry could implode in the coming months, and despite the doom-and-gloom predictions from Europe, this catastrophe is occurring on the other side of the Atlantic.

U.S. regional airlines have always been perceived as tertiary to the majors and low-cost carriers that are household names in the country. But despite the low-key brand awareness, most U.S. passengers have some first-hand experience with regionals as legacy carriers increasingly rely on these smaller operators for feed.

Those feeder contracts used to be lucrative, with the majors assuming most of the risk while providing nearly double-digit margins for a slew of regional companies. Indeed, these contracts were so healthy that regional airlines at times came to the financial aid of those same majors.

But those days are long gone, as mainline operators rein in costs, restructure the loosely written capacity purchase agreements and stringently enforce every condition of the new contracts.

The effect of these changes has been devastating. Mesa Air Group, a leading force in the growth of 50-seat jet feed in the early part of this century, is a shadow of its former self, having shed most of its fleet during a Chapter 11 protection proceeding from which it emerged last year as a privately owned company with just a handful of contracts.

ExpressJet has disappeared completely after rewritten contracts by then-owner Continental Airlines eventually forced a sale to SkyWest, once a stalwart of fiscal sobriety that is now posting consecutive quarterly losses because of that acquisition. Elsewhere, Pinnacle Airlines’ future is bleak after recently noting that only two of its contracts—both with Delta Air Lines—are viable, and Republic Airways’ journey into mainline branded operations has come almost full circle as the carrier attempts to offload Frontier Airlines. Alarmingly, Republic last week also promoted its relationship with AMR Corp., which entered Chapter 11 on Nov. 29, 2011, as its saving grace.

The viability of privately owned Trans States Holdings and Air Wisconsin is less known, although chatter from within indicates all is not well at either carrier, and while US Airways’ patronage of Air Wisconsin means the feeder will shift capacity from New York LaGuardia to Washington Reagan National Airport, it came at the expense of the major’s own regional subsidiary, Piedmont Airlines.

Piedmont’s distress is mirrored at other wholly owned feeders, with Delta’s Comair perpetually for sale and AMR’s American Eagle Airlines operation under review and likely dependent on a combination of new scope clauses and drastic cuts in fleet costs.

The regionals’ only option is to ask suppliers to share their pain. Now this is nothing new to the airline industry and the majors have asked the same of their suppliers, which included the regionals. But this temporary solution does little to stanch a systemic problem in the regional airline industry. It simply cannot survive with the current business model.

And it will only get worse. While reduced aircraft payments will provide a timely reprieve for many operators, there are other issues that need to be resolved, many of which were summarized in an internal memorandum posted this month by Mesa Chairman/CEO Jonathan Ornstein.

In that message, Ornstein warned that while his Chapter 11 reorganization eliminated some aircraft costs, the downsizing of the U.S. airline industry has produced a crew roster heavy in seniority but with a smaller fleet to spread that higher cost. Compounding this is an unexpected maintenance requirement for the airline’s fleet of Bombardier CRJ900s that the launch customer thought was coming several years from now, and, says Ornstein, new regulations that will increase fixed costs.

But the most telling part of that memo was Ornstein’s insistence that he, like his peers, is signing contracts that will never make a profit simply to “live to fight another day.” This can only ensure that the regional industry is destined for failure.

Consolidation has been a byword for the global airline business model for years, but that will do little to help U.S. regionals; in fact, it has contributed to their dilemma. Something deeper is required, but for now that solution is as absent as their profits.