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Old 06-04-2008, 04:18 AM   #1  
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Default Forbes - The Little Airlines That Can't

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Major airlines may be putting merger talk on hold for a while, at least with each other. But don't expect them to lose their appetites for regional carriers, those small niche players in need of a serious collective cash infusion.

Times are tough for the regionals. Big Sky Airlines and Skybus ceased operations. Aloha Airlines killed passenger service, flying only as a cargo carrier. Frontier Airlines is also in bankruptcy, though industry experts aren't writing it off.

Next to join the hit parade could be Mesa Airlines, which says it will file bankruptcy soon if Delta Air Lines terminates a contract that feeds it passengers. Mesa says nixing the deal will cost it $20 million a month. The company has a $37.8 million convertible bond it's due to redeem this summer, for which it doesn't have the cash, according to Port Washington, N.Y.-based industry consultant Robert Mann.

Sky-high fuel prices mean for a lot of small airlines, competitive advantage is gone, at least for now. How can you make money as a low-cost carrier when your biggest cost is going through the roof? What's more, big carriers have wrestled better contract terms from partnerships with regional airlines in recent years. The result: lower departure fees (the majors typically pay a fee to the regional for agreeing to a flight schedule that maximizes connection traffic pushed to their flights) that have tightened up profit margins for the little guys.
"It used to be a license to print money," says Mann of regional fliers. "Not any more."

Houston-based ExpressJet, he thinks, made a mistake in spurning takeover inquiries from SkyWest, especially now that Continental Airlines has declined to renew its flying agreements for the bulk of ExpressJet's 50-seat jets. With $70 million in losses last year, what other viable choice does it have?
A possible solution: Hook up the regionals with the big guys. With large airlines cooling the merger talk among themselves right now, experts think the better play is to go after small carriers that can feed passengers to long-haul flights, especially the lucrative international routes. The regionals' small workforces don't bring the same kind of antagonistic seniority problems to a merger that a pairing of two large airlines does, so labor issues aren't likely to kill a deal.

"You're not putting two gorillas in a cage, you're putting a gorilla in with a mouse," says Marick Masters, a professor at the Katz Business School at the University of Pittsburgh who specializes in the airline industry.
Some regional airlines are hanging tough. SkyWest, based in St. George, Utah, grew profits 9.2% last year on $3.3 billion in revenue. The company's 70-seat planes, notes Mann, operate more efficiently per seat than the standard 50-seaters most small airlines use. He also likes Republic Airlines, which counts a lot of fuel-efficient Embraer jets among its 219-plane fleet. Republic turned a profit of $82.8 million last year, up from $79.5 million in 2006.

Still, the overcapacity that continues to fill the skies, along with $128 oil, means that all small airlines expect to have a tough road ahead.
"I think they'll all be looking for [merger] opportunities," Masters says.
And where do JetBlue and Southwest Airlines, two 'tweener airlines that fit somewhere between a major and a regional, fit into all of this? Experts think both can survive on their own, and Southwest, thanks to the impressive results of its fuel hedging program, has a big leg up.

Known for investing in new gates each time the majors retrench during a down cycle, Southwest will do so again this year, Mann figures. Should the U.S. Department of Transportation, as expected, take some slots away from the majors at New York's JFK and LaGuardia airports, expect Southwest to move in, giving it a foothold in a new city with lucrative routes.

Things are less rosy at JetBlue, which just announced it would delay the purchase of 21 Airbus 320A jets it planned to add to its fleet. Its shares are trading just above $4, near an all-time low. Born as a discount airline, JetBlue is raising fares faster than anyone in the industry right now. That makes the company more reliant on strong customer service and other niceties, like its leather seats and DirecTV, to deliver a better passenger experience than its competitors.

"It's now a value proposition more than a price proposition," says Mann. The good news: Other airlines won't be able to fully duplicate JetBlue's on-board features anytime soon. They generally can't be retrofitted onto existing planes, so airlines have to wait and order them on new ones. Given the current cash-starved environment, that will take a while.
http://www.forbes.com/2008/06/02/avi...als_print.html
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Old 06-04-2008, 04:22 AM   #2  
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Interesting, after all this it would be quite ironic to see a return to wholly owned regionals.
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Old 06-04-2008, 05:01 AM   #3  
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I've never understood the reasoning behind selling off the wholly owned regionals. Look at how much money SKW and RAH make off of their regional flying. Where is the benefit of outsourcing. The majors are paying more for their regional flying than it would cost to just operate it. XJT used to make a killing when all 274 a/c were devoted to CAL. I'd love to see some hard numbers on how much CAL saved by #1 selling off Continental Express and #2 cutting regional flying from XJT and giving it to CHQ.
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Old 06-04-2008, 05:22 AM   #4  
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Stick a fork in the majors, their domestic capacity is done.....
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Old 06-04-2008, 05:27 AM   #5  
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remember CHQ was more expensive than XJT so it cost them more....
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Old 06-04-2008, 07:57 AM   #6  
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This guy is beyond clueless...

The whole purpose of regional airlines is to keep labor costs low via whipsaw. Few majors wants wholly-owneds, and they sure as hell don't want to integrate them into one list
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Old 06-04-2008, 08:48 AM   #7  
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Originally Posted by rickair7777 View Post
This guy is beyond clueless...

The whole purpose of regional airlines is to keep labor costs low via whipsaw. Few majors wants wholly-owneds, and they sure as hell don't want to integrate them into one list
It isn't always about the pilots...when oil was cheap(er), Majors were watching regionals make higher profits then them using their res systems and their name to sell tickets. They wanted a bigger piece of the action, so they bought the regionals and created "capacity purchase", effectively limiting the amount of profit a regional could make and ensuring the excess went to the parent.

Of course, when oil is expensive, that means the regional is flying for a loss - no profit - and now that loss is on the major, not the regional per se, so then we get a bunch of talk about selling the regionals.

In the end, it is all about the major partner trying to angle themselves to make the most money - if times are good, you want to own your regional so that you can take their profits by forcing a lousy CPA on them (paying them far less per block hour than revenue from tickets) and pocketing the difference (they have no choice, they are wholly owned). When times are bad, you want them to be seperate companies, so you can force your lousy CPA on them (paying them even less, less than operating costs) and if they cannot slash and cut to make payroll based on the revenue the major supplies, too bad...if they go under, just RFP the flying and someone will be happy to bid. My .02
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Old 06-04-2008, 10:17 PM   #8  
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Originally Posted by rickair7777 View Post
This guy is beyond clueless...

The whole purpose of regional airlines is to keep labor costs low via whipsaw. Few majors wants wholly-owneds, and they sure as hell don't want to integrate them into one list
Reminds me of a certain regional that tried to buy another certain regional.
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Old 06-05-2008, 02:02 AM   #9  
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Look at how much money SKW and RAH make off of their regional flying.
Yeah, when you don't have to pay for fuel, it's nice....
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Old 06-05-2008, 03:15 AM   #10  
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Like AWAC, PSA, Piedmont, ASA ( SKW ), Mesa, and just about every other "regional" out there.....
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