Regional Airlines Get Wings Clipped by Big Pa
 

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Regional Airlines Get Wings Clipped - WSJ.com

google it. good story!

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.

Other regionals are stepping up efforts to provide service under their own banners or entering alliances with large discount airlines. For the past three years, Mesa Air Group Inc. has run an inter-island carrier in Hawaii called go!.
While go! is still producing operating losses, those losses are narrowing. In September, SkyWest Inc., the No. 1 regional operator by passengers, won a modest contract to operate five planes for discounter AirTran Holdings Inc.
In their bread-and-butter business, however, competition remains fierce. SkyWest, based in St. George, Utah, recently extended its existing contract with United Airlines parent UAL Corp., and won the right to place 13 additional jetliners into United service early in 2010. In return, SkyWest said, it agreed to loan United $80 million for 10 years and defer $49 million of payments United was to make to SkyWest. A spokeswoman for SkyWest declined to comment on the concessions.
United recently chose not to renew a regional contract with Mesa, and ended up putting most of that business with ExpressJet, the No. 5 regional carrier.
But Houston-based ExpressJet had to compete with six other airlines for the contract. Moreover, in the first nine months of this year, it flew 7.3% fewer hours than a year earlier for its biggest client, Continental Airlines Inc.
Mesa, the No. 6 regional carrier, is hanging onto a contract with Delta Air Lines Inc. only because an appellate court affirmed an injunction barring Delta from terminating the deal. But a series of reversals has hit Phoenix-based Mesa. Its stock is trading at 12 cents, compared with $12 in early 2006.
Mesa CEO Jonathan Ornstein said some big airlines continue to treat their regional carriers as partners, but "others have taken a much more adversarial approach."
The regional carriers together flew 159 million passengers in 2008, up from 78 million in 1999.
But as the domestic airline industry cut capacity by 11% over the past two years—first to cope with surging fuel prices last year, then with the recession—the regional airlines found themselves with too many airplanes as well as planes with uneconomically high lease rates.
Mr. Boyd, the industry consultant, figures that the number of regional jets in the North American fleet will decline to 1,390 next year, down 17% from 1,675 in 2008.
By 2017, he thinks the number will fall to 800. The poor economics of 50-seat jets don't help. With fuel still pricey, planes with fewer seats "burn up all the profits" halfway through a flight, he said.
Bill Swelbar, a researcher at the Massachusetts Institute of Technology's International Center for Air Transportation, thinks Republic and SkyWest have staying power.
But troubles in the sector could result in more consolidation, leaving four big providers in the end, he says. "The question is who's going to be the third and the fourth," he adds, and whether there will be capital available to the survivors.
Mr. Boyd said travelers will notice few service gaps as the sector continues to shrink. But some of the ambitious nonstop flights between small cities and hub airports will be dropped because they don't make money, so passengers–as in the past–will have to make connections.

'Bout time!!

Lets hope the outsourcing stops well before 2017 too.

"Mesa CEO Jonathan Ornstein said some big airlines continue to treat their regional carriers as partners, but "others have taken a much more adversarial approach." "

You mean like the way Mesa has always treated its employees?

Amen! Sucks for all my buddies still there, but it's been a long time coming for JO

I am not convinced that Republic will be one of the survivors.