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.

On the front of regional losing business and others getting more, or simply the reshuffling, where is the news in that?

It's nothing new nor revolutionary. USAir was playing their express carriers off against one another over a decade ago. When UAL went into BK, it was nothing but a reshuffle where the existing feeders lost in one form or another. DAL/NW followed suit.

Old news. At least it's finally getting some attention though.

I agree. Kind of like in the World Series of Poker when half way through the main event there were two or three players with mega stacks that contained a large percentage of all the chips in play. Those players never made it to the final table. Playing "big stack" poker never works in the end.

Kind of pathetic that a mainline company has to borrow money and cut a deal with one of it's regional partners. I think that speaks volumes about the type of leadership at UAL these days.

I didn't realize they had to borrow money from SkyWest. That IS pathetic...

Don't know about "had to borrow money", since UAL expects to end this quarter with 3 billion in cash. More like it CAN borrow money from a regional....."you want the contract? you have to pay". The majors are in the driver's seat. The regionals will play ball, or end up like Mesa.

It's pathetically sad either way you look at it when pilot jobs are auctioned off like a commodity. I think Mesa is an example of how bad it can go, chipping away at every possible expendable operating cost leaving an empty shell of a company with an embittered, fatigued, and labor-abused pilot group. I think CEO's need to take back a look at what happens in the long term by treating employees like garbage.

UAL borrowed that money from SkyWest at 11% interest! The loan was guaranteed by ground equipment! That doesn't sound to me like a loan on UAL's terms! It sounds like they "had" to get the money. Additionally, it's a LOAN not a PAYMENT. How is that "paying"?

Please cite your source on the $3B cash...

US Air has done the same thing from AWA and RAH to a total of close to 35 million I believe..

In the streets of Brooklyn, we call that a shakedown. UAL is the pimp, Skywest is the hoe!

ASA needed to do something with the CRJ 200's that DAL is kicking out next year so UAL agreed to take them on, but only with a little sweetner. Its not personal, just biznez. I sure would like to see the terms of the new XJT agreement. I heard there were 6 bidders!! As for the 3 Billion, here is your source..... from the CFO about a week ago

"Today we issued an update to investors on our financial outlook, commonly referred to as “investor guidance,” for the fourth quarter of 2009. This update is part of our normal practice as we approach the end of each quarter. To see the full update, you can go to United Airlines - Investor Relations Home..........

Lastly, I want to highlight our cash position. We expect to end the quarter with an unrestricted cash balance of approximately $3.0 billion, which is about $500 million higher than what it was at the end of the third quarter. This balance does not include roughly $250 million from financings completed in the fourth quarter that will fund in early 2010."

jsled, not necessarily doubting you, but the link you provided makes no mention of $3B in cash. Can you point me to a SEC filing or a press release that specifically states that? Your quote looks like some sort of internal memo... hardly a credible source.

And what do you think about the 11% interest rate. That's loan sharking compared to a typical loan rate. Add up the interest of $80 million at 11% compounded interest, then tell me with a straight face that SkyWest got hosed!!!?

As for XJT, I hear they are doing the flying at a loss. They want to stop the bleeding from all the parked planes. Flying them at a loss costs the company less than just keeping them parked.

I'd say it's the other way around. I've heard inside information that UAL actually secured a credit line of up to $300 million from SkyWest, the $80M was just the up front loan.

11% is lower than the 175mill@ 12.75% notes(that were issued at a discount so they yield 17%) United issued earlier this year..........

John,

You have to scroll down to "investor updates". It is dated Dec 17...here ya go..

http://phx.corporate-ir.net/External...R5cGU9MQ==&t=1

Still dispute the 3 billion? and that is unrestricted.


As for the interest, look at the DAL credit line issued in Sep...9.2% I believe and UAL's latest was 13%!! Major airlines are not a good risk. I suspect Skywest had to make the loan to close the deal, and who is to say this deal won't be operated at a loss? What else would ASA do with those jets?

Ah unsubstantiated rumors, so yummy! First off how on earth does anyone know that isn't part of XJT's top management? Secondly, XJT has been scraping by for years now so I doubt they could honestly take a deal at a loss just for the sake of flying airplanes. Unlike SkyWest or Republic they don't have a billion dollars sitting in a bank for a rainy day. The flying will be done for a profit, even if it's a razor thin margin.

I don't know where you get your information from but I was told (to my face) by our VP of Flight Ops that the United deal is profitable at a certain block hour level. We have already surpassed that level with our projected block hour numbers for the summer and United continues to add to those projected block hours every week, hence why we are having to recall and determine where the new base will be. Our profit margin is lower than our historic margin but that is what the regional airline business is morphing into, less profits and higher quality requirements. The key is XJT is paying 1/2 price for the already discounted lease rates for our aircraft, that coupled with the size of our fleet allows us to operate at a lower price. I know you guys like to assume that we are doing this at a loss but XJT has the lowest cost per hour of any 50 seat operator right now for various reasons. Our UAX operation will not only be cheaper than the others but we will also have wifi, power outlets, and XM radio on our aircraft which will give us a better product. The only reason we are able to underbid everyone is our lease payments that are currently 50-60% lower than any other 50 operator which was part of our new CAL CPA, that coupled with the size of our fleet makes each 145 very very cheap. Glad to see XJT and ASA get new flying and hopefully it is a trend that will continue.........

Can you cite a source to this? I know that with the new CPA with CAL at the rates XJT was forced to accept due to attempted SKW buyout, it is at a loss at current aircraft utilization, it is at a loss.

As for doing flying at a loss because of parked airplanes, isn't that the same reason why SKW got a deal with UAL to fly 13 out of 20 parked airplanes?

The way that deal was explained to me is that the new CAL CPA was a completely different payment model than what XJT was used to. Before it was a cost+10% payment plan which is now a flat hourly rate. The reason it was unprofitable is that the flat hourly rate doesn't make money if CAL gives us low block hours. With the recession CAL cut us back about as far as they could possibly go without getting rid of airframes. So in the end XJT paid the leases but didn't get much money from CAL as they flew the airplanes relatively little.

Now that UA is thrown into the mix the block hours of the entire fleet will bring them into profitability. Hypothetically, if things go the other way and the planes are pushed to their limits then XJT's profits would be at it's peak.

Really???:confused:

Yes. It is good when higher paid pilots replace lower paid pilots.

I know where you are going with this and yes I agree it would be even better if lower paid regional pilots are replaced with higher paid mainline pilots. But that is out of our control.......this is a good thing that higher paid pilots are getting more flying even if it is just a baby step. I look forward to the day mainline pilots wake up and stop outsourcing to regionals but that day has not happened yet.

Yes, the CPA was the same CPA SKW had negotiated with CAL. Except that the CPA SKW had negotiated with CAL included cost savings from the synergies of getting rid of duplicate jobs, economies of scales, and 16% pay concessions (which included implementing PBS, getting rid of our B fund, and other work rule changes) from the pilots plus 700 furloughs. Thus the block hour rate is too low for the amount of block hours that CAL had forecast to begin with. This is why the CPA was later amended to include an a minimum block hour reimbursement. Not to mention other things such as that the charter would have been closed down, SKW pilots would have taken over the DAL CPA flying, and SKW would have used 25 XJT aircraft to fly for CAL under a separate CPA, and CAL would have the ability to put the 205 aircraft CPA up for bid in 12 months. All while giving up scope as well.

Well... actually... the latest rumor is that we're sending them to Vietnam.

I can't. That's why I said "I hear". I'm hearing it from our management. I guess all the managements know what they bid and what each other bid.

Glad to hear. Good luck, and enjoy that ORD winter. Power outlets and XM! WOW! Mesa could never compete with that! ;)

Is that the same management that, in April 08, said XJT would file for BK in 6 months (when the CAL CPA was up for "bid")?

It can't be any worse than these Northeast winters can it? (If true than I do not want to know ;) )

Um... yeah. It's worse. Just as much snow, but a lot colder.

Yeah right outsourcing is in their DNA it will never stop as long as wide body guys are happy. Only change I see is less LCC. Now skywestt and republic are here to stay and I hope down the road they don't repeat mistakes from the past. One more thought kywest and republic will merge oncemainline drop em

Rhino, to clarify, it's not "new" flying really. It's "new" for XJT and ASA, but it's just UAL canning one of their current feeders that does a crappy job and replacing them with somebody else.

Yep, in a perfect world, ALL that flying would be going to back to UAL mainline.

Tell me, you REALLY see UAL doing that?

yes it is. its also the same management who's 'business plan' was hoping that mesa would go out of business. they've been planning on this for 2 years plus and it isn't working out too well for us.

they also were the ones who continued to hire well into '08, after most everyone else stopped, because they were so sure we were going to grow. we haven't grown in 6 years. so if that is where JP's sources are, i can see why he's always confused.