Regionals need a new business model
 

Commentary

Paradise Lost

U.S. regional carriers must find a new business model to survive

Aviation Week and Space Technology
February 13, 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 horror 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 across large swathes of the country. But despite the low-key brand awareness, most U.S. passengers have a first-hand experience of regionals as legacy carriers are becoming increasingly reliant on these smaller operators for feed.

Those feeder contracts used to be lucrative, with the majors assuming most of the risk while providing near-double-digit margins for a slew of 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 (above), 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 that saw it emerge 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, itself a stalwart of fiscal sobriety that is now posting consecutive quarterly losses because of that very acquisition. Elsewhere, Pinnacle Airlines' future is bleak after recently noting that just two of its contracts—both with Delta Air Lines—are viable, and Republic Airways' journey into mainline branded operations has traveled almost full circle as it attempts to offload Frontier Airlines. Worryingly, Republic last week also promoted its relationship with AMR Corp., which only 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 Arizona-based 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.

And that is the crux of this sector's problem—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 from their suppliers, which included the regionals. But this bandage does little to stanch a systemic problem that plagues the regional airline industry. It simply cannot survive on 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 earlier 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, according to 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.

Good, now lets get rid of them altogether and get all that flying where it belongs in the first place: majors.

now only if the majors would holdout for scope... they are the reason the regionals are here in the first place. cant have the cake and eat it too.

agreed. plain and simple.

Yep. Kpia to kord should be at least a 737-500. Maybe a 319 kpit to gso?

OMG the sun will not rise in the morning. We are all doomed to lose our jobs! Every regional will fail!

What a crock of crap. The truth is only 1 airline has ever made a profit over a long stretch of time and thats WN. Even their glory days of profit are over. In the end, planes will move and pilots will fly. Who we are flying them for will probably change, but the planes will move none the less.

We need more happy posts on here. There's a pilot shortage coming....LOLOLOLOL!

Remember the days when Pan Am and TWA ruled the skies and there were a handfull of trunk carriers flying the rest.

It that circle of life thing. Just saying :rolleyes:

Here is the thing. There is something the majors don't want to do. Fly smaller aircraft to medium and small sized communities. So regionals in some form or another will be around in the future. How big they will be and what aircraft they will fly is the big unknown.

If by "the majors" you mean mainline management, it seems to me that they have no desire to actually get their hands dirty operating an airline at all. Whether it be on a peer-to-peer level (oneworld, Star Alliance, etc.), or on a regional feed relationship, I think they'd just rather compete sub-contractors against each other on a rolling basis to keep contract costs down and reap bonuses every quarter.

If by "the majors" you mean mainline pilots and their union representation, I think, and HOPE, that they have learned from past mistakes made on scope. Hundreds of pilots are furloughed from mainline and flying at regionals making half the pay they were previously on the same routes. Futher, thousands of pilots have joined the airline ranks in the past 10 years with severely diminished career expectations because of the collapse of mainline scope restrictions.

I don't think it's a strertch of the imagination to see that all pilots would benefit if all of this flying was operated at the mainline level.

Is this sarcasm?