Wielding the power of bankruptcy, US majors have forced their regional partners to fly for less, but given them more leeway to fly for other airlines
Against the backdrop of the restructuring of US major airlines, through three bankruptcy reorganisations, the US regional sector has seen a profound change of its own. It has in effect traded guaranteed levels for greater freedom to seek profit.
Phil Trenary, chief executive of Pinnacle Airlines, which signed a new agreement with Northwest Airlines last year, says: "We have been squeezed, but we have won the right to seek more opportunities, to diversify, and so have that much more control over our fortune and future."
Once exclusively a Northwest partner, Pinnacle has diversified by acquiring small turboprop operator Colgan Air and signing a deal to fly 74-seat Bombardier Q400s for Continental Airlines. Pinnacle has also agreed a contract to fly 76-seat Bombardier CRJ900 regional jets for Delta Air Lines.
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Now the biggest US regional, SkyWest flies for United and Delta and is adding Midwest |
The new revenue streams will reduce Pinnacle's dependency on Northwest to 70% next year, with Colgan's 30% contribution coming from three partners: Continental and US Airways at about 12% each and United Airways the remainder.
Through the latest crisis, regional carriers have gained the power to escape from their dependence on a single major airline and to operate on behalf of multiple partners, with contracts that provide reliable streams of income and balance out geographic or seasonal cycles.
Bryan Bedford, chief executive of Republic Airways Holdings, says: "Even though new contracts may be squeezing our margins, we are at our capacity. In each of our competitions we are very satisfied with our returns. If we are not satisfied with the terms of a possible deal, we just don't bid on it." Republic did not bid on new flying for Midwest or Northwest.
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Delta put flying of its new CRJ900s out to bid |
Republic's holding company structure has allowed its carriers to become regional partners to six major airlines. By the end of 2007, Republic will earn about 24% of its revenue from US Airways, 30% from Delta, 20% from United Airlines, 14% from Continental, 9% from American Airlines and 4% from Frontier Airlines.
The majors got what they wanted in the major reshuffling of flying contracts that dominated the last 12 months: lower costs. Through their powers in bankruptcy, both Delta and Northwest put almost all regional flying out for competitive re-bidding, and the downward pressure on margins spread through the industry. For many regionals, Trenery says, target margins set in the contract have dropped from about 10% to 8% or less.
At the same time their revised contracts loosen restrictions on where and with whom the regionals can do business, limitations of pilot-union scope clauses on aircraft size have been eased. "We've seen a lot of relaxation of scope and, though it isn't gone, we will see the lines of demarcation gradually moving in our favour," says Bedford. "That frees us to operate and acquire the larger Embraer E-Jets."
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Already operating the E-170 for US Airways, Republic has begun flying the aicraft for Frontier |
SkyWest diversifies
At SkyWest diversification has been achieved through the purchase of Atlantic Southeast Airlines from Delta for $425 million in 2005, a deal which boosted it to the top of the 2006 rankings (see table). SkyWest's new Midwest contract, although small at 15 aircraft initially, will grow and help to diversify it away from its reliance on two majors, Delta at about 65% and United at about 43% (by capacity).
The need to find new places and ways to fly has led some regionals to try corporate flying as charter operators and toward the risky path of flying their own in so-called branded operations. ExpressJet, after Continental cut 69 Embraer ERJ-145s from its contract, is placing 42 aircraft in its own colours on point-to-point routes.
Few regional executives are optimistic about this experiment, with SkyWest chairman Jerry Atkin calling it "risky at best" and Pinnacle's Trenary saying "that's probably not something that we would look at". ExpressJet's planned to use the remaining ERJs for charter flights, but a new 18-aircraft feeder deal with Delta will take all but nine of the surplus ERJs.
Mesa Air Group has been the most daring diversifier. Not only will it fly for as many majors as it can, Mesa also flies for itself on small community services and has embarked on two offshore adventures: a standalone Hawaiian low-fares operation dubbed Go! and a regional jet venture in China. Mesa will own 49% of Xian-based Kunpeng Airlines, which should begin flights later this year with three CRJ200s.
Mesa chairman Jonathan Ornstein dismisses sceptics. "We are desperately serious about Hawaii and we are making a go of Go! And we see enormous potential in China, with perhaps 20 aircraft a year coming into the operation. We're big enough that we can try very different strategies". At Mesa, the split is now 41% from US Airways, 36% from United, 17% from Delta and the rest from other contract flying and independent Go!
With the return of some semblance of stability to the US majors, SkyWest's Atkin says regional growth may moderate. Raymond James and Associates analyst Jim Parker agrees, predicting the extraordinary rates of 2003-5 - which reached between 16% and 30% annual capacity growth - will moderate this year to just over 2.6%.
Growth slowed considerably in 2006, says the Velocity Group, a Washington DC-based aviation consultancy. Scheduled enplanements increased by only 3.1% from 2005 levels. "The last time regional airlines posted single-digit aggregate passenger gains was in 2001," says Velocity Group partner Doug Abbey.
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New watchword
The key drivers of recent regional growth - new aircraft deliveries - have all but evaporated, Abbey says. Instead the industry is "rearranging the deckchairs", with the major airlines reallocating codeshare franchises between the same dozen or so regional carriers. Cannibalisation is likely the new watchword, he says.
"What drove the growth was the 50-seat regional jet, in huge numbers, and that is not happening," says Abbey. "It is going back to how it was prior to the regional jet revolution, and with no impetus for growth it is a stagnating industry." Regionals have become interchangeable commodities - "vendors competing against other vendors", he says.
What is barring regionals from returning to double-digit growth rates, Abbey says, are pilot scope-clause restrictions that mean the "natural progression of the regional industry fleet - from 50-seat to 70-seat and ultimately to 90- or even 100-seat jets - is no more than a pipe dream". This could become critical if airport congestion leads to renewed calls to limit regional operations. "Without the ability to up-gauge aircraft capacity, most operators will have few options," he says.
Source: Flight International
