Beneath the surface of the booming US regional airline sector, there are major changes taking place that could change the future landscape
On the surface, the US regional industry continues to move along nicely, but behind the scenes there are shifts taking place that could alter the sector profoundly. Not least, is the decision by one of its largest players, Atlantic Coast Airlines (ACA), to abandon its role as a United Express feeder and strike out as a low-cost independent.
Certainly, the headline figures continue to show robust growth for the US regionals. The US Regional Airline Association (RAA) says that its members posted a growth of 15% in passenger numbers last year, taking the total to 113 million. That means that roughly one in every six US domestic passenger journeys is now being made on a regional.
Revenue traffic miles have grown even faster. The latest Top 100 Regional Airline Ranking suggests growth of close to 30% for North America's regionals last year as majors continued to hand down new routes to their regional partners. Latest forecasts from the FAA suggest that traffic growth could continue at 22% this year and 14% next. Regionals are generally profitable too. Unlike the major carriers they serve, the publicly traded regionals had net profits last year, notes Douglas Abbey, partner with the Velocity Group consultancy.
But beneath these healthy headlines there are some major uncertainties as structural shifts take place across the US air market, spurred in large part by growing low-cost competition. The pending exit of ACA, the fifth largest US regional, is a case in point. The carrier now plans to transform itself into a low-cost carrier based out of its home base in Washington Dulles International.
This means a substantial shake-up of the United Airlines feeder network. ACA carried 8.4 million passengers last year. Some 85% of those were carried for United, centred on operations at Dulles and Chicago O'Hare. That made it the largest single United Express operator. The remainder of the ACAbusiness is as a Delta Connection partner, flying out of Boston and Cincinnati.
After lengthy negotiations, ACA and United have now agreed the terms of their separation. ACA will begin moving the 50-seat regional jets out of United Express service and into its own operation beginning in June, when it starts up its new Independence Air operation. And the near 15-year marriage will be officially over on 5 August.
United has lined up some new partners - Shuttle America, Chautauqua and Republic airlines - to fill part of the gap in its regional feed. In addition, several existing United Express carriers - Air Wisconsin, TransStates, Mesa and SkyWest airlines - will take on new flying assignments.
United is hoping for a smooth transition, but it is a big change to be implemented over a short period of time. Like other network carriers, United has been relying increasingly on its regional partners for feed traffic. According to William Swelbar of Eclat Consulting, about 45% of United's connecting passengers came from regional partners last year, up from a third in the mid-1990s. United Express stood alongside American Eagle with around 18 million passengers last year, and second only to the mighty Delta Connection. What marks out the United operation is that it achieved that volume without owning any captive regional.
Swelbar notes that although regional carriers should not be seen as "cheap capacity", the majors believe their mainline services benefit from a stream of connecting feed that they could not economically carry themselves. "Regionals really are the low-cost carriers of this business," says Velocity Group's Abbey, adding that they contribute substantially to a major's bottom line.
Geoff Crowley, president of Air Wisconsin, says the United Express reorganisation should not be a problem. Flying for United since 1985, Air Wisconsin has changed its hub several times, from Chicago to Denver, then back to Chicago, and soon it will be United's largest regional partner at Washington. Contract flying enables the major partner to use the regional partner in any way it wants, Crowley says, as if it was a wholly owned subsidiary. "We're totally indifferent to where we fly," he says. "We get paid to fly and we'll fly anywhere they want us to."
ACA's contract with Delta will also end in October, with Delta expecting to assume the leases on 30 Fairchild Dornier 328JETS flown by ACA. It is in talks with regionals about picking up the work.
US Airways move
Another significant move in the US industry is the creation of MidAtlantic Airways by US Airways. The new regional jet division began operating in April with three new 72-seat Embraer 170s on eight routes initially from Philadelphia and Pittsburgh. As it continues to take delivery of aircraft - 39 by year-end - its route system will expand. US Airways also has begun taking delivery of 25 Bombardier 70-seat CRJ700s that have been assigned to PSA Airlines, a wholly owned subsidiary operating as US Airways Express.
The aircraft are the first 70-seaters to operate in the US Airways Express fleet. Throughout its bankruptcy proceeding and later, US Airways executives have argued that it needed the ability to serve smaller markets with more efficient jet aircraft and more attractive labour rates. It has the new larger regional jets but did not win all the flexibility it wanted on the labour front.
Under a "Jets for Jobs" agreement with US Airways pilots, the Embraer 170s are being flown exclusively by furloughed US Airways pilots and flight attendants. After a lot of contentious bargaining, the Air Line Pilots Association (ALPA) union agreed to wage rates for the 170 that are comparable to those at American Eagle. At PSA, half of the flying on new 50-seat regional jets goes to furloughed US Airways pilots and all of the flying on 70-seaters will initially go to the laid-off mainline pilots.
Scope clauses in major airline labour agreements - limiting the size and number of regional jets that can be flown by regional partners - continue to be a major issue challenging the regionals. "It's an albatross," says Philip Trenary, president of Pinnacle Airlines, the Northwest Airlink carrier, which was floated last year. "Scope has to be reformed dramatically or eliminated altogether."
Pinnacle, which flies from hubs in Detroit, Memphis and Minneapolis/St Paul, operates 90 CRJs, 47 with a reduced number of seats because of ALPA's agreement with Northwest. "We fly 44 seats; we could fly 50 seats or higher but can't," Trenary says. "We are irrationally constrained, and consumers are being hurt. At the end of the day, scope hurts everyone."
Crowley agrees. "The problem with our industry is that not only do we have our own labour problems, but also those of our partners." Arbitrary scope restrictions protect mainline employees' interest at the expense of the regionals and result in uneconomic operations, he says. They give the legacy and regional carriers a "double disadvantage", he adds.
While there has been some scope clause loosening, they still remain strongly in force at most carriers. A court challenge continues as a result of a suit filed by pilots from Atlantic Southeast Airlines and Comair. The two Delta Connection carriers have challenged ALPA on grounds that they favour the interests of Delta mainline pilots over Delta Connection pilots, both represented by ALPA. "There's clearly a conflict of interest," Crowley says.
Although regionals have done well recently, especially compared with their larger partners, they know they are under pressure to reduce costs. "We're basically partnered with airlines which are struggling very hard and for us to continue to be profitable, the majors need to be profitable as well," Crowley says. "So we have to work hard to keep our costs low."
He notes that United's bankruptcy gave it an opportunity to ask its regional partners for lower rates for its fee-for-departure contracts. "I can assure you they were successful," he adds. "We are all going to earn less money going forward than we did in the past, but we'll still be earning enough that we think we can maintain our business."
RAA president Deborah McElroy, points out that many regional carriers have not been fully exposed to the true brunt of the revenue shortfall in recent years since they operate under capacity purchase agreements that provide a base level of income, even if it has been reduced of late. But cost containment is essential, she adds. While the industry has seen a shift in capacity from mainline to regional flying, the same revenue stream is supporting both, she notes, and it continues to be squeezed, especially by low-cost competition. "The long-term viability of regional airlines is intricately tied to the viability of their major partners," she says.
Hub operations
Questions are also being raised over whether no-frills expansion into new markets, particularly point-to-point, will reduce the value of traditional hub operations. Crowley does not think so, pointing out that his home base at Appleton, Wisconsin, has regional jet air service to six significant hubs. "It is unlikely that the Southwests could ever justify coming into the market because they couldn't sustain the pattern of frequency and volume that they need to one point in that market," he says. "I think there are markets like Appleton throughout this country that frankly aren't large enough to have service by larger airplanes."
Both Crowley and Pinnacle's Trenary think the hub system will remain largely intact because it works. "It's the most efficient way to distribute seats," Trenary says. Crowley adds that talk of hub inefficiencies ignores the fact that they are "significantly revenue-efficient. It's probably the only way small and medium-sized communities are going to have access to larger markets and basically to the global network."
With all the current unknowns and various challenges, Crowley's forecast of the industry's future says it all: "Where are we headed? Who knows?" n
REPORT BY CAROLE SHIFRIN IN WASHINGTON
Source: Airline Business
