US regional carriers brace for a bumpy ride caused by rising fuel costs and consolidation among the majors
US regional airlines face an uncertain future as they attempt to help their network partners battle fuel prices per barrel hovering in the triple digits and potential consolidation triggered by the proposed merger of Delta Air Lines and Northwest.
"A lot of the capacity in the marketplace is not working," Republic Airways Holdings chief executive Bryan Bedford told the Regional Airline Association annual convention in Indianapolis in early May.
Bedford, who this year is also chairman of the RAA, says the turbulent environment "affects all operators, all equipment types and all hubs". He adds no operation is immune and he sees "no end" to the issues that the US regional industry is up against.
 |
|---|
"A lot of the capacity in the marketplace is not working" |
As regionals move proactively to help minimise the disruptions fuel costs and consolidation are causing network carriers, some operators, especially the independent publicly traded companies, face the task of pleasing two masters. Bedford says Republic has to ensure the company works with its major partners to accelerate their objectives without "crushing our ability" to deliver a return to its shareholders.
Other regional carriers are not frightened by shrinking in the short-term to ensure their long-term competitiveness. Horizon Air is shedding 20 Bombardier CRJ700 regional jets during the next two years to transition to a single fleet type - the Bombardier Dash 8 Q400 turboprop. Horizon chief executive Jeff Pinneo told the RAA convention the carrier would respond to industry uncertainty through proactive adjustments even if that means "reducing the fleet to get stable footing to grow again".
The chief operating officer of SkyWest Airlines, Russell Childs, is choosing to remain optimistic throughout the current turbulence, explaining the turmoil could result in additional business opportunities for regional airlines. In the short-term, SkyWest faces operational headwinds as fuel costs have forced major partner Delta to drop utilisation levels on some 50-seat CRJ200s flown by SkyWest to contract minimums, and those levels seem to be the norm going forward.
SkyWest chief financial officer Brad Rich characterises the lowered utilisation rates as a "vulnerable spot within our business model", explaining that SkyWest not only loses revenue but still incurs costs because in most cases it does not have time to adjust its cost structure to the reduced flying levels. The USA's largest regional saw its unit costs during the first quarter increase 6% year-over-year as profits dropped 16% to $29 million.
Fuel is also forcing Trans States to re-examine its 50-seat jet strategy. The carrier's president, Rick Leach, explained that with fuel prices at record highs "creative opportunities" triggered by lower ownership rates are "a little more challenging than a year ago". But Leach remains optimistic that it "will work hard to find creative solutions for our partners".
While 50-seaters are being singled out by major carriers as unprofitable in the current environment, operators of larger regional jets are also not immune from the pressures of high fuel costs and other facets of US industry turmoil, including bankruptcies. The April bankruptcy filing of Frontier Airlines accelerated discussions between that carrier and Republic to end the 76-seat Embraer E-170 flying Republic began last year on behalf of Frontier. Bedford characterises the Frontier situation as the "biggest challenge we face". Republic now has 17 E-170s coming offline with Frontier and is examining options for the aircraft, including sales to foreign operators.
Republic's efforts to secure business for the E-170s exiting Frontier are occurring as SkyWest attempts to initiate consolidation in the US regional sector. SkyWest, which purchased ASA from Delta in 2005, recently offered to buy Houston-based ExpressJet to broaden its partner base beyond Delta, United and Midwest Airlines. But ExpressJet, which flies 37- and 50-seat regional jets for Continental Airlines and last year launched an independent scheduled operation under its own brand, rebuffed the offer.
Consolidation among regional airlines occurred on a smaller scale last year with the purchase of small turboprop operator Colgan Air by Pinnacle Airlines. But fuel prices are creating challenges for that tie-up in the short-term. Pinnacle chief operating officer Doug Shockey said that it is paying as much as $5 per gallon for fuel in some stations. Fuel is not a pass through cost in the pro-rate flying Colgan performs with 19 and 30-seat turboprops for United and US Airways.
Colgan's fuel cost per gallon rose 54% during the first quarter, which was one factor that contributed to Pinnacle earnings tumbling 71% to $3 million. Still, Shockey says Pinnacle does not regret its Colgan purchase and remains confident of its competitive position in the future, which is partially built around the 70-seat Q400 flying Colgan began in February for Continental.
As US network carriers move towards consolidation through the proposed Delta-Northwest tie-up and speculation of follow-on deals continues to build, regional airline leaders are all too aware that consolidation will reshape their business, but also understand combinations among the network carriers are necessary to ensure the viability of the industry. "We view consolidation as a good thing, a necessary thing," says Pinnacle chief executive Philip Trenary. "It is something that needs to happen if our industry is going to be viable."
Source: Airline Business
