The days of US regional airlines posting margins superior to their network partners are fading as the contracts supporting those results begin to morph into pacts that force more risk on the regional operators.
Joined by his counterparts during the Regional Airline Association's annual convention in May, ExpressJet chief executive officer Jim Ream said with major carriers posting 1%-2% margins during the best of times "at some point we are going to get drawn into that economic struggle".
Putting the pressure regionals currently face into context, SkyWest Airlines president Chip Childs notes that "contract scrutiny by major carriers is as heavy and intense as it has ever been".
As a result of that high-level scrutiny, more pro-rate deals are emerging, with United Airlines taking the lead in brokering those agreements.Through pro-rate arrangements regional carriers agree to shoulder more risk, such as fuel expense, rather than passing the costs through to the major partners. Pass-through costs are the backbone of current fixed-for-departure contracts governing most regional-mainline carrier relationships.
United has recently established pro-rate deals of varying length with ExpressJet, Trans States Airlines and SkyWest covering the operation of 50-seat aircraft.
United Express vice-president operations and planning Cindy Szadokierski believes the pro-rate arrangements allow United to broaden depth of certain city pairs to support additional service, which creates extra revenue.
But those deals also supply a low-risk method for the network airline to test a new market. "A lot of what we do [in pro-rate deals] is drilling for oil for a major carrier," says Childs. "We do a better job of marketing to smaller communities where a major doesn't operate."
Trans States chief executive officer Richard Leach believes there are "various ways and methods" the shifting of risk to regional carriers can be achieved. Falling lease rates on 50-seat jets could make those aircraft more viable, and easier to operate under some pro-rate scenarios.
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Source: Airline Business
