And so regional markets continue to boom. Equipped with a multiplying fleet of new regional jets and an increasingly free hand from the majors, most regional carriers again turned in double digit traffic growth in 1998 and made profits to match.
The growth shines through in this year's Airline Business passenger ranking of the world's top 100 regional carriers. The results show that passenger numbers rose again by close to 10%. Neither has the expansion been at the expense of performance. Load factors edged up despite the hectic growth rates and profits appear to have improved again. It is not always easy to glean financial performance among regional carriers - often privately owned or subsidiaries of larger groups. But a tentative ranking of those for which results are available suggest that the sector's operating margins rose above 7% last year- a clear three or four points ahead of the airline industry as a whole.
Yet this growth also brings with it questions over when and if the runaway success will start to hit its ceiling. One fundamental factor surrounds how much further the majors will be prepared - or allowed - to let regional affiliates continue raising the scale of their operations.
To date, the constraints have largely lain with the limits imposed on the majors by their pilots unions - keen to ensure that the low-cost affiliates do not encroach too far on mainline flying. More than one USmajor is now brushing up hard against the scope clauses enshrined in pilot labour contracts (see P66). The world is waiting to see how much more ground, if any, they may be prepared to yield.
Among the more anxious onlookers are the regional aircraft manufacturers, proposing to take their regional jets above 90 seats if and when the unions allow. The smaller regional jets have clearly swept all before them. Two years ago the industry's orders for regional jets outstripped turboprops for the first time and in 1998 they extended their lead with 78% of new sales.
Walter Coleman, president of the US Regional Airlines Association (RAA), says there is much discussion among members about the extent to which the regional jet will affect the US network. "It is going to change the national transportation system. There's no reason to stick to the historic markets anymore." To what extent the network will change, he says, is a subject now being aired.
The Federal Aviation Administration in its latest long-range look at US air transport, suggests that the growth in the scale and scope will continue. It reports that regional enplanements rose by more than 7% last year to hit 66 million and is looking for similar growth again this year. That number may slow over the next three years as the US economy cools, but is still expected to outstrip mainline domestic services at 5.2% a year. Financial performance, too, has been strong. The US regional industry ended last year with its seventh consecutive quarter of improved operating profits. Margins came close to 10% on sales of $6.1 billion.
The fastest growing of the new style jet-equipped feeders have done better still, with passenger enplanements running at twice the industry average. Stars such as Comair and Atlantic Southeast Airlines (ASA) have been turning in profit margins at above 20%.
Such groups are likely to continue to thrive, as the regionals follow the pattern set by the US majors and consolidate around a handful of powerful groupings. Since the start of the 1980s, the number of regional operators has come down from over 250 to little over 100 and the outlook is for the trend to continue.
"There is no reason to assume that the trend towards further consolidation of the regional industry will not continue for at least several years," say the FAA.
The top 10 feeder groupings now account for close to 90% of regional US traffic, with the leaders emerging as powerful strategic players in their own right. American Eagle, US Airways Express and Delta Connector groupings each carry over 10 million passengers a year for their respective mainline groups.
AMR group's American Eagle subsidiary passed the $1 billion revenue mark a year ago - a figure which could virtually qualify it as a major itself. Comair also climbed above $650 million last year, while Mesa Air Group and ASA are over $400 million. Beneath them the likes of SkyWest, Atlantic Coast, Mesaba and Trans States are rising fast.
Growing US groups
In short, the regionals are becoming attractive to buy and too important to lose. The point has been underlined by the deal-making over the last year. The AMR Eagle group has completed the acquisition of Business Express, having tied up the loose ends by bringing together its subsidiaries more tightly under the American Eagle brand. Delta is also in pursuit of ASA and holds a comforting minority stake in Comair, while others too have been tidying up their feeder groupings.
It is worth pointing out that as a result, some of the groups now quote figures only for their regional grouping as a whole (such as American or US Airways), while others still report by individual carrier. Across the border the two Canadian majors are a case in point. Both have established regional groupings around the 4 million passenger mark, but independent passenger figures also still given by the individual carriers that make up Air Canada Connector (Air BC, Air Ontario, Air Nova and Air Alliance). In this case, both individual and group figures are included in the ranking.
"No-one really anticipated the Delta or American moves, but there is certainly consolidation going on. It has been stable for a long time, but I think there may be more of the same coming," says Coleman. The spurs to such restructuring are not hard to trace.
First there is the fear among majors that rivals could take control of key regional partners. However careful American Eagle was to point out that its new Business Express acquisition would "initially" remain as a separate business and continue its codesharing with other carriers, it is still now controlled by AMR. Fast-growing independents such as Trans States and Skywest (now a United feeder) are no doubt being watched closely.
The second concern among the brand-conscious majors is to ensure that these regionals maintain the expected levels of service. "They want to be sure they are providing a consistent and desirable product to the passenger," says Coleman. His point is echoed by Doug Abbey, president of AvStat Consulting in Washington DC: "A number of major carriers had let their affiliate partners fall below their own service levels. These partners need to be reliable."
One major falling out has already taken place as Mesa Air Group went through a nasty break-up with United Airlines. Mesa had operated 80 of its fleet of 186 aircraft in United Express colours under two codeshare agreements: one on the West Coast through the WestAir subsidiary and the other with Mesa Airlines in Denver and on the West Coast.
Following the collapse of the United codeshare, the group saw its passenger numbers drop 36% last year. Its finances were also on the slide, posting some rare red ink among the sector's otherwise healthy financial results. Under a new management team, Mesa has instead employed its new regional jet fleet for US Airways Express and on own-brand operations. Neither was it long before the restructured Mesa announced plans to acquire fellow US Airways Express operator, CCAir.
It is not just in North America where the regional sector is becoming more interesting. Further south in Latin America some sizeable groupings are emerging while consolidation within some of the domestic Asian markets has been gathering pace over the past few years. This year, Taiwan's UNI Airways - itself majority-owned by EVA Air - climbed up the league having completed its merger with Great China Airlines and Taiwan Airways. China Airlines is in the process of restructuring its own regional operations around Mandarin and Formosa.
The majority of the carriers heading up the top 100 ranking are owned wholly or partly by the mainline partners for which they fly. The extent of the ties with the majors is reflected by the fact that barely more than half of the carriers in the ranking (51% to be exact) now fly under their own name or flight code.
European franchises
After a late start, the US franchising trend is clearly gathering full force across the Atlantic. British Airways, which started the experiment six years ago, last month signed up its tenth franchisee, Base Airlines in the Netherlands. Its franchise network is more or less on a par with the US majors, now up above the 13 million passengers a year mark. That includes GB Airways, British Mediterranean and South Africa's Comair, which are not strictly within the regional definition used in this survey since they operate mainline aircraft.
But such distinctions are becoming more difficult to draw and definitions are likely to blur as pressures increase among the regionals to raise capacity. Both British Regional Airlines (BRAL)and Cityflyer Express have thought out loud about the eventual need to take the next step into the bottom of the Airbus or Boeing ranges. In terms of services offered, it is arguable that the Deutsche BAand Air Liberté subsidiaries are regional operators despite their larger fleets. That, together with BA's own "regional" operation, would take the total passenger numbers well above 20 million.
As in the US market, Europe is having to navigate its way through pilot labour negotiations, but the trend towards larger aircraft seems irresistible.
The newly released report from the European Regions Airline Association (ERA) shows that its members averaged a 12% increase in passenger numbers last year. A significant part of that rise came from the increased utilisation and capacity of faster, larger aircraft.
Average capacity for the European regional fleet is up at 62 seats per aircraft, while the ERA notes that the regional jets, which account for over 40% of the fleet, continue to achieve 400h more utilisation a year than their turboprop counterparts. The regional jets have also helped take average sector lengths up by another 3% to reach 517km (280nm).
The FAA forecast paints a similar picture for the US industry, with average aircraft size and trip length each expected to increase 2% annually through to 2010. That would take the US fleet's average aircraft seating from just over 33 seats to above 42 and extend average trip length from around 390km to close to 500km.
Also, like their US counterparts, Europe's regionals are becoming highly profitable and attractive propositions, as witnessed by a series of share flotations and acquisitions over the past year. The European flag carriers, too, have been watching closely.
While BA was happy to stand aside as BRAL safely launched on to the markets - separating itself from British Midland in the process - the UK major was quick to step in to acquire Cityflyer, its original franchisee, when it came up for sale, so safeguarding a valuable tranche of slots at crowded London Gatwick.
Swissair also continued its pursuit of equity alliances through into the regional sector, with a deal to take 44% of Air Littoral. Led by its own Crossair subsidiary, Swissair's European-based Qualiflyer alliance can muster an array of sizeable regional carriers, together carrying around 9 million passengers a year.
KLM, which already owns most of its regional partners, consolidated its brand name in March by painting its name and colours on independently owned franchisees Air Engiandina and Air Alps. This followed the admission last year of regional partner Eurowings to the frequent flyer programme of KLM-Northwest-Alitalia alliance.
Air France, meanwhile, may be able to catch up with Europe's other major airlines in the regional franchise game. Following a new pilots agreement it has a free hand to go ahead with plans to double franchising traffic. Its independent franchisees such as Jersey European, Brit Air and Gill Airways have been thriving as the network grows.
Growth continues
The ERA believes that the boom still has room to run. "We do not see any reason for growth to be less strong this year," says Andrew Clarke, assistant director of air transport policy. "There are a number of threats on the cost front, but none of these will have an impact in 1999," he adds.
He lists the European Commission's expected environmental penalties, wage pressure and shortages of pilots and engineers, as well as a rising training bill for replacement staff.
New rules on pilot flying times are also imminent, but again will take time to feed through into hard changes in cockpit.
The regions carriers continue to suffer from serious delays, which remain stubbornly high. On-time performance fell to 58% last year, down two points on 1997, and 8% of flights were delayed by more than 1h - with air traffic control attracting a large slice of the blame.
Another of the big issues ahead will be the opening up of the eastern European aviation market, which is set for 2003, says the ERA.
While the current restrictions are hampering the growth of western carriers into eastern markets, the eastern European carriers themselves are simply struggling to survive.
With limited growth possibilities, the difficulties of finding finance to modernise their ageing fleets and develop new routes is amplified. Slov-Air of Slovakia has recently suspended operations due to lack of finance.
Dac Air of Romania suffered the same fate last year. "It is a tough market to be in," says Clarke.
However, some appear to be profiting from the tough times east of the Elbe. Russian regional Sibir is reported to have increased its traffic in a contracting market, by taking over three failed airlines last year and it has plans to become a major regional airline, by continuing its strategy of absorbing more indebted Russian carriers. In Poland, LOT's regional subsidiary Eurolot is also bucking the trend in the East. It has doubled passenger numbers since start-up in mid-1997 and its 12 aircraft order will make it Embraer's first customer in eastern Europe. Asian crisis
Looking further east to the Asia Pacific carriers, there were signs of fallout from the lingering economic downturn. Across the passenger rankings as a whole, the passenger share of Asia-Pacific shrank from over 10% last time to just 6.7% in 1998. Europe increased its share to above 30%, but it is North America that continues to account for over half of the world's regional.
To an extent, the Asian fall may have been exaggerated due to a lack of figures from a number of key regionals, including a couple of major names in Australia, but the general trend seems clear enough from some weak individual performances. Indonesia's Pelita saw traffic tumble dramatically and where there is rare red ink on the financial returns, it has tended to come from the South Pacific and a few airlines in Latin America where economies were also quick to catch the Asian flu.
But in the world at large, and the US market in particular, regional growth seems assured at least for the next year or three.
Source: Airline Business
