The capacity purchase agreement (CPA) dominates the regional airline industry in the USA.
Every carrier from niche CommutAir with just 21 turboprops to giant SkyWest Inc with more than 700 aircraft live on these agreements with a small - or no - percentage of their flying done at their own risk. Like it or not, today's regional industry is a CPA business.
But the model is not without its flaws.
CPAs encourage mainline carriers to look for the cheapest safe flying that they can find - often going for the regional carrier with the lowest labour costs at the expense of well established airlines with decades of experience. Pilots at Comair at least partially attributed the decision by its parent Delta Air Lines to shut it down last September to the fact that the mainline carrier could source feed more cheaply from newer regionals like Trans States-subsidiary GoJet Airlines.
Cincinnati-based Comair began flying in 1977 and operated as a feeder for Delta since the mid-1980s. GoJet began service in 2005.
Helane Becker, an airline industry analyst at Cowen Securities who has covered the industry since the 1980s, says that regional airlines "sold their souls" for protection from fuel price volatility and the other ups and downs of the industry, during a speech to regional airline executives at the Regional Airline Association (RAA) annual conference in Montreal on 7 May. She argues that the ability to control inventory is the main issue facing the carriers.
"The regional industry needs to recapture control of the product," she says. "It's not good to have to worry about filling seats, maximising load factor and volatile fuel prices but the negative is you become beholden to your major airline partners. It's probably better to be in control of your own destiny and take some of those risks."
Becker says that this would allow regional airlines to more effectively invest in aircraft and manage maintenance, labour and other expenses over the long-term, compared to under the typical CPA, which is often less than 10 years.
History provides ample examples. Colgan Air, which was bought by Pinnacle Airlines in 2007, was known for submitting low bids and signing CPAs that could not cover its expenses as operations expanded. The fight to keep flying while maintaining low costs led to Pinnacle's own bankruptcy restructuring in 2012, as well as similar cost cutting efforts outside of chapter 11 at SkyWest Inc and Republic Airways.
"Until we have greater clarity on our labour costs it will be very difficult for Republic to compete for any new business," said Bryan Bedford, chairman, president and chief executive of Republic, on the opportunity to operate up to 70 Embraer 175s for United Airlines during an earnings call on 30 April.
Not everyone is against the CPA.
John Sullivan, chairman and chief executive of Burlington, Vermont-based CommutAir, says that CPAs still work and cites the fact that the carrier just extended its two agreements with United through 2018.
"I guess Helane hasn't run an airline fully at risk," he says at RAA. "The fact is that these major carriers offer us a lot. We have adopted their identity and they do all the advertising, staff stations [and] have the reservations systems."
The logical conclusion to this argument is a regional industry that is more balanced between CPA and at risk flying. It is currently skewed - for better or worse - towards CPAs at the behest of mainline carriers but some regionals maintain small at risk flying portfolios that could expand if they so choose. SkyWest is an example of a carrier that has both CPA and at risk operations.
Opportunities are likely to emerge for regionals in markets suited to 30- to 50-seat aircraft as mainline carriers upgauge their contracted fleets towards 76-seat aircraft. For example, Fort Lauderdale-based Silver Airways has begun flying to Greenville, Tupelo and Laurel/Hattiesburg in Mississippi, and Muscle Shoals, Alabama, under a codeshare with Delta after the major dropped its CPA service to the cities when it removed less than 50-seat aircraft from its fleet.
Cape Air operates entirely independent of mainline carriers except for two ATR 42-300s that it flies out of Guam under a prorate agreement with United Airlines. It codeshares with JetBlue Airways and other airlines on the majority of its routes elsewhere, including in the Caribbean, midwest and New England.
"We're starting to think that the light at the end of the tunnel is not a freight train," says Becker on the state of the industry. However, it may be too early to say just what that light is.