ANALYSIS: US regionals struggle to cope with partner scheduling changes

Washington DC
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Erratic schedule changes by US major carriers in their regional operations is wreaking havoc on the profitability of the US regional sector as costs to accommodate their partners continue to creep.

Regional groups SkyWest and Pinnacle both felt cost pain during the third quarter triggered by moving crews and adding staff to support the changes imposed by their partners. SkyWest logged an additional $9.7 million in crew costs during the quarter while Pinnacle notched up an additional $5.1 million on that expense line.

The increases follow a rise of $3.8 million at Pinnacle during the second quarter and $13.7 million for SkyWest.

Speaking to analysts, SkyWest Chairman Jerry Atkin stressed the challenges in accommodating its major partners in a time of higher fuel costs with lower daily utilisation in off peak seasons while still supporting higher utilisation levels during high peaks.

"The utilisation on the smaller aircraft is a bit of a challenge and it is not defined extremely well in the contracts about how those rates move when those utilisations move," said Atkin, who explained SkyWest was in talks with its major partners about the swings in utilisation. SkyWest through its subsidiaries operates Embraer Brasilia turboprops, ERJ-145s and Bombardier CRJ200s/700s/900s.

From an operational standpoint Atkin concluded SkyWest does have some ways to mitigate the fluctuations through labour force management, but the carrier needs to determine if those changes are worthwhile once higher utilisation levels snap back into place.

"It is a practical problem we have to solve internally and with our partners," said Atkin. "It is unsolved at this moment."

During the second quarter of this year Pinnacle explained the major scheduling challenges it dealt with was migrating from hub operations for Delta in Memphis, Detroit and Minneapolis to flights in the US northeast at John F Kennedy International airport in New York and some point-to-point flying that stressed the system. The changes created challenges in movement of crews, the carrier stated.

Pinnacle stated during its third quarter earnings discussion outlining a $5 million pre-tax loss, it expects some of the inefficiencies and the related costs to be mitigated during the next three-to-six months.

"We have adjusted near-term block-hour production and have increased pilot staffing levels to address the issue," the carrier explained. "However, the cost to stage our crews as required by the operation will continue."

Both Pinnacle and SkyWest also faced expense pressure during the quarter from the integration of carriers each company has purchased as consolidation in the US regional industry mirrors the mergers and acquisitions among the country's legacy carriers.

SkyWest's subsidiary Atlantic Southeast Airlines acquired Houston-based ExpressJet last year and during the third quarter the addition of ExpressJet's operations generated almost $250 million of additional expenses.

Making a rare appearance during SkyWest's earnings discussion Chairman Atkin stated: "I realise your confidence in SkyWest has undoubtedly been tested a bit, as we announced the first quarter of 2011 as the first quarterly financial loss in a long time and have missed our own planning each quarter since then by producing a break-even financial operation in the second and third quarter."

He declared the loss and missed targets are "relative surprises to both you and us".

Atkin stated that while SkyWest believes the ExpressJet acquisition was a key strategic move, "the timing was less than ideal and has stretched ASA's capability", and disclosed the overall integration of the two airlines will likely take a year longer than originally anticipated.

Pinnacle purchased Mesaba from Delta last year after acquiring Colgan Airways in early 2007. The carrier is in the process of transferring Mesaba's Bombardier CRJ200s/900s to Pinnacle's certificate and has started integrating a pilot seniority list for its operating subsidiaries.

Pinnacle CEO Sean Menke stated due to additional integration costs and increases in labour rates, "we have seen an impact from the financial results of each of these business units [Pinnacle, Mesaba and Colgan]".

Menke described 2012 as a transition year, noting integration will account for a large focus in the first half of next year.

SkyWest expects its financial results to improve in 2012 relative to 2011, said Atkin, "but most of that won't occur until the second half of 2012". However, he predicts "notable improvement in 2013 compared with 2012".