ANALYSIS: USA's regional airlines adapt to market changes

Washington DC
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United Airlines’ unofficial shuttle between Washington National and Newark has long been the domain of the regional airline industry’s workhorse 50-seat jets, fitting nicely with the mainline carriers’ decade-long preference for higher frequencies on smaller aircraft.

Change is now afoot, however. United’s current schedule for the route offers a few less flights – eight instead of 10 or more – on weekdays, but with half of them operated by up to 74-seat Bombardier Dash 8 Q400s, Innovata schedules show. Similar shifts will increasingly occur across US airline schedules, as mainline carriers increase the capacity of their feeder fleets over the next two years.

American Airlines, Delta Air Lines and United, together with their regional partners, have outstanding firm orders for 151 76-seat Bombardier CRJ900 and Embraer 175 aircraft, and options for an additional 177 aircraft. This does not include six E-175s that Republic Airways had taken delivery of for American as of 29 September, according to Flightglobal’s Ascend Online database.

The aircraft are being used largely to increase the capacity of regional fleets.

Glen Hauenstein, executive vice-president of network planning and revenue management at Atlanta-based Delta, said in an investor presentation last December that eliminating “50-seat regional depth” and replacing it with fewer flights on larger aircraft would result in more “cost-efficient” flying for the carrier.

Delta plans to remove more than 40 of its 50-seat aircraft this year, with a target of operating a regional fleet of roughly 125 small jets by the end of 2015. It had 309 50-seat aircraft in its fleet at the end of June.

American has plans for similar reductions, while United has yet to disclose its strategy for its 50-seaters beyond its orders for E-175s.

Bryan Bedford, chairman and chief executive of Indianapolis-based Republic, said in July that the carrier anticipates about 600 small regional jets being replaced by 300 larger aircraft in US fleets through 2016.

He added that he is confident that the airline would be able to keep its 50-seat fleet under contract until at least 2016.

Republic had 70 50-seaters and 157 larger regional aircraft in its fleet – not including its Frontier Airlines subsidiary – with the 47 American E-175s on order at the end of June.

Utah-based SkyWest faces a more daunting challenge. “My biggest issue with SkyWest is that they fly more 50-passenger aircraft than any other airline in the world,” says Helane Becker, an airline analyst at Cowen Securities.

The carrier is beginning to address its exposure. It placed 34 larger regional jets at Delta this year – in exchange for removing 66 small jets by 2015 – but it has yet to map out as direct of a programme for its United operations – its largest mainline contractor.

The regional carrier had 519 up-to-50-seat jets, with 343 flying for United, and 199 larger aircraft in its fleet at the end of June.

“I wouldn’t be a bit surprised to see a few of the 50-seaters on the United side go away,” says Mike Kraupp, chief financial officer and treasurer of SkyWest. “The jury is still out.”

The airline’s orders for 60 “reconfirmable” E-175s– pending additional capacity purchase agreement contracts and options for another 100 of the Embraer jets – position it well to capture additional 76-seat flying.

SkyWest’s main competitors for new large regional jet contracts in the USA are Republic – where on-going contract negotiations with its pilots have forced it to sit out recent tenders – and Trans States. The remaining large regional jet operators are wholly-owned subsidiaries of mainline carriers, including American Eagle Airlines (American), Endeavor Air (Delta) and PSA Airlines (US Airways).

Rule changes

A number of new US Federal Aviation Administration training and flight and duty rules started to enter force from August this year. While these are generally seen as a method of boosting safety in US skies, some aspects are creating concerns of impending staffing and cost issues for regional carriers. The training rules include a requirement that all first officers have at least 1,500h flying time in order to hold a commercial pilot certificate. These went into effect on 1 August.

Roger Cohen, president of the US Regional Airline Association (RAA), calls the hours requirement an “arbitrary quantity trumping quality” barrier. “Instead of focusing on the kind of training that will help pilots fly ­modern airliners in complex airspace, they will be forced to get their hours the cheapest and fastest ways possible,” he says.

SkyWest’s Kraupp says that the carrier is in compliance with the new regulations because it “built the [air transport pilot] licence issue into our current training programmes”.

The new FAA pilot flight and duty requirements include a minimum 10h rest period before flights, an expanded definition of duty time – to include deadheading and other duties – and a minimum of 30h off duty every week. The new rules, which were in response to a fatal Colgan Air accident in February 2009, go into effect on 4 January 2014.

The RAA anticipates that these rules will require a 5-10% increase in the number of cockpit crew members across regional carriers in order to operate current schedules, says Cohen. Some fear that the new rules could exacerbate any coming pilot shortage. Republic has already faced issues hiring qualified crews for its Q400 operations, and both American and US Airways highlight the changes as a potential future risk to their businesses.

John Sullivan, chairman and chief executive of CommutAir, said in May that the anticipated shortage is one of his main concerns, but added that he hopes “other events” will push things in the opposite direction.

Maintaining profitability

Regional carriers are bullish on their prospects, despite the industry’s evolution. SkyWest and Republic reported net profits of $51.2 million and $51.3 million, respectively, in 2012 – a turnaround from net losses the year before. No other independent regional carrier is publicly traded. Executives at SkyWest cite a successful cost reduction programme, while executives at Republic point to the restructuring of their Chautauqua Airlines subsidiary for their respective profits.

Cowen’s Becker is a bit more sceptical, however. “You’ve got that whole cost side of the equation going in to the wrong direction if you’re a regional and you have no power to raise your fares,” she says, referring to the potential pilot shortage and the rates that ­regionals have locked in under contracts with mainline carriers.

She explains that regionals are likely to begin facing pressure in 2016 and beyond. But a 2016 or later time frame gives regionals time to adapt. “I suspect there will be more innovation down the road,” says Cohen.