Comment: When the music stops

By:  
-
Source:
This story is sourced from Flight International
Subscribe today »

The straightforward tactic for the age-old children's pastime of musical chairs is being nimbler and quicker than your competitors to escape being the last one standing. Currently, US regional airlines are playing this game. But one key question remains - what will happen this time when the music stops?

Undoubtedly the exponential growth experienced by regional carriers in the mid-1990s to the early 2000s has not continued. Now airlines find themselves jockeying for business from a shrinking pool of network carriers, based at a small number of hub airports.

With the consummation of United and Continental's merger in late 2010, just four US network groups exist, leaving fewer chairs in the game.

The result is that regional carriers with balance sheets strong enough to support scooping up their competitors, such as SkyWest, are building powerhouses to ensure the longevity of their play. To a lesser degree Pinnacle is building its own fortress to outlast its competitors through strategic acquisitions.

The mergers and takeovers have allowed those airlines to build efficiency of scale, giving them some leverage in their dealings with legacy carriers during the next few years. To an extent, the boot has moved foot.

Yet one ultimate question remains. Is positioning yourself to jockey around a shrinking number of chairs any way to build a business for the long term?

Aside from SkyWest's foray into offshore investments and Republic's diversification strategy through its acquisition of low-fare carrier Frontier Airlines, US regional carriers are largely basing their gameplans on the hope that scope clauses - inherent elements of mainline pilot contracts that constrain the number of seats on aircraft that are flown by regional airlines - will continue to dissolve.

While scope has loosened over the past few years from the tight noose of 50-seat aircraft, the cut-off tolerated by mainline pilots is 76 seats. But escalating oil prices - which have effectively killed off the smallest regional jet types - mean the sustainability of 70-seat aircraft is now under question.

If the traditional hub-and-spoke air transport system is to survive in North America, regional carriers need - almost certainly through consolidation - to switch to larger, more efficient equipment and redefine their relationships with the majors.

As far as the existing business model is concerned, the rules of the game are changing fast.