Old models for US regionals under pressure in downturn

Washington DC
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Capacity purchase models that served as the backbone of US regional airline operations for the late 1990s and in the current decade are eroding as economic uncertainty dictates little growth under those current schemes.

"Historically in times like these, again characterised by low demand and low fuel prices, there historically has been a fairly significant growth as our network carriers eliminate loss making mainline flying by taking out their older less efficient aircraft and replacing them with regional jets," says chief executive officer of US regional operators Republic Airways Holdings Bryan Bedford.

But he cautions that is not the case in the current business cycle, as the bad news is the company is not seeing a huge uptake in demand for larger regional jets yet. Roughly 75% to the company's total capacity for 2009 is allocated to E-170/175 aircraft ranging from 70 to 78 seats.

"It's our view that until the business climate becomes stable, we just don't anticipate any growth under the current capacity-buy model," says Bedford. "And so for those reasons we are going to forecast limited growth for 2009. Now over the past nine years Republic has maintained over a 40% compound annual growth rate."

Republic's projected capacity growth for 2009 is set to fall from 13.2 million available seat miles in 2008 to 13.1 million. Its fleet count is dropping from 221 at year-end 2008 to 208 in 2009 as three additional E-Jet come onboard and 15 50-seat regional jets exit the company's fleet. All of those aircraft are exiting operations for Continental - 10 Bombardier CRJ200s being returned to lessors and five Embraer ERJ-145s being subleased to a Mexican carrier.

Counting five partners in its stable - American, Delta, Midwest, Mokulele and US Airways - Republic is the most diversified US regional operator. Bedford explains the company is operating below contract minimums with one of those partners, but there's an adjustment mechanism that makes Republic "whole economically".

The company's other partners have responded to reduced demand by scaling back aircraft use on a day-of-week basis as part of tactical scheduling adjustments to accommodate traffic levels on peak and off-peak days. "That's fairly consistent throughout the entire range of partners we have," Bedford explains.

Acknowledging the "tough hill to climb in 2009" given Republic's lack of growth, Bedford says Republic is having to spend more time examining ways to "run the business better " being more creative in developing new opportunities within the current business model".