Phew. It was a tough negotiation, as all union talks are. A strike was avoided only after presidential intervention. Nobody is entirely happy with the outcome. But there is a palpable sense of relief throughout the industry that American Airlines and its pilots have, at last, reached an accommodation.

Few would argue that a strike by American's pilots would have been a disaster for the airline industry. The short-term effects a strike would have had on American are obvious and, as always, the mere threat of a shut-down was enough to lose business for the carrier. But the real damage would have been longer term in nature.

A lengthy strike, followed by further concessions by management, could have left American with a cost structure which put it at a serious competitive disadvantage. Furthermore, it would have been an open invitation for employees at other airlines - all of which are paid less than American's to start with - to take an equally hard line with their own managements.

During a euphoric period of record industry profits, it is always very difficult to persuade employees that further sacrifice is needed. When a company like American's parent, AMR Corp, announces net profits of $1 billion, it is natural for employees to demand a share in the form of higher salaries and better conditions, and to resist management attempts to cut costs. Yet in such a cyclical industry an airline the size of American ought to be making at least $2 billion in a good year to help offset the poorer results during periods of recession.

American seems to have successfully persuaded its pilots, who will continue to enjoy the best working conditions in the US industry, that it needs to restructure its short-haul operations by allowing its American Eagle regional subsidiary to operate jets.

The trend towards offsetting more feeder routes to regional carriers, including jet operations, is rapidly intensifying. The Regional Airlines Survey in this issue of Airline Business shows that the 100 largest regional carriers increased their passenger traffic by over 13 per cent last year, double the growth rate of the airline industry as a whole. Among the regional carriers which divulge financial data, revenues grew by over 16 per cent, again much higher than the overall industry average.

Regional airlines are growing fast because they can operate short-haul routes more cost-effectively than the majors. Hitherto largely limited to turboprop operations, the use of jet aircraft by regional carriers is mushrooming. This year's survey shows that the 100 largest regionals now have almost 900 regional jets in service, on order or on option, compared with only 250 two years ago.

In the last few years, eight US regional carriers have ordered 160 jet aircraft with options on over 360 more. More than 100 of these orders and 300 options have been placed since mid-1996. (see 'The new jet set', page 40). These orders mainly cover the Delta, Continental and Northwest affiliations; American and US Airways have not been able to participate in this trend because of restrictive union scope clauses, and United only has limited ability to do so.

The trend is obvious in Europe, too. Swissair subsidiary Crossair has now taken over all of its parent's 100-seater operations; Lufthansa CityLine is now exclusively a jet operator, with turboprop operations transferred to partner airlines which Lufthansa does not own; and carriers like Air Littoral, Brit'Air, CityFlyer Express and Manx have moved into jets or plan to do so in the near future.

The simple fact is that most major airlines cannot operate aircraft seating fewer than 100 passengers economically. Their overheads are too heavy and their staff earn too much. In many cases, employee productivity is hampered by union agreements that are designed to suit intercontinental Boeing 747 operations rather than short hops in 70-seaters.

Yet all major carriers with hubs need feed from smaller communities. Very often the market is now demanding jet aircraft because traffic has evolved to the point where larger aircraft are appropriate, or because the spoke is too far from the hub for a turboprop to be effective, or customers prefer jets, or, most important, because competitors are offering jet service. Very often, major airlines are using regional jets to 'raid' competitors' hubs, by linking a competing hub's spoke airport with their own hub.

The regional jet is now an important competitive weapon, provided it is flown by a cost-effective regional carrier. The majors that have been able to find ways of transferring these operations to regional carriers have gained a clear competitive advantage.

Source: Airline Business