Some things like mobile phones and airfares shrink over time. Others like bandwidth, deficits, waistlines and aircraft sizes grow.
Once upon a time, the role of regional airlines was relatively clear and business models were fairly well understood. Then, regional carriers operated smaller aircraft. Back in 1989, 70% of the aircraft flown by carriers under the European Regions Airline Association (ERA) had less than 40 seats and over 30% of them had 19 seats or fewer. These aircraft either connected secondary and remote airports, or linked those airports to major hubs.
But the arrival of 50-seater regional jets in the mid-90s changed all of that. The combination of new aircraft and the comparatively lean structures of regional carriers with low costs gave majors a cost-effective way to serve thin spokes on their major hubs.
It also led the way for growth in the average size of regional aircraft. By 2001, the sub-40-seat share of ERA fleets dropped to only 17%. Today, it is below 12%.
Meanwhile, regional feeders in the USA such as SkyWest and Republic Airways prospered on the back of lucrative capacity purchase agreements. In 2006, SkyWest recorded an operating margin of 11% and its rival Republic grew its fleet from 18 aircraft in 2000 to 163 in 2006, while posting consistent profit growth.
Fast forward to 2012, and 50-seater jets are emphatically yesterday's solution and today's problem. Their higher seat costs were initially offset by moderate fuel prices and modest yield premiums. But the sustained rise in fuel prices and the seemingly permanent shift in short-haul yields, brought about by low-cost carriers, have turned this asset into a liability. The US majors' Chapter 11 bankruptcy filings have allowed them to nullify their 50-seat contracts and gain pilot scope clause concessions to operate 70- and 100-seater aircraft with lower seat costs, adding on to the grim outlook.
The healthiest US regionals are scrambling to cope by restructuring their businesses. SkyWest's margin may have dwindled to just over 1%, but the carrier is still doing better than its US regional peers - American Eagle and Pinnacle are in Chapter 11 bankruptcy, while Republic works to restructure its loss-making Chautauqua subsidiary. At the lease rates of 2006, low utilisation levels of 2012 and heavy maintenance liabilities of 2014, the 50-seater jet has become an out-and-out toxic asset.
If the US regional market is suffering its own subprime crisis, the outlook is not much better in Europe. European regional carriers face a near-perfect storm of challenges. Industry-wide external factors like fuel prices and taxes, coupled with changes to network carrier strategy, are leaving them high and dry. There is also the fear that the impending EU slot regulation (in the form of the Airports Package) will squeeze them out of major hubs.
Historically, European regionals have survived by focusing on the convenience and proximity of local airports. But now, many of their historic point-to-point routes are challenged by low-cost carrier competition and improved rail links, since many travellers prefer sacrificing convenience for a lower headline price in this price-driven world.
Hub feeding, another important market segment for regionals, is under threat as European majors struggle with the profitability of hub networks. European legacy carriers face fierce competition from low-cost and Gulf carriers. Yield pressures from low-cost carriers are pushing the legacy carriers' short-haul business into the red, while market share gains from Gulf carriers are jeopardising large parts of their profit from long-haul connecting traffic.
Air France is a case in point as it struggles to put its house in order. The carrier's results for the second quarter of 2012 illustrate the problem. While long-haul revenue per available seat kilometre (RASK) increased by a creditable 6.4% (ex-currency) year on year, European and domestic RASK fell by 3.0% in the same period. Fixing the profitability of short- and medium-haul flying, is "priority number one", according to Air France-KLM group chief executive Jean-Cyril Spinetta. Thus, Air France is undertaking radical restructuring by handing some regional operations to its low-cost subsidiary Transavia and merging three of its French regional subsidiaries, while eliminating 21 smaller regional jets.
So is there any hope for the regional sector? Regional carriers that can combine favourable cost bases with efficient aircraft (eg modern turboprops or larger regional jets) can still play a useful role in assisting their network-carrier partners. An extreme example would be Austrian Airlines, which transferred its entire operation onto Tyrolean's air operators' certificate to benefit from the smaller carrier's flexible labour contracts and lower cost base.
Some independent regional airlines can successfully maintain their niches, especially when protected from competition by geographical or operational constraints. As average aircraft size increases, new opportunities arise for carriers that can identify profitable niches for smaller aircraft, or can benefit from acquiring toxic assets at marked-down prices.
Airline managers are a hardy species and regional airline managers are arguably the hardiest of all. Regional airlines may not face extinction and niche regionals may even thrive. But in a world with fuel prices of $130/barrel, constant yield pressure and economic austerity, it is hard to avoid the conclusion that the "mainstream" regional sector is joining the list of "things that shrink over time".
Patrick Edmond is managing director of Dublin-based aviation consultancy e2consult which advises airlines, airports and industry stakeholders