Plans for flotations and progress on scope clauses are still in the balance as US regionals watch the majors restructure
For regional airlines, there is no joy in the disaster befalling the major carriers even though in the past the smaller sector has profited from troubles at the majors. Even as regionals grow, they face the challenges of rising fuel costs and a newly invigorated enemy - the car, made more attractive by security hassles and taxes and fees that on a short flight are more of a deterrent than ever. And even as major retrenchments present new opportunities, the restructuring at the network carriers is delaying some changes.
Certainly, the growth trends of recent years have continued. Analyst Jim Parker, a leading observer of the regional scene at Raymond James & Associates, calculates that by the middle of 2002, regional jet flights were increasing at an annual rate of 41%, while those of narrowbodies were falling by 16% and widebodies by 5%. By year-end, regional jet schedules grew by 34%, compared with a 3% fall for narrowbodies, 3% growth for widebodies and a 22% decline for turboprops.
Nearly a half of all route announcements made in 2002 were for first-ever non-stop flights - such as Newark to Oklahoma City - according to Doug Abbey of the Regional Air Service Initiative (RASI) trade group. He says: "Regionals are focusing on the addition of new city pairs, the majority of which were never served non-stop before."
Abbey adds: "Surprisingly, the number of routes where regional jets replaced mainline aircraft accounted for only a small proportion of all new service, about 9% of the total." So the early trend of using regional jets to replace turboprops has fallen, as regional jets become both replacements for mainline carriers and providers of new service, with 26 US airports receiving their first-ever scheduled service during calendar year 2002.
Regional jets can replace an entire hub. When America West pulled down its Columbus, Ohio, operation, a mix of regional and mainline jets, Delta Air Lines moved in, but only with regional jets.
Delta brought Chautauqua in as its feeder airline instead of relying on subsidiaries Comair or Atlantic Southeast Airlines (ASA). The major has moved to spread its feeder business around rather than become reliant on one or two Connection carriers after the lengthy Comair strike of 2001 taught it a lesson on reliance on a single connection.
American has used regional jets to rectify what in retrospect it may think was a mistake in purchasing TWA, the former TWA hub at St Louis is now predominantly an American Eagle/American Connection regional operation. Trans States Airlines, the major Connection operator there, has added almost a dozen regional jet routes replacing American routes, including long routes to Charlotte, North Carolina, and displacing most of American's mainline service to Houston.
So, the opportunities are there, but fuel is a rising cost, and the revenue side of the equation has taken a major hit as the majors, led by United, move toward lowering the set or fixed fees they pay. And at the bottom of the regional industry, the issue of small community service is more contentious than ever.
Overall, it is the bottom of the regional industry that is taking the deepest hit, according to Regional Airline Association (RAA) president Deborah McElroy, who places a lot of the blame with new government charges. She says that "because many fees are levied on a per-segment basis, regional carriers and residents in smaller communities bear a disproportionate share of the impact".
Other unique factors are shaping the industry. In two of the most promising areas regional progress has been slowed. A year ago, the possibility that their strength would lead some regionals to market, to initial public offering (IPOs), had hopes high. And a year ago, many thought that sense would prevail, allowing meaningful change to labour-contract scope clauses to be discussed in earnest.
Of the planned flotations, only that of Continental's ExpressJet has taken place, while Northwest Airlines placed on hold its spin-off of Pinnacle, the Northwest Airlink formerly known as Express Airlines I. Chautauqua, which is controlled by private investment firm Wexford, postponed its IPO as Republic Airlines.
Share price slump
ExpressJet shares fell in the months after its flotation by as much as 40%, although the carrier posted strong financial results, with an $85 million full year profit, including a remarkable fourth-quarter profit of $23 million. Its new aircraft, 18 Embraer ERJ-145XRs, boosted capacity and drove a 25% increase in revenues while pushing average stage lengths up by almost 10%. But the slump led ExpressJet to defer 27 of its 86 deliveries of the type until 2005, the first major regional jet delivery deferral.
Embraer expects to be the beneficiary of the successful US Airways restructuring since the airline is far along in negotiations toward the purchase of as many as 200 of the ERJ-170 family. Such a purchase was made possible by changes in the US Airways pilot contract scope language, a concession that took place under the pressure of its bankruptcy.
Although the scope-clause revisions contain a complex jets-for-jobs formula that guarantees regional flying to US Airways mainline pilots, it clears the way for US Airways to fly as many as 465 regional jets, a large but not yet determined portion of them 70-seats-plus. That, predicts a hopeful Embraer president Mauricio Botelho, will compel other carriers "to respond to this challenge" and revise their scope clauses to allow 70-seaters. Although the final distribution of how many big regional jets it will fly has yet to be made, US Airways made enormous strides, breaking its scope limit from 70 to 140 and then to 465 regional jets.
Industry trade groups the RAA and RASI had both planned public awareness campaigns to draw attention to the ways in which scope clauses limit air service. These campaigns though have taken a back seat to the more pressing task of survival. Another lobbying group calling itself Communities for Economic Strength Through Aviation (CESTA) continued this effort. But scope-clause reform has been achieved by force of events rather than public persuasion.
Abbey of RASI says: "A private dialogue with Congress on scope has been overtaken by events. Certainly, with the changes at US Airways and those unfolding at United, you will see changes at American because more important issues are shaping the labour agenda such as basic job preservation. In a sense, the Iraq war may be the straw that breaks the camel's back on scope."
Bankruptcy also helped United Airlines make scope clause breakthroughs. At least 150 new regional jets including large ones can be added to the United Express fleets, although details were still to be determined through United's bankruptcy process.
United's on-going bankruptcy reorganisation has led to some significant developments. It threatened to rewrite an economic underpinning of the regional industry, the fee-per-departure contract. In this arrangement, the major pays the regional this fee regardless of how full the flight is or what fares were paid - it insulates carriers from sharp increases in fuel.
However, regionals are very much affected in the long term because their major airline partners will either have to decrease the fee paid or take fuel costs out of the contract. United wants to cut the typical fee (estimated at as much as $3,571 for each regional jet departure), saying it can get others to do the flying for about three-quarters of the price. It may be considering giving more flying to Mesa, Mesaba or Chautauqua Airlines.
Credit Suisse First Boston analyst Jim Higgins says that the carrier most vulnerable to such a change would be Atlantic Coast Airlines, which flies as United Express at two United hubs, Washington Dulles and Chicago O'Hare. The regional went to bankruptcy court, asking the judge overseeing United's reorganisation to order it to clarify its contract terms with Atlantic Coast. That judge refused and United may still seek to bargain down its fee for departure.
United is the site of another very visible change in the industry: the return of Mesa Airlines as a United Express feeder. The airlines had severed their relationship five years ago in a flurry of complaints, but Mesa and its irrepressible chairman Jonathan Ornstein are back.
No matter what the relationship is between a regional and a major airline, though, the basics remain the same. As Delta Connection ASA President Skip Barnette says for any regional: "As any major goes, so goes their regional partner relationship."
Source: Airline Business