By David Field in Washington and Jackie Thompson in London
The regional sector is still a growth market, with revenues up by a fifth on the previous year, but fierce competition is forcing carriers into massive efforts to slash costs and raise productivity
In common with the rest of the airline industry, regional carriers are making huge efforts to emerge leaner and meaner as they struggle to cut costs and boost productivity in an extremely competitive market.
However, it remains a growth sector. Total revenues in 2005 were up by 20% compared to 2004 at just over $24 billion. The operating result for the sector was $1.32 billion, which saw regionals post a reasonable operating margin of 6.8%. However, this is down on the previous year's 7.6% margin, probably due in large part to soaring fuel bills.
The world's largest regional carrier by revenue, US-based SkyWest Airlines, even jumped 11 places in the Top 150 Airline Rankings, rising to 49th place.
But in the USA, the relentless demand from the major carriers for lower costs and cheaper suppliers has further squeezed their feeders. "It is as intensely competitive as any period I have seen, but we are entering a slow growth environment," says Velocity Group consultant Doug Abbey.
Efforts to improve productivity and cut costs have borne fruit in Europe too, while consolidation continues. Against this, however, revenue per passenger has declined by 8.5% over the past 18 months, according to European Airlines Association director general Mike Ambrose, and this, combined with fuel increases averaging 30% over the period, mean that profitability can only be achieved by greater productivity.
"Sales and distribution costs have fallen by 20-25% as internet use increases," says Ambrose. In addition, overheads are down by 11%. "All these elements have caused a lot of pain and sadly jobs have been lost," he says.
The challenge for European regionals comes from budget carriers with their lower seat costs. Airlines like Lufthansa CityLine have set tough internal cost-cutting targets this year to ensure they can survive.
The challenging climate in the USA has threatened some carriers with previously impeccable credentials. Comair, the Delta Connection regional that was long held out as paragon of managerial and fiscal virtue along with its parent Delta Air Lines, is now in bankruptcy reorganisation. It also faces labour strife and, worse, could lose its contract for Delta flying.
Delta, which has been in Chapter 11 since September 2005, put out a request for proposals for carriers to take over much of the flying that Comair does now, seeking bids for 93 jets with 50 or 70 seats, and possible future flying by up to 50 more jets with 76 seats. Comair was invited to bid on the flying, but would have to be the low-cost contender to keep the business, which will be a challenge for the carrier.
While some interpret the Delta move as simply a way to pressure Comair and its employees into lowering costs and reviving stalled cost-cutting negotiations, the major airline could in fact carry through its threat to take business away from its offspring, which Delta bought outright in 2000 for an admittedly high price of $1.8 billion.
Similarly, Continental Airlines seems set to take a large amount of flying away from ExpressJet, the Continental Express feeder that was once a wholly owned Continental unit. ExpressJet, however, may be better equipped than Comair to survive, Abbey says. Continental spun off its regional jet subsidiary in 2002 and now owns about 9% of the company.
Late last year, Continental announced plans to seek replacement carriers for 69 of the 274 ExpressJet aircraft that had been feeding its three US hubs. ExpressJet, seeking a home for the 69 aircraft that will be available next year, may submit a bid to Delta for the regional jet business.
Abbey thinks ExpressJet represents a trend that emerged this year - independent, point-to-point regional operations. He says the carrier is profitable and has the leverage to find new opportunities.
He also notes that the year has seen the rise of stronger regional families such as SkyWest Airlines, long one of the best managed regionals and topping our regional ranking by revenue for 2005 (see page 69). It has gown substantially since it acquired Delta's old Atlantic Southeast Airlines unit last year.
Bob Mann of consultancy RW Mann & Associates sums up the fiercely competitive regional world like this: "Profitability is narrower, and the haves have less and the have-nots have almost nothing." ■
Source: Airline Business