Rebecca Rayko / FLORIDA
In a period marked by substantial losses among the major airlines, US regionals are reporting strong results for the second quarter. Several regional airlines, including Atlantic Coast Airlines (ACA), were not only profitable, but showing signs of earnings growth year over year.
Regional airlines are somewhat insulated from the slowing US economy because many have entered per-departure contracts with their major airline partners.
ACA is now flying all of its flights under contract, compared with none at this time last year. With an operating margin of 14.3% for the second quarter, ACA has demonstrated the merits of contract flying, says Mike Linenberg of Merrill Lynch.
Other regionals report similar success as they shift from pro-rate flying to contracts. Mesa Air Group has announced a 37% increase in revenues from contract flying for the quarter. In two years' time, up to 90% of its passenger revenues could be derived from contracts. Chief executive Jonathan Ornstein says he prefers the stable earnings generated by contract flying over the higher, yet volatile, margins associated with pro-rate flying.
Doug Abbey of AvStat Associates comments: "While revenues may not reach the levels of the past, the stability helps insulate the airlines from the volatility of pricing."
Regional airlines are also reporting strong profits due to their more favourable revenue mix. The high levels of frequency provided by regional airlines is well suited to the business market, and margins tend to be better because regionals typically carry a larger percentage of higher yield business traffic, says George Hamlin, an analyst with Global Aviation Associates.
So far, the regionals appear unaffected by falling business travel levels and seem almost immune to the announced slowdown of capacity growth by the majors last month.
The new-found stability brought about by fee-per-departure flying could leave regionals set for modest growth even in troubled economic times. As well as contract flying, the large number of regional jets being delivered is prompting growth for this sector. "The challenge will be to control expansion in a high fuel price environment," Abbey says.
Source: Flight International
