Regional Airlines Will Have to Adjust

All airlines, be it a major, a low-cost, a commuter or a regional can trace their ancestry back to the fledgling days of aviation when airmail was the event that nurtured the industry through their infancy to today's environment of niche airlines.

Prior to 1978 all commercial aviation industry routes, fares and schedules were governed/regulated through the Civil Aeronautics Board (CAB). The Airline Deregulation Act of 1978 phased out the government's control over airfares, services and routes. Thus it created an "Open Skies" policy. The focus was on concern for the consumer. Deregulation and its by-product of competition has led to ticket discounting and flight availability resulting in flying now becoming a primary method of interstate travel between large cities worldwide. Key dates and events for regional airlines was the development of the hub-and-spoke network in 1978, barriers to entry being lifted in 1980 and ticket price freedoms in 1983.

What the regionals bring to the marketplace is the ability for the population located in smaller and rural communities to travel faster, farther and cheaper then if they were to use the more traditional method of rail and highway. The regional airline market is growing and Federal Aviation Administration statistics reflect that as of the 2nd quarter of 2004 nearly 129 million passengers have flown on regional airlines; that is up 18 percent from a year ago.

Regional airlines have transformed from small, independent, fixed-base-operations with a few piston and turboprop aircraft to billion dollar-a-year companies. The number of passengers flying between any two points, yield and airport facilities drives competition for this niche market. While competition among the regional airlines is healthy and industry trends show profits across the board, it is the major airlines that are shaping the dynamics that regionals operate in. This is being done by forcing regionals to take on "Scope Clauses" which in essence are artificially imposed barriers on the size of regional jet's being flown. Where free market principles dictate that all airlines should be allowed to optimize any given flight, regardless of market or time of day, with the specific aircraft type of their choosing, such a concept does not apply to regional airlines.

Aircraft manufacturers are being forced to produce small-capacity jets in the 70 to 100-seat range that meet the growing demands for high density short-haul air travel. The majority of US major carriers are being limited to operating these types of airframes until scope clauses are amended to relax current restrictions. Since the 1978 Deregulation Act, passengers have shown a marked preference for nonstop flights. This propensity for direct flights has resulted with the major airlines elimination of wide-body jets such as the B747, DC10 and L1011 from domestic operations. To fill the void are more versatile aircraft such as the A320, B737, MD80 and B757.

With regional airlines continuing to increase their share of the traffic, it's not surprising that 65 percent of North America's airports depend exclusively on regional airline service. There were 90 regional airlines in the market entering 2004. Regional airlines will remain strategic partners for the major carriers by providing economical service to hub-and-spoke airports and allowing the majors to maintain a market presence (networking). The regional airlines fleet of aircraft is rapidly expanding, increasing load capacity, flying longer segments and providing greater flexibility and operating efficiency to the customer.

Regional airlines compete on the bottom end of commuter carriers and above the business jet class. The business jet is no longer viewed as a pricey perk for the executive. Rather it is viewed now as a cost-effective alternative to dealing with security issues and waiting for flight departures within the hub-and-spoke system. The business jet can fly direct and is cost effective if used properly. After two years of decline, the world's manufacturers delivered 392 new business jets through Sept. 30, 2004 that is up 10 percent from a year ago.

Major airlines are burdened with high labor costs; unions protecting salary; compensation; benefits and pension obligations are draining financial reserves. In a market where unstable fuel costs and excess capacity equate to a loss of operating capital, allowing regionals to fly to a hub-and-spoke results in passengers waiting to board at the next gate. Regional carriers can fly short hops more profitably than the major carriers they serve, largely because they have lower labor costs and make more money for each mile their passengers fly, they also operate on a point-to-point system, flying between smaller cities and the hub connection, they don't share the cost burden of running the hubs they feed.

Pilots and flight attendants on regional carriers typically make less money than workers with the same seniority at mainline carriers. Although regional carriers have been in existence since the beginning of the passenger aircraft they have gained a significant role since the terrorist attacks of 9/11. Major airlines have not been able to fill aircraft since 9/11; the regionals by flying to hub connections allow the majors the ability to fly between large cities resulting in a bigger payload per flight.

Major airlines have created an ecosystem of regional airlines that feed off the legacy carriers. Major airlines operate under the archaic notions that tend to revolve around their desire to focus on national and international routes. This focus on loftier goals has the major airlines essentially pushing business down to the regional airlines. Regional airlines have not only benefited from the short routes they receive but also from the legacy carriers paying them a guaranteed return. The relationship is one where the major airlines cover the day-to-day costs for fuel and marketing and in exchange, the regional airlines ensure their routes are run on time.

As of January 1st, 2004 there was major, commuter and regional airlines serving 654 US commercial airports and of that number 479 airports were served exclusively by regional airlines. Over the past five years, regionals have taken on a more prominent role, adding planes and delivering more passengers under lucrative contracts with the major airlines. Of the top 22 airlines listed as safest to fly between Jan 1981-Jan 2004 listed by Plane Crash Information and the FAA; 10 are regional airlines.

The Way Ahead

During 2003 regionals collectively registered a profit margin of 13.2 percent. The major airline network carriers with which they contract registered a 9.2 percent loss.

Airlines Profits & Losses
  • Regionals: $201.7 million
  • Low-cost: $57.7 million
  • Major carriers: -$1.31 billion
*Source: Department of Transportation

Travelers and communities have a stake in how economic pressures reshape the regionals. One in six domestic airline passengers use a regional carrier, and hundreds of communities across the US depend on them as their only link to the worldwide air travel network.

Regional Airline Passenger Characteristics
  • Approximately 65 percent are business travelers
  • Prefer boarding via loading bridges
  • Desire planeside baggage checking to save time at origin and destination
*Source: Regional Airline Association 7/20/04

Regionals while making a profit since 9/11 have not thought creatively. Under contracts signed in the past five years, their profit margins have been locked-in, they have seen these profits range from 8 to 14 percent. The regionals have been paid a fixed fee per departure, an allowance for miles or hours flown, and a negotiated markup to include reimbursement for fuel costs.

Regionals are slowly breaking out from under the major air carriers' umbrella and are starting to fly independently; examples are those of Atlantic Coast Airlines and Independence Airlines. Where Atlantic Coast Airlines decided to end its ties with Delta and fly under its own colors and has remained solvent, Independence is now seeking affiliations as a United Airlines regional partner. In the ever-changing market place major and regional carriers are increasingly crossing into each other's flight paths.

The future of regional airlines tends to be centered around:

  • Low fares. Discount airline will continue to force airfares to the lowest average since deregulation. Low fares have lured more passengers aboard.
  • Regional airlines. Jets are replacing turboprops. Regional airlines will therefore pick up additional routes handed off by cost-cutting big-airline partners.
  • Full planes. Major airlines will need to eclipse their 2003 record of flying their planes 74.2 percent full on average.
  • Future aircraft development. Regional airlines will have to adapt and take advantage of manufacturer production of the 70- to 100-seat airplanes, a size bigger than common regional jets, but smaller than the smallest planes typically flown by major airlines.
  • Limitations of air traffic control system. Free flight advocates would have you believe that this is not an issue, however air traffic control is in direct correlation to more flights, greater frequency and on time arrivals. The FAA must continue to be proactive, and the regionals have a major play in this arena.
  • Regulatory cost burden. With major air carriers being so volatile to bankruptcy this is an area where the commuter and regionals will have to pay more in order to operate in the aviation industry.
  • "Scope clause" restrictions. These restrictions are artificial boundaries and are reminiscent of the days when the CAB was enforcing regulations and dividing not only classes of travel but also sectors of flight. Big brother is not the federal government but rather the major air carrier.

Loading