RAA Convention 2006: Regional-mainline partnerships lose some of that loving feeling

 - September 19, 2006, 11:01 AM

While at first it seemed hard to reconcile the rather dark and anxious mood of last year’s RAA Convention in Cincinnati with double-digit profit margins and record revenues, by the end of the three-day event it became clear to everyone what regional airline executives had seen coming for years. The heyday of so-called cost-plus agreements that guarantee a profit had passed, and with it the rather quaint idea that the interests of the regional airlines necessarily corresponded with those of their major airline parents.

As we approach the opening of this year’s gathering in Dallas, evidence of the changing nature of the relationships between majors and their regional affiliates continues to mount. No longer can regional airlines single out the infamously hard-edged United Airlines as Continental, Northwest and Delta try to extract cost concessions from their regional partners with a level of zeal once thought peculiar to UAL. Today, once iron-clad partnerships have turned into uneasy acquaintances, making a strong industry association capable of advancing the interests of regional airlines all the more vital.

Although she stopped short of endorsing any reference to her member airlines as mere commodities, RAA president Debby McElroy agreed that the relationship between the sectors has assumed a much more antagonistic tone of late, and not just at the level of individual code-share partners. For example, as the FAA prepared to issue its proposal for budget reauthorization, the regionals appeared likely to break from the majors on support for some key aspects of the funding plan.

Although few in the airline industry would argue against imposing user fees on business aviation, the Air Transport Association’s (ATA’s) support for a system of set fees based on the number of takeoffs and flight time, regardless of the number of passengers, does not sit well with the regionals. A system that takes no account of aircraft weight would not only shift more of the cost burden to business jets, but it would especially affect high-frequency RJ and turboprop operations, they argue.

Although by the time AIN went to press the FAA hadn’t yet released its proposal, it seemed almost certain that it would propose a user fee of some kind. However, regionals worried that the agency might shy away from considering aircraft weight in its proposal because the simpler the formula the less costly it becomes to administer. Furthermore, the FAA cannot easily calculate its true cost of handling a given flight; it can only formulate a proxy based on controller workload. Of course, the ATA didn’t lose sight of that fact when it devised its proposal.

Although McElroy said the RAA would not issue an official position until the FAA went public with a proposal, a graduated fee structure based on weight, such as that used by Nav Canada, certainly appears favored over the simpler formula the ATA espouses. In fact, McElroy has invited Nav Canada president and CEO John Crichton to speak at the convention about how his agency’s funding mechanism works.

“What the [RAA] board has agreed is that whatever system is developed cannot disproportionately increase regional airline cost or disadvantage small community air service,” said McElroy.

Unless business aviation somehow absorbs all the costs the ATA wants shifted away from the major airlines, that wish will no doubt go unfulfilled. As a result, it seems certain that the regional airline industry as a whole will find itself at odds with major airline interests after years of gradual assimilation into the mainline system.

Reassessing Code Shares

“As go the majors so go the regionals,” became the mantra at RAA conventions in recent years. While that remains true to a degree, “the majors” and “the regionals” never operated as monolithic entities, and individual regional airlines have done a masterful job of spreading their risk among multiple mainline partners. But as regionals cut their exposure (with differing levels of success) to their mainline partners’ ills, the majors have begun to reassess their own tolerance for risk related to their code-share contracts.

So when the ATA says that fee-per-departure arrangements will take into account the extra costs the regionals would pay under its FAA funding proposal, don’t believe it, warn those intimately involved in negotiations over new code-share contracts.

“Cost-plus agreements are done,” warned Cape Air chief executive Dan Wolf last year in Cincinnati.

“We’re coming full circle,” added Comair president Fred Buttrell. “The majors don’t want the risk any more.” Buttrell should know. Since assuming the top post at the Cincinnati-based CRJ operator in place of the deposed Randy Rademacher in January last year, the former Delta Connection president has watched Delta sell off fellow subsidiary Atlantic Southeast to SkyWest, strip Comair of 26 percent of its fleet and instigate a new round of cost-concession demands that might well have led to a strike and maybe the end of the oldest regional jet operator in the U.S.

After all, the likes of Mesa Air Group and Republic Airways present cheaper and often more flexible alternatives. With today’s glut of 50-seat regional jets and plenty of operators willing to fly them, the major airlines enjoy a range of choices like never before. If Comair can’t deliver what Delta demands, someone else will.

Air Wisconsin certainly learned that lesson the hard way when it refused to yield to United’s contract demands last year, prompting UAL to end their 12-year relationship. Fortunate to find a would-be partner fishing for investors in US Airways, Air Wisconsin nevertheless saw its transition to the US Airways Express system result in a more than 20-percent cut in passenger traffic.

Others to have felt the sting of major airline “cost realignment,” such as Mesaba and Pinnacle Airlines, still haven’t yet completely run the gauntlet, as Northwest prepares to open a new wholly owned Northwest Airlink regional dubbed Compass Airlines. Over the past seven months Northwest has terminated leases on 12 of Mesaba’s Avros, grounded 14 of its Saab 340s, halted deliveries of a total of 30 CRJs to both airlines and asked for bids from several other regionals to fly jets carrying up to 76 seats.

Meanwhile, relations between Houston-based ExpressJet and Continental Airlines reached a new low point last month, when the major airline notified its long-time regional partner that it intended to withdraw 69 of the 274 Embraer jets from their capacity purchase agreement and award the flying to Chautauqua Airlines starting in January.

As in the case of Mesaba and Pinnacle, ExpressJet finds itself in a particularly vulnerable position because it doesn’t fly for any other major airline. Although it could continue to sublease from Continental any of the 69 withdrawn aircraft at lease rates that run 200 basis points higher, it can fly into Continental’s hubs only under its Continental Express agreement.

In response, ExpressJet has laid plans to take its business all the way to Europe, where it holds a 49-percent stake in JetX Aviation, a start-up enterprise involving former principals of defunct Irish regional airline JetMagic. To operate under the name ExpressJet Europe, the airline would introduce capacity purchase operations to the continent, possibly with the Embraer ERJ 145s due for withdrawal from the Continental system.