RAA’s policy influence cuts across sector lines

 - November 1, 2006, 9:43 AM

Five years as an association president might seem like a modest stint to some, but Debby McElroy has seen enough in her tenure at the RAA to last a lifetime. To watch an industry that just a half decade ago accounted for one in nine domestic flights grow to seize a quarter of all scheduled traffic must all seem a bit surreal, but as McElroy learned during her 17 years with the association, from adversity often comes opportunity, and nowhere has that proved more true than in the regional airline business.

Once seen by legislators and the public as more or less a supporting player, the regional airline industry has over the past decade turned into an indispensable part of the nation’s air transport network. Granted, even before 9/11 the so-called regional jet revolution had lifted the industry into a new stratum, but few expected the integrity of the entire air transport system would one day depend so heavily on regional airlines. As a result, the RAA has had to take a more active and wide-ranging role in influencing public policy than ever before.

“We need to be more involved in a greater number of issues,” said McElroy. “Whereas before we could often look to the major airlines and the ATA, today we get the calls from FAA, we get the calls from TSA, we get the calls from Congress, which is good and that’s what we worked to achieve, but at the same time that requires us to have more input with the members on a wider variety of issues. With a small association, you always have to pick your battles. And we have a lot more of those battles because the members are involved at a greater level in air service.”

One of the big issues the RAA must directly confront involves security fees that, according to McElroy, already impose a real strain on the regional airlines’ ability to keep costs at bay. This year the Bush Administration has proposed raising fees by $3 to a maximum of $8 for one-way travel as a key element of the 2006 Home- land Security budget. TSA chief Michael Chertoff called the hike “economically sound,” but the RAA characterizes it as just another impediment to the industry’s struggle to emerge from the mire.

“Certainly this proposal to raise the passenger fees is a huge issue,” said McElroy. “The economics are that such carrier costs are going up, you’ve got fuel, you’ve got security costs that the airports are trying to pass along with higher fees, and as a result the equation doesn’t work in a lot of these small markets.”

As if to drive another nail in the coffin of the RAA’s smallest members, the Administration has again, like last year, proposed lowering the Essential Air Service budget from $113 million to $50 million and completely stripping EAS of its entitlement status. It would also do away with the Small Community Air Service Development Pilot Program, which grants a total of $20 million a year to about 40
communities to address air service deficiencies and unreasonable air fares.

Contrary to some critics’ claims, the RAA hasn’t forsaken its smallest airline members as a result of the shifting interests of bigger regional airlines, said McElroy. In fact, the RAA played a big role in defeating the Administration’s planned cuts last year, and the issue appears near the top of the association’s agenda again this year, she said.

“The association has never forgotten the importance of small community air service,” insisted McElroy. “[Vice president of technical services] Dave Lotterer has been working a lot with the Small Business Administration when we file comments [with the FAA] to ensure there’s a better understanding within the government about the challenges 19-seat operators face.”

Unfortunately, the FAA faces “challenges” of its own, namely budget cuts. Desperate to find deficit offsets for the multibillion-dollar occupation of Iraq, new homeland security initiatives and tax breaks ostensibly designed to stimulate the economy, the Administration and Republican-controlled Congress cut FAA spending even as evidence of inadequate inspection staffing raised the specter of uneven safety oversight, most notoriously of maintenance contractors. Of course, the issue struck a resonant chord with regional airlines when the NTSB issued a scathing indictment of the FAA in its report last year on the January 2003 crash of Air Midwest Flight 5481.

Meanwhile, airlines such as Trans States and Pinnacle, both of which must open new divisions to fly 70-seat jets because of scope clause barriers, must deal with the ever more sluggish bureaucracy at an understaffed FAA. “We’re obviously concerned about the FAA budget,” said McElroy. “People are being told that the FAA is not going to be able to respond to requests for new business like new STCs or from people who want to get new certificates approved. What kind of impact is this going to have? It’s worse now [than last year] because they’re not going to be able to replace people who leave.”

Some carriers have turned to contractors to help them through the CSET process. According to airline sources, the FAA has suggested that applicants do virtually all the auditing work themselves to help the agency save its resources and move the process along more quickly. But, again, contractors don’t work for free, making an already costly process even more so.

Unless the political climate changes drastically, the industry can only do its best to soften the blow of budget cuts and look for cost-cutting opportunities from new sources. Airport fees, for example, account for a big slice of an airline’s budget, and many carriers complain that some of the smaller facilities have priced themselves out of the market with unnecessary improvements and expansion. Some airports have gotten the message, and have actually tried some innovative ideas.

For example, said McElroy, Springfield-Branson Airport in Missouri has bought its own ground support equipment to help airlines defer the cost of those services. Five regional airlines fly out of Springfield, including Comair, for which the airport not only supplies the ground handling equipment but also performs baggage handling, de-icing, lav service and interior cleaning for RON flights. As a result, Comair saves on both capital outlay and recurrent operating costs.

Unfortunately, Comair faces problems much bigger than its ground handling costs. When Delta Connection last year awarded new flying to Atlantic Southeast and independent carrier Chautauqua instead of its once favorite son from Cincinnati, it became apparent Comair’s generous employee contracts had finally begun to take their toll. Finally, in February, Comair president Randy Rademacher lost his job after presiding over a disastrous holiday scheduling snafu and failing to move quickly enough to control costs. Delta Connection’s Fred Buttrell stepped in and immediately embarked on an ambitious effort to win concessions from employee groups in return for a chance to add more regional jets.

Of course, Comair’s parent, Delta Air Lines, has problems of its own to tackle. In dire need of capital, Delta has started looking for a buyer for its Cincinnati-based subsidiary, and possibly its regional unit in Atlanta, Atlantic Southeast Airlines.

To their credit, many regionals have done well to use the opportunities presented them to prepare for the worst. A more focused effort toward diversification of code-share partnerships and largely successful cost-cutting campaigns has placed many in their best positions since 9/11. Some have done better than others, but if that fateful day taught the airlines anything, it certainly taught them to take nothing for granted.

To wit, consider the moves taken by Indianapolis-based Republic Airways, parent company of Chautauqua Airlines. Over the past year the company launched an IPO, signed a new code-share contract with United Airlines, became the first independent regional airline in the U.S. to fly the Embraer 170 and expanded its deal with Delta Air Lines to fly the Brazilian 70-seaters. More recently, both Republic and Air Wisconsin moved to join the US Airways system with bridge-financing deals that will give them equity stakes in the major airline once it exits bankruptcy.

Meanwhile, carriers such as Pinnacle and Trans States Airlines struggle to shake the bonds of scope clauses that continue to hamper their efforts to fly 70-seat jets. Approaching a point where less and less room exists for growth of 50-seat networks, regionals still unable to add 70-seat airplanes face a severe competitive disadvantage. Regionals flying for Northwest and American find themselves in a particularly tough spot–both those major airlines operate under scope clauses that limit their regional partners to 50-seat jets, in not only their own systems but any others as well.

As scope barriers fall at certain airlines while others stubbornly stand, the competitive balance throughout the regional ranks tips lopsidedly in the favor of those able to fly 70-seaters. One company, Republic Airways, has chosen to disregard the American scope clause and place 70-seat jets with its Chautauqua Airlines subsidiary even though it flies as American Connection out of St. Louis. Although it planned to open a new division called Republic Airlines specifically to fly those airplanes, it appears now that it won’t get its certificate until at least July.

Meanwhile, as Pinnacle and Trans States spend untold amounts of money for new certificates, they and everyone else must work even harder to keep costs in check or face the consequences Comair suffered when Delta shut it out from new regional jet flying in favor of Atlantic Southeast and Chautauqua.

The continued quest to squeeze cost out of regional operations has benefited one sector of the industry that for years has seen a steady decline with the rise of the regional jet revolution. Turboprop operations have suddenly come back into favor within some circles, notably at Continental Airlines, for which CommutAir, Gulfstream Airlines and now Colgan Air have added more than a few isolated routes.

Now, as fuel prices approach $60 a barrel, the practice of deploying RJs to fly segments shorter than 300 miles simply to match equipment flown by hub-raiding competitors looks ever less tenable. But airlines such as Continental have not dismissed the value of small-market destinations. With opportunities for more RJ flying dwindling fast, the prospect of adding a point or two to mainline load factors with short-hop feed traffic looks worthwhile again.

If even only a blip, the apparent resurgence in turboprop interest at least reflects a growing urgency to curb expenses. In fact, said McElroy, cost-cutting strategies will no doubt again dominate the discourse at this year’s convention.

At the convention, the RAA will also drive home its position on airport capacity and talk about the progress of ATC initiatives meant to help alleviate congestion. Discount carriers continue to complain that regional jets deserve a disproportionate share of the blame for delays. The RAA has vigorously disputed the claim, and continues to wage a campaign aimed at “educating” the public and legislators on its position.

“Much of this comes from [the low-fare airlines’] frustration about their inability to get into some of the capacity-controlled airports,” said McElroy. “RJs are basically giving passengers what they want. They want frequency, and they’re an appropriate cost alternative for the majors.”