High-flying regionals work hard to maintain altitude

 - January 31, 2007, 7:57 AM

It had been a somewhat quiet year since the RAA staged its annual convention in St. Louis last May. Seemingly immune to the ills that have crippled their mainline counterparts for the past four years, the regional airlines finished last year with close to 30-percent traffic gains and average yields of 10 percent, leaving many wondering how long the major airlines would allow such an imbalance to continue.

But as we approach the start of this year’s convention, set for May 16 to 19 in Cincinnati, the gravy train has begun to show signs of slowing. Few predict an imminent derailment, but as RAA president Debby McElroy warns, as the majors go so go the regionals, a discomforting thought in an environment where two legacy carriers operate under bankruptcy protection and a third teeters on the brink of Chapter 11.

A few regionals, particularly those wholly owned by their major airline counterparts, have already felt the effects of industry “realignment.” Chicago Express, for one, last month counted the days before its owner, American Trans Air, shut down the Saab 340 operation, leaving hundreds of employees wondering who, if anyone, might save it from liquidation.

Although not under the same pressure as Chicago Express, Cincinnati’s own Comair faces an uncertain future as well. 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, the 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 have 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.

Assessing Scope Clauses
Meanwhile, carriers such as Pinnacle and Trans States Airlines struggle to shed 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, not only in 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.

While Republic ignores the American scope clause, others accept more modest gains until they can open new divisions to abide by it. 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.

Turboprop Revival
The continued quest to squeeze costs 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 whom CommutAir, Gulfstream Airlines and now Colgan Air have added more than a few isolated routes.

Now, as fuel prices exceed $55 a barrel, the practice of using RJs to fly segments shorter than 300 miles simply to match equipment flown by hub-raiding competitors looks untenable. 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. “The overall theme of the meeting, at least from the executive level, is continuing to provide information on how to maintain the cost advantages of the regionals and improve efficiency,” said McElroy.

Of course, besides providing a forum to air concerns and share ideas at the annual convention, the RAA spends much of its time lobbying legislators on issues such as security fees, the essential air service budget, airport costs and labor issues. “Our function is to work with the FAA, Congress, the TSA and the DOT to try to create a regulatory, legislative and business climate where the carriers can grow, where they’re not hamstrung by regulations and a lack of federal resources to do what they need to do,” said McElroy.

At the convention, the RAA will outline its plan for tackling such issues as the shrinking FAA budget, new security fees and a $63 million cut in essential air services spending proposed by the Bush Administration. Industry issues ripe for discussion include the thorny problem of airport capacity. 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.”

As if to drive home the point that the majors and regionals share more challenges than ever, McElroy has invited Air Transport Association chief economist John Heimlich to speak at this year’s convention about the state of not only the regional airline business, but the air transport industry as a whole.

The RAA also plans to recruit representatives from various airports around the country to talk about innovations aimed at lowering the cost of using their facilities. As has become custom, this year’s RAA chairman, American Eagle president Peter Bowler, will address the general session during the second day of the convention. Other presentations will center on technical issues, operations, safety and maintenance. To close the proceedings, McElroy has asked financial analyst Jim Parker from Robinson Humphrey to talk money matters at the final day’s breakfast.