Rising tide raises all boats in the air transport business

 - July 5, 2007, 6:03 AM

The cyclical nature of the airline business showed its inevitability again at this year’s Regional Airline Association convention, held May 21 to 24 in Memphis, Tenn. More than 1,500 visitors passed through the turnstiles at the Memphis Convention Center–a record number for an RAA convention. Of course, numbers alone can’t measure energy and enthusiasm, neither of which ran in short supply in the birthplace of the blues and Elvis, but they can tell a lot about the challenges faced by a business that has certainly seen its share of statistical peaks and valleys over the past decade.

For example, almost 30 percent of all pilots placed on furlough during the last industry downturn have declined invitations to return to work, leaving regional airlines such as Memphis’ own Pinnacle Airlines struggling to field a full complement of flight crews. The last time the airline business saw anything like a pilot shortage, 9/11 hadn’t yet happened and 50-seat regional jets still held their former status as the darlings of the industry.

Today, as fuel prices soar, turboprops have come back into fashion, while less restrictive scope clauses have effectively removed the market for new 50-seat RJs in favor of 70- and 76-seat varieties. This time, however, the job of flying the airplanes appears to have lost some of its luster, after bankruptcies and restructuring forced unions to accept deep pay and benefits cuts. Whether or not the current situation reflects a sort of backlash, it seems clear that the day when management held the preponderance of bargaining power has passed.

Sitting alongside new RAA president Roger Cohen to brief reporters on the convention’s closed-door President’s Council session, this year’s RAA chairman, Mesaba Holdings CEO Paul Foley, echoed the warnings issued by labor law specialist Jerry Glass of the Washington, D.C.-based Ford & Harrison law firm.

“There is a blip over the next two or three years where, depending on what happens with the Age Sixty rule, there will be an increasing number of retirees, or not, and the consensus we’re hearing is that the labor movement pendulum will swing more to the right or to the left depending upon your perspective, but particularly pilots will become more active to win back concessions that were given up in most recent history, starting with United, and that will trickle down to the regionals,” said Foley. “It wasn’t a glamorous representation of the state of the industry in regard to labor relations.”

Although Foley wouldn’t go so far as to agree that the recent squeeze on pilot hiring has emboldened union leadership to assume a more militant posture of late, he did acknowledge that demand pressures would at least increase costs associated with training, particularly at the regional level, as well as likely shift the balance of bargaining power.

“The data we saw today was compelling,” he said. “Almost every major airline will have recalled all of its pilots by the end of the year and regional pilots aspire to go to the majors, so that will trigger a number of training transactions, increasing the costs at the regionals. So to the extent that there is more demand for pilots, I think the pilots are going to be able to negotiate better terms and conditions.”

On a more positive note for management, however, the changing labor landscape likely won’t end the continuing trend toward looser scope clauses within mainline pilot union contracts, predicted Foley. “The sense we got today is that scope clauses would probably be relaxed to somewhere around the 100-seat level,” he said.

That would spell good news for the likes of Bombardier, whose newly launched 100-seat CRJ1000 would benefit from a wider audience among U.S. regionals. In the meantime, Bombardier and its competitors in the turboprop market can take comfort in the fact that the surge in demand for new prop-driven airliners since early 2005 continues to translate into new orders. Recent business for Bombardier turboprops includes a firm order from Croatia Airlines for four Q400s announced June 4 and another for 15 from Flybe in early May. ATR, meanwhile, saw this year’s firm order total rise to 27 with the sale of six ATR 72-500s to the Philippines’ Cebu Pacific.

Market Eyes Larger Aircraft
As in the jet market, the turboprop sector has seen demand for more capacity shift the balance of sales far to the upper reaches of today’s product offerings. In fact, at the convention ATR senior vice president John Moore indicated that, although he hasn’t seen “a huge push from existing customers yet,” the company has considered the possibility of introducing a turboprop larger than the 68-seat ATR 72. Much, it would seem, depends on Bombardier’s decision about a proposed stretch of the Q400, studies into which the Canadian company began early last year.

Of course, the trend toward larger airplanes makes sense. Rising fuel costs and airport fees coupled with tighter security relegated most new scheduled 19-seat service to Essential Air Service (EAS) routes during the early part of this decade. But over the past year or so inventories of small turboprops have dropped to some
of their lowest levels since the Beech 1900 went out of production. The situation has Raytheon Airline Aviation Services (RAAS) watching with keen interest Viking Aerospace’s return to production of the 19-seat Twin Otter in Calgary, acknowledged RAAS director of marketing Dave Carter at RAA.

Resurrecting Beech 1900D production after its unceremonious demise in 2002 didn’t cross many minds by the time the last RAA convention took place in Cincinnati last year. Although Carter stressed that the company has not committed to anything “yet,” his acknowledgement that the possibility exists speaks volumes about the improved health of the turboprop market. “A rising tide raises all boats,” said Carter in an allusion to the seemingly improbable recovery of the 19-seat market.

At the time of this year’s convention, only 18 Beech 1900s–including the older C models–remained parked, as 97 now fly in EAS duty alone and airlines such as Great Lakes Aviation must delay plans to open new service due to the lack of availability of good used equipment. Meanwhile, one of the industry’s main sources of 30-seat turboprops, Saab Aircraft Leasing, has seen its inventory of Saab 340s suitable for airline service shrink to virtually nil as well, leaving company president Michael Magnusson contemplating leasing airplanes built by manufacturers other than Saab.

“It’s an interesting question, [about] what are we going to do in a couple of years,” said Magnusson. “It’s something we definitely talk about.” Still, Magnusson opined that a new-generation turboprop remained “still a way off,” due primarily to the need for a “$1 billion investment in engine technology.”

For Carter, Magnusson and their peers, any worries about a lack of used equipment to lease might prove fleeting indeed if the RAA for a moment loses its focus on the seemingly constant threat to EAS funding and a Senate FAA reauthorization bill that, if passed as proposed, would levy a $25 per-segment fee for IFR operations by turbine aircraft. Although Foley and Cohen didn’t issue an explicit position on the measure, the association’s stated policy requires that it oppose it if it would hurt airlines that perform high-frequency flying in low-capacity airplanes, and by extension cut service to small communities.

“I would leave it at we reaffirmed some of the principles that should guide our negotiations, those principles being no disruptions to small and midsize city services, and that everybody in the room believes that we need a next-generation system that’s aircraft-centric and satellite based,” said Foley.

Response to FAA Funding Plan
Asked if the President’s Council reached any consensus on the bill, Cohen implied that at least the proposed $25 “modernization surcharge” met with disapproval. “It’s fair to say that the incorporation of a new element, a flat-fee $25 surcharge on all flights, would have a disproportionate effect on regionals and the economics of regional flying,” said Cohen.

“At the same time there’s growing recognition that other segments are not paying their fair share, notably business aviation, corporate aviation, the whole fractional [and], if one believes that it is going to be significant, VLJ movement; that those look an awful lot like the same kind of services regional airlines are providing; and that they ought to pick up a more representative share of funding the modernization effort that’s out there. So there is a hundred-percent consensus on that.”

Cohen, however, wouldn’t concede that the major and regional airlines stood very far apart in any significant aspects of the fight to reapportion FAA funding, notwithstanding the Air Transport Association’s opposition to a proposed Senate amendment that would have eliminated the $25 fee. “There is probably only [a minute] bit of difference between the two positions, and if that much,” said Cohen. “I think some of the reactions and perceptions over different proposals have gotten a little bit overblown.”

Overblown or not, the issue will become moot if the consensus opinion against user fees of any kind holds sway in the House. And, as RAA legislative affairs director Faye Malarkey put it during the convention’s Opening General Session, “this bill’s got lots of hoops through which you must jump before it can actually get passed and enacted.” Meanwhile, she said, the RAA will have ample time to attack what it regards as the damaging aspects of the bill, including the $25 surcharge, something Malarkey argued against with less ambiguity than her RAA colleagues.

“The idea behind this is that airlines will be able to recoup that money by getting an elimination of the 4.3-cents-a-gallon fuel tax,” said Malarkey. “Unfortunately, considering the dynamics of regional airline travel and the short-haul nature of our trips, the point where you begin to break even with that happens long after the stage length for regional air travel has expired. So…we stand to lose a lot in this debate.”

Malarkey estimated that the Senate bill, as it read at the time of the convention, would cost the regional airline industry $100 million a year.