Rejuvenated regionals can’t let down guard

 - October 4, 2007, 8:23 AM

By any measure of market share and financial performance, the convalescence of the U.S. regional airline industry looks nearly complete. Since last year’s RAA convention in Phoenix, the nation’s regionals have posted double-digit traffic gains while margins marched toward pre-9/11 levels and RJ fleets grabbed another 5 percent of the air transport network’s market share. Far from issuing a clean bill
of health, however, RAA president Debby McElroy warns not to lose sight of the ethic that lifted the segment out of its doldrums. There remains a lot of hard work ahead, she insists, and to think otherwise could easily lay waste to the progress her association and the industry at large labored so diligently to effect.

“As regionals have to accept less compensation and increased risk in their contracts with major partners, it’s even more incumbent upon them to keep their costs in check, and it’s incumbent on the association to continue our work to educate policy makers about the impact of new regulations and legislation,” McElroy told AIN last month.

Less rate flexibility based on cost hikes and fewer safeguards against contract cancellations typify code-share contracts rewritten in recent years at the behest of the majors. Today, more than ever, price dictates which regionals win code- share contracts, said McElroy, placing even more pressure on employees to accept less pay, reduced benefits and more flexible work rules.

But convincing workers of the urgency of cost control has become a tougher sell lately, particularly as fleet sizes multiply and financial statements suggest anything but hard times.

U.S. regional airlines sit in contract negotiations with no fewer than 24 employee groups, the results of which could shift the industry’s competitive balance for years. Com-air, for one, felt the effects of a costly pilot contract when it failed to win any of the new flying Delta recently awarded to Chautauqua and Atlantic Southeast. Others will no doubt confront a similar fate. “Again, this is a very important issue for us. We have to ensure that our employees understand the economic climate,” said McElroy.

One wouldn’t have to look far to see the effects of uncontrollable costs; 19-seat operations have all but faded into oblivion in the span of six years due largely to regulatory burdens that arose out of a spate of accidents in the mid-1990s. The effects of 9/11 only compounded the problem, as security hassles at airports convince people to drive their cars and simple economics prompt airlines to shed their small turboprops. As a result, in just four years, the number of origin-and-destination flights shorter than 400 miles has fallen some 25 percent.

Meanwhile, airports hosting scheduled flights in airplanes designed to carry between 10 and 30 seats face a new FAA rule that holds them to costly standards once reserved for large airports under Part 139. “This is going to be hugely problematic for small airports,” said McElroy. “We assume that many will apply for exemptions, and I think the carriers will support that approach because I just don’t know where [the communities] are going to get the money.”

Airports subject for the first time to Part 139 would fall under Class III, a category that allows FAA-approved alternative firefighting and EMS provisions, as long as they ensure “safety comparable” to the standards covering airplanes less than 90 feet in length. The FAA said it would also consider exemptions for airports financially incapable of meeting the new requirements and help others secure federal AIP funds. “We should focus on spending money to prevent accidents,” said McElroy. “Aircraft rescue and firefighting is a response to an accident. You can do things like pavement management and inspections, wildlife management, things like that, but the FAA did not agree with our suggestions.”

The FAA claims the change, scheduled to take effect June 9, will cause service to fall by only 4 percent, but it bases its estimate on the notion that airlines flying essential air service routes will renegotiate their contracts to reflect higher airport fees.
However, if the Bush Administration gets its way, not only will money needed to fund such contract increases not exist, but the level of EAS funding will fall from $113 million to $50 million, seriously threatening the air links so vital to the economic well being of small communities.

Desperate to find deficit offsets for the multi-billion-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 on the January 2003 crash of Air Midwest Flight 5481.

FAA Failures
The NTSB found that the FAA contributed to the accident by virtue of its “failure to aggressively pursue the serious deficiencies in Air Midwest’s maintenance training program that were previously and consistently identified.” It reported similar conclusions in its investigations into the 1996 crash of a ValuJet DC-9 and the crash of an Alaska Airlines MD-83 in 2000. Still, opinions about the source of the FAA’s failings vary, but the general consensus seems to validate complaints of staffing shortages.

“We’ve been told the FAA is evaluating how most appropriately to use its inspector workforce to respond to the NTSB’s concerns, recognizing that it is unlikely to get additional manpower,” said McElroy.

For the same reasons the FAA can’t count on more money to address its staffing deficiencies, airlines have run into stiff resistance against their crusade for relief from airport security taxes. As the federal budget deficit balloons to more than $500 billion, the odds of success appear remote, regardless of the validity of the legal principles the airlines cite.

RAA argues that because the Aviation and Transportation and Security Act (ATSA) mandates that the federal government “shall provide for the screening of all passengers and property,” neither airlines nor individual passengers should bear any financial burden for security. Of course, the argument for a repeal will carry little weight unless the courts get involved. So for now, RAA will have to concentrate on more immediately winnable battles, such as the distribution of security responsibility and initiatives for helping regionals with equipment financing.

Aside from the $2.50 fee it charges passengers for each leg of their journeys, the government collects from airlines monthly security fees that equate to one-twelfth the amount they paid for passenger and baggage screening in 2000, before federal screeners took over. Within the next few months, the TSA plans to decide on a formula to calculate what each airline should pay. The RAA has rejected an Air Transport Association proposal to share 20 percent of the cost equally and the remaining 80 percent based on a pro-rate formula tied to today’s payment scheme. Instead, the RAA wants the fee determined by the number of originating passengers–a truer measure of the screening services an airline uses, argues McElroy.

Among the individual RAA member airlines, Great Lakes Airlines issued separate comments explaining the disadvantages suffered by carriers that have cut their operations since 2000. Great Lakes favors a formula that would divide the number of airports a given airline used in 2000 to arrive at a “per airport” cost, and multiply that amount by the number of airports it serves now to calculate next year’s fees.

Great Lakes has met a fate shared by virtually every small turboprop operator in the U.S.: it expends most of its energy on simple survival. But the industry at large has to grow to compensate for increasing costs and less lucrative code-share deals. In a twist of irony, the RAA has turned to the U.S. government for help.

“We’re talking to folks up on the Hill to see if there might be something that we can do legislatively,” said McElroy. “We recognize that the inability to obtain reasonable financing rates carries the potential to limit the growth of regional carriers.”

The association hopes to sell the proposal, still in the early stages of development, on the premise that the problem represents yet another threat to small and medium-size communities. “A bunch of different things are being talked about, but it would be a program to help carriers get that financing,” said McElroy. She wouldn’t discuss specifics, but the general theme presumably involves loan guarantees or some mechanism to encourage lower interest rates.