RAA: Airlines can’t absorb any more national defense costs

 - May 9, 2008, 5:44 AM

Even though regional airline traffic is up 13 percent from the second quarter of last year, and regional airliners account for 34 percent of the overall domestic fleet, the industry cannot continue to pay for security expenses.

“Aviation security is a national defense function,” argues Debby McElroy, president of the Regional Airline Association, “and there needs to be clear recognition of that. Whether it’s proposals to increase taxes or fees, we just cannot continue to absorb those [costs].”

Speaking at an Aviation Safety Alliance seminar on the economics and operations of regional airlines last month near Washington Dulles International Airport, McElroy said that in the first quarter of this year, in origin and destination markets of less than 500 mi, traffic has dropped 18 percent. In markets below 250 mi the reduction is almost 30 percent.

“We’re competing with the automobile,” she said, “in large part because of taxes and fees, and also the hassle factor, a term that a lot of folks at the [Transportation Security Administration] might not like to hear. But it’s a fact.” McElroy called for the industry to establish a convenient, predictable, effective security system.

Other “critical” issues facing regional airlines are the difficulties that scope clauses are imposing on the industry and the prospect of capacity restraints when the airline industry finally rebounds.

“Part of the reason that we were able to recover as effectively as we were after 9/11 was because we had the ability to deploy regional jets into markets where you could no longer justify a mainline narrowbody,” said McElroy. “[But] scope clauses inhibit our ability to do that, whether it’s a limitation on a 50-seat airplane in absolute numbers, or whether it’s the ability to operate 70-seat airplanes.” The airlines collectively need the flexibility to use the appropriate airplane in the appropriate market, she argued.

Meanwhile, although airspace and airport capacity have not received much attention recently, traffic will come back. “We like to focus on enhancing the system as opposed to putting into place congestion pricing,” said McElroy, “or other measures that limit the ability of airlines and passengers to have the appropriate airplanes and the appropriate pricing for those markets.”

Brian Bedford, CEO of Indianapolis-based Chautauqua Airlines, told the gathering that his company took delivery of its first regional jet in July 1999, and by then it was apparent that RJs were both a competitive tool and an offensive weapon for network carriers to compete with one another. In the span of three years, Chautauqua’s order for 10 Embraer regional jets with an option on 20 was increased to its current order for 75 firm aircraft and options on another 67.

“In the post 9/11 world, the regional jet is no longer the offensive weapon that it was over the past five years,” said Bedford. “It is now a defensive tool that allows our partners to maintain a presence in the marketplace–a high-frequency presence–which is certainly good for travelers.”

It is better to have six flights per day with a regional jet than two or three mainline flights with a 150-passenger aircraft, he said, because the direct operating cost of an RJ is 65 percent lower than that of a narrowbody network jet. And indirect operating costs come into play as well.

According to Bedford, regional jet operators tend to be “lean and mean” when it comes to overhead and staffing, without compromising safety or quality of the product. He said that all of these benefits are ultimately passed through to the regional airlines’ network airline partners through fixed-fee contracts. “Finally, and probably most important in the post-9/11 world, regional jets have balance-sheet capacity to finance the capital acquisition costs of regional aircraft,” Bedford explained.

Flexible Fliers

Meanwhile, the current uncertainty facing the regional airlines’ network partners has forced the regionals to be a lot more flexible–schedule deconstruction and reconstruction to meet network partners’ targets for grounding narrowbody aircraft–while maintaining presence and frequency in both small and large communities.

“We’ve actually accelerated growth for our network partners, not decelerated,” Bedford insisted. “We’ve been able to start manufacturing more replacement ASMs, or complementary service, replacing narrowbody service for our network partners.”

But the Chautauqua executive cautioned that the investment community remains concerned that contracts between the network carriers and the regional airlines are not sustainable. “Can you have a situation where we have one group (network carriers) losing billions of dollars, and a segment of that group (regional carriers) earning hundreds of millions of dollars in profit,” he asked. “Fortunately, the answer is: yes, you can. That is a sustainable imbalance, up to the point in time when network carriers begin to fail.”

He claimed that his airline has undergone belt-tightening to provide temporary relief to its network partners–“to share some of the pain”–without compromising Chautauqua’s long-term objectives. But he confessed that while it is appropriate to help all of the participants through this economic downturn safely, “I have no illusion that if times were incredibly great that our network partners would be coming to offer us windfall profits.”

Bedford expects the outlook for 70- to 90-seat regional jets to be “very strong,” because the large carriers are parking their older, narrowbody jets in the desert. That will create a vacuum between the 50-seat RJs and the 130- to 135-seat aircraft being retired.

“I submit this 85-seat gap is unsustainable, and the marketplace is not going to allow this vacuum to remain unfilled,” he told the attendees. “Either the network carriers have to right-size their costs, allowing them to operate newer-generation, larger-capacity regional jets, or scope will have to be relaxed to allow regional airlines to expand up into this type of new market opportunity. I don’t know which way it’s going to go–maybe a mixture.”

Gary Spulak, president of Embraer Aircraft Holding, agreed with Bedford that the large airlines initially were using regional jets as offensive weapons. From 1996 to 2002, the number of departures for regional jets essentially doubled from year to year.

At the same time, although the 50-seat RJ was designed for a mission of about 400 mi, airlines found they could use the regional jet to replace turboprops of all sizes, even on stages as short as 200 mi, and make money doing it.

They also found it could be used on stage lengths as long as 800 mi. “That’s the narrowbody jet replacement that the regional airlines are using now,” said Spulak. “That was an offensive [weapon] and now it turns into a defensive element of the recovery.”

The Aviation Safety Alliance (ASA) seminar was the first devoted to regional airlines. ASA is an advocacy organization dedicated to educating the media, policymakers and the general public about aviation safety and security issues. Created in 1998 with the support of aviation and aerospace companies, foundations and associations, the alliance is led by a board of directors whose members include representatives of the major airlines, manufacturers and suppliers, as well as public leaders.