After a tumultuous year, RAA members take stock

 - December 1, 2008, 7:04 AM

What will the regional airline industry look like when the economic dust settles? That’s the question the Regional Airline Association challenged its panelists to answer at the RAA fall meeting, held October 28 and 29 in Washington, D.C.

Association president Roger Cohen pointed out that the landscape for the regional sector has changed dramatically since the association gathered last year. “A year ago the regionals were growing so quickly that they were blamed for causing congestion in the ATC system and were hungry to hire pilots. Now we’re making furloughs and cutting capacity,” he said. “No one has been immune to the loss of 10 to 12 percent in capacity since this time last year.”

The untethered price of oil is among the assaults that have battered the industry in the past year. Since the association met last fall the price of oil per barrel doubled and then fell to $69. When oil reached $145 per barrel in July, the association joined a political coalition whose goal was to stop speculation in the oil futures market.

According to John Heimlich, chief economist and v-p for the Air Transport Association, regional carriers must develop a business plan that can accommodate fluctuations in the cost of oil. As for the recent fall in oil prices, he added, “It’s a brief respite in a down cycle more than any sign of an up cycle,” he concluded. “We should be working toward a business model that is profitable at both $70 and $170 per barrel,” he said.

In the last year the association has had to contend with a dwindling number of operators and the loss of some executives. First, with the loss of Big Sky Airlines, the association now numbers 40 operators. In addition, some regional executives have moved on. For example, Warren Wilkinson, v-p of public relations for Republic Airways, is leaving the industry. Wilkinson gave the following parting advice: “Everyone should be focused on the removal of capacity domestically.”

“People are surprised to hear that the regionals comprise 50 percent of domestic flights,” added Cohen. “Customers don’t know that it’s a regional aircraft. They look and feel the same as the mainlines.”

Cohen expressed anger at the Department of Transportation for “selling off of the national airspace” in upcoming slot auctions in the New York sector. “It’s no coincidence that the slot auction will take place on January 4 while the current administration is still there. They pushed through every step while Congress was away,” said Cohen, arguing that the agency has “defied the will of Congress” and that its ideas are driven by partisan ideology rather than sound economics.

Faye Malarkey-Black, RAA vice president for legislative affairs, said that the cost of a slot awarded through an auction can be recaptured only with an international flight or a cross-continental pair. “Regionals are forced to give up something that they now own for sale to the highest bidder,” she said.

Regional Service Celebrated

The service experience for regional passengers was a bright spot for regional attendees. Cohen maintained that of the total passenger service experience from door to door, the portion delivered by the regionals is superior and props up the rating of mainline carriers, which suffer from delays in ATC affecting their hub service among other ills.

Leo Malloy, president of Skyway Airlines dba Midwest Connect of Oak Creek, Wis., echoed Cohen’s comments, noting that regionals in smaller communities offer service that’s “a throwback to the 1970s” and that “service managers are scoring off the charts.” Skyway’s fleet has been grounded since April, and with 400 of its 1,200 staff idled, the company shifted to services such as ground handling; Malloy said that overall revenue is about breakeven. The company sold its Beechcraft 1900s to an African operator, and parked its 328Jets in the Carolinas.

Malloy had to abandon four essential air service (EAS) communities such as its stop in Escanaba, Mich., and is “surprised” that other carriers immediately bid on the service. In the RAA panel session, Malarkey-Black predicted that more than half of EAS coverage could evaporate next year, unless Congress follows association recommendations to increase subsidies from $50 million to $200 million, and to permit a profit allowance of 15 percent rather than 5 percent, pay up to $300 per passenger to cover rising fuel costs and to commit carriers to five-year contracts rather than two-year agreements to stabilize capital.

For EAS routes as well as marginally profitable city pairs, Kelly Creamer of ATR announced that her company is continuing to push the efficiencies of its turboprop line, “which is not your mother’s turboprop.” Creamer set aside industry scuttlebutt about a pending announcement from the company on a 90- to 100-seat model.

Creamer said that the public is “reacting more favorably than a decade ago” to flying in a turboprop versus a jet, especially given one line of reasoning that fuel efficiency might translate to a favorable ticket price, but that ATR is “treading lightly” in its marketing message.

“I don’t think that passengers are making a choice based on the type of engine,” said Cohen, who added that the RAA’s message is that “all regional aircraft have made great strides.” The choice facing many corporate travelers is whether to fly at all. According to Kevin Mitchell, president of the Business Travel Coalition, which surveyed 196 corporate travel sourcing managers, 25.5 percent of the managers said the companies “were making emergency cutbacks or were at a travel standstill.” Of those implementing an emergency travel stop, 16 percent said it would apply until further notice. Mitchell cited a rising percentage of corporations that are challenging their travel management companies to remind employees of alternatives

to flying such as videoconferencing.

Mitchell said that if oil prices linger at $80 to $85 per barrel the reprieve would allow the regionals some time to formulate a plan for when prices inevitably rise. “But this is a defensive posture and not a chance to ‘grow the business’ or to invest in the efficient new equipment that they need,” he stressed.

Neil Planzer, v-p of air traffic management for Boeing, compared the airline industry to the levels of aspiration outlined in psychologist Abraham Maslow’s “hierarchy of needs.” Planzer said that regionals are focused on Maslow’s lowest tier–basic survival–for now.

He warned that delays in the ATC system might be reduced over the next six months, as a result of capacity cuts by the airlines. “That’s not a good solution,” he added. “The capacity of the system has to be increased by reducing separation standards,” he said, since the original standards were based on technology of the 1940s and 1950s.

Planzer’s first metric for industry health is the question of whether safety is improving; his second metric is whether the time to fly between city pairs is decreasing. He argues that it is not. In fact, he flew from LGA to BOS in a DC-3 when he was young; today on a 737, total journey time is longer. He said that the ATC system has also missed his next metric: increasing hourly capacity.

Pricing Initiatives

John Heimlich, chief economist and v-p for the Air Transport Association, analyzed recent initiatives to offer a la carte pricing for in-flight services and said that back-office or corporate cost-savings ideas also made common sense, for example eliminating toll-free reservations lines given that the great majority of passengers now have unlimited long-distance service. Heimlich said that the a la carte price model of Ryanair makes it the most profitable carrier in Europe, and

the model of Allegiant Air with its fleet of MD-80s has become the most profitable in the U.S. market.

Heimlich summarized developments in alternative fuels and suggested that aviation is the industry with the most potential to pull through systemic change as a buyer of fuel in volume. One proposed fuel would come from algae, and with targeted buying it might become a substantial component of the jet fuel supply within 10 years.

All speakers at RAA’s conference predicted that the competitive battleground will intensify in the international arena. Given a similar ticket price on a U.S. domestic versus a foreign flag carrier for a first- or business-class ticket, analysis and surveys show that passengers consider

the service level of foreign brands and the quality and efficiency of their newer airframes far superior. Mitchell added that some corporate travel managers not only choose a foreign flag carrier when available on a given route, but that recent domestic alliances have roped in undesirable member airlines and managers have withheld bookings in response.

Heimlich applauded a recent focus on New York as pivotal to reducing system delays, noting that chipping away at problems at its three major airports would resolve as much as 48 percent of delays nationwide. Yet he is highly critical of the method, namely slot auctions. Heimlich asserted that a recent spurt of improvement in ATC delays was unintended and hardly a positive approach. “Some of the cuts in capacity made due to the cost of fuel are in small part offsetting the effect of corporations cutting back on travel due to the economic conditions.”