RAA special section 2009

 - April 30, 2009, 11:35 AM

Trans States Holdings president and COO Rick Leach has seen his company through rough patches in the past, and he has helped the RAA tackle “challenges” of many sorts from his position as an association board member. But as this year’s RAA chairman, Leach finds himself presented with a rare opportunity–a chance make a tangible difference during a time of genuine economic upheaval.

“I think in this environment, really the role of the RAA is just focusing on issues of survival,” he said. “And that’s what we’re all doing–maintaining sound safety, operational and financial performance, and making good, sound decisions that affect safety and service…I think a lot of what RAA is trying to do is manage the chaos.”
Unfortunately, the evolving nature of the relationship between regional airlines and their mainline partners hasn’t made things any less chaotic. Increasingly, as the economy has deteriorated and passenger counts dwindled, some major airlines have tended to view their regional affiliates more like vendors than full partners in the business. For the regionals, that means less say in strategy, and therefore less control over their own fates.

Some might argue that the regional airlines sold their souls, in a sense, to serve their major partners long ago. It didn’t take long after the first Bombardier CRJs began populating network fleets for most regional airlines to trade autonomy for a steady revenue stream and guaranteed margins with so-called cost-plus, fee-per-departure contracts. But when economic times were good and opportunities abounded for new code-share business, regional airlines–and particularly those with ready access to regional jets–held significant negotiating leverage. That no longer holds true today; regional airlines fight for every last scrap of a largely consumed network pie.

“There are definitely fewer opportunities,” said Leach. “That’s why you have to work so hard to maintain what you have– focus on high quality, strong financial performance and be as efficient as you can. You want to bring value to your partner in any way you can these days, beyond even the feed you bring them.”

For Trans States subsidiary GoJet, that value-oriented approach has translated into a 67-percent increase in Bombardier CRJ700 flying for United Airlines over the past year, said Leach. In mid-March GoJet took delivery of the fourth of an order for 10 new CRJ700s, the last six of which will arrive by the end of this year. Flying 19 sixty-six-seat CRJ700s in United’s 66-seat explus configuration at the time of Leach’s interview with AIN in late March, St. Louis-based GoJet served 25 cities from three hubs–Washington Dulles, Denver and Chicago O’Hare. According to vice president of marketing Bill Mishk, GoJet will spread the remaining six airplanes across all those hubs.

Unfortunately, the experience of sister company Trans States Airlines–the operator of the company’s 50-seat Embraer ERJ 145s–has more accurately reflected the prevailing market conditions. By the time Leach spoke with AIN, Trans States’ fleet had shrunk from 52 to 33 over the course of about a year, forcing the company to lay off more than 100 pilots last summer and about 40 more as the RAA Convention approached.

This month also happens to mark the end of Trans States’ flying relationship with American Airlines, as it returns to the Dallas-based carrier the last of 10 Embraer ERJ 145s it flew as American Connection. Leased by Trans States from American, the airplanes became the subject of an outsourcing controversy when the pilots of American Eagle claimed contractual rights to fly them. Eventually American acquiesced and agreed to pull the airplanes from Trans States and place them with Eagle, leaving Leach’s company primarily with ground-handling responsibilities.

Although Leach didn’t go into detail about the lease rates and cost guarantees associated with the American contract, 50-seat jets in general don’t carry the profit potential they once did. In fact, operators still paying up to $130,000 per month under the terms of contracts signed before the market for 50-seaters crashed would likely welcome a chance to return the airplanes early. Trans States, for one, turned mandates for capacity cuts into opportunities to return its highest-cost 50-seaters to their lessors, and hold onto the equipment it leases on shorter, less expensive terms.
Of course, the cost of ownership of ERJ 145s and CRJ200s has plummeted in the secondary market, and Trans States keeps active moving airplanes in and out of its fleet when cost conditions warrant it.

“I think flexibility is as important as cost in this environment,” said Leach. “We were able to move pretty quickly on [ERJ 145 disposals], and that has been a painful process–don’t get me wrong…It’s a lot more fun [expanding] an airline than shrinking one.”

Leach also said the airline remains committed to flying 50-seat jets for its United and US Airways partners, despite their fuel burn drawbacks compared with turboprops, for example. “When you can get ownership levels that are significantly different in price–it could be as much as 50 percent less in some cases–and on top of it have lease terms that are much shorter and more flexible…that’s also an opportunity,” he said. “We’re always looking at what’s available in the market; we’re always trying to stay in tune with what’s happening in the marketplace; we’ll be the first ones to step up and take advantage of that opportunity, and go after that more efficiently priced ownership and more flexibly termed leased aircraft.”

Whether such an opportunity will soon extend to turboprops looks less likely, given today’s prices for Bombardier Q400s and ATR 72-500s, said Leach. Out of the turboprop business since it retired the last of its Jetstream 41s in 2006, Trans States “talks with [its] partners about whatever they’re interested in,” but, to Leach, the price tags for new-generation turboprops don’t warrant the level of commitment major airlines typically want from a turboprop operation.

The turboprop of today is not the turboprop of a few years back,” said Leach. “They’re as [expensive] in some cases as a 70-seat jet.” Leach explained that because majors generally don’t want to enter contracts that extend beyond 10 years, he would hesitate to take the chance on a 15-year lease that might, for example, come attached to a Q400 or ATR 72-500.

“Because of the financial terms of these aircraft, it’s hard to get a monthly economic ownership nut, if you will, that’s reasonable enough for the major to accept on a 10-year lease these days,” he said. “So you’re looking at thirteen-, fifteen-, sixteen-, sometimes seventeen-year leases and financing structures, which means that if you have only a ten-year agreement, what are you going to do with that airplane for the next five or six or seven years beyond that?”

Not one to jump on any bandwagon, Leach never allowed the temptation to chase trends to override the pragmatism with which he has helped build Trans States and GoJet into two of the industry’s most respected names over the years. Now, during perhaps the most tumultuous period in its 35-year history, the RAA can count itself fortunate to benefit from the same kind of common sense Leach brings to his duties as chairman.

“Right now, less is more, to use an old cliché,” said Leach, referring to his preference for short-term leases. Hopefully for the RAA, less hyperbole from steady influences such as Leach will translate into a more fruitful partnership with Washington lawmakers and regulators–and set the conditions for a recovery from one of
the most trying times in the history of the airline business.