Regionals turn in mixed Q2 results

 - August 31, 2009, 5:30 AM

While second-quarter traffic posted by some of the largest publicly traded regional airlines in the U.S. followed the prevailing patterns set by their mainline partners, some carriers reacted to the exercise in “resizing” better than others. So as the airline industry in general continues to slog through one of the most difficult periods in modern history, a number of regionals continue to turn a profit–even as their major partners do all they can to strip costs associated with service contracts.

While slashing employment rolls to reflect diminishing capacity has certainly played a part in minimizing red ink for some, replacing smaller-gauge jets in favor of larger equipment has proved just as vital to others, as has lowering aircraft rents by allowing high-cost leases to expire and negotiating new terms based on lower aircraft values. Of course, circumstances differed wildly at the various airlines, but, as usual, those who did the best job of containing costs emerged from the quarter with the strongest results.

For example, Memphis-based Pinnacle Airlines registered what CEO Phil Trenary characterized as a “solid” performance at both operating subsidiaries despite a 5-percent reduction in block hours and a 7-percent decline in Bombardier CRJ200 use. The CRJ decline resulted from shorter average flights and an overall drop in scheduled flying for Delta Air Lines, while Pinnacle’s Colgan Air subsidiary experienced a 15-percent decline in block hours due mainly to the retirement of 11 Saab 340s and Beech 1900s. Nevertheless, excluding certain non- recurring items related mainly to the retirement of Colgan’s Beech 1900s, Pinnacle more than doubled its profit from a year earlier, from $3.5 million to $7.3 million.

“The real strength I think this quarter relates to the fact that our operations group worked really hard to find those cost savings where they could,” said Pinnacle CFO Peter Hunt. Total operating expenses fell from $219 million to $189 million, and although much of that resulted from lower fuel costs and fewer expenses related to impairment and aircraft retirement charges, costs in the “other” category fell from $24.1 million to $17.5 million.

Meanwhile, other profitable regionals didn’t express quite the same level of satisfaction with their cost performance. Among them, Indianapolis-based Republic Airways saw profits decline to $14.1 million from $28.4 million a year earlier, while its operating revenues stayed relatively flat, declining just 0.9 percent, from $286.4 million to $283.7 million, excluding reimbursements from its major airline partners for fuel expenses. Including fuel, total operating revenues fell 18.2 percent, from $391.4 million to $320 million.

Although aircraft/engine rent fell by 11 percent, every other non-fuel item in its expense report showed an increase, resulting in roughly a 6-percent rise in non-fuel expenses. “A lot of that, of course, is driven just by how our partners are scheduling our aircraft,” said CEO Bryan Bedford, who noted that the company saw a 6-percent decrease in block hours during the quarter and a 5-percent drop in average stage lengths.

During the second quarter Republic removed nine Bombardier CRJ200s and three Embraer ERJ 145s from the Continental Connection program and restored a single Embraer ERJ 135, at one time held out for sale, into its operation with Midwest Airlines when the sale fell through. Now flying 210 aircraft, Republic saw its fleet size fall from 221 airplanes at the end of last year’s second quarter. However, its fleet of aircraft holding 70 or more seats increased from 113 to 130 airplanes, while its less profitable fleet of 37- to 50-seat jets fell to 80 from 115.

Like Republic, St. George, Utah-based SkyWest would have turned in an almost flat revenue performance during the quarter if not for $232.9 million of reduced fuel cost reimbursements. Including fuel, total revenues fell from $950.8 million to $698.8 million, while net income fell from $36.4 million to $26.2 million. Block hours dropped by 3 percent and cuts to SkyWest’s schedules by its mainline partners resulted in a $15.2 million decline in operating revenues.

SkyWest’s expenses, meanwhile, increased 1.1 percent due primarily to the cut in block hours and resulting 2.4-percent reduction in ASM production. The airline said it continues to incur “significant” nonreimbursable maintenance costs and excess crew expenses attributable to fewer block hours and the aging of its fleet. Now flying 444 aircraft primarily for Delta and United, SkyWest in June began removing 12 Bombardier CRJ200s from the network it flies for Midwest Airlines, a program it expects to exit completely in January.

Losses at ExpressJet

As expected, the ranks of the unprofitable regionals during the second quarter included Houston-based ExpressJet, which reported a loss of $13.1 million, including special items, compared with a $34.3 million loss during the same period a year earlier. The results reflected continued downward pressure on aircraft use due to decreased travel demand throughout the industry, said the airline.

Although it operated the same number of airplanes–214–it flew as Continental Express a year earlier, ExpressJet’s flying for Continental fell 10.7 percent on a block- hour basis, as average utilization fell from 9.58 hours to 8.42 hours.

“Bearing in mind that block hours are down 27-and-a-half percent year over year, if you look at wages, maintenance and other operating expenses, those probably give you the best indication of how we’re doing in getting the business resized,” said CEO Jim Ream. Wages fell 26.8 percent during the quarter, maintenance costs dropped 27.5 percent and the category of “other” operating expenses showed a 29.8-percent decline.

“While the second-quarter performance is disappointing, it’s reflective of what’s going on generally in the airline business,” said Ream. “If you look at our cash margin off the P&L–negative about one-and-a-half percent–that’s going to be consistent with where the majors are coming in…So as we gain greater demand back in air travel, and start being able to increase our utilization, we’ll see these results turn.”

Seattle-based Horizon Air has already seen something of a turnaround, as its adjusted pre-tax loss of $300,000 during the second quarter represented a $7.4 million improvement over last year’s second quarter. Horizon CEO Jeff Pinneo noted that his airline has seen four straight quarters of improved income performance. The results included a $5.2 million charge related to falling market valuation of the six remaining Bombardier Q200 turboprops on Horizon’s books.

“While we’re pleased with our improved performance...we remain concerned about the outlook on demand and the volatility of fuel costs,” said Pinneo. Horizon’s second-quarter revenues decreased 16.4 percent, from $188.9 million to $157.9 million, on a 12-percent decline in both traffic and capacity. System yield declined 5 percent. Excluding fuel and fleet transition charges, expenses increased 3.5 percent, said Pinneo, despite a 22.6-percent drop in maintenance costs and the furlough of 480 employees, or 12.8 percent of the workforce, since last year’s second quarter.

“Unit costs in maintenance and flight operations continue to be high relative to our peers, as do airport costs in several key cities,” said Pinneo.