Cities risk losing service unless airports play ball

 - May 27, 2010, 12:08 PM

Some 30 U.S. airports risk losing their last regional airline flights unless they take “critical steps” to better balance revenue, cost and compensation rates, according to a report published earlier this year by San Diego-based aviation consultancy Innovation Analysis Group (IAG). The group advises small- and medium-sized airports to institute so-called “pay to play” strategies, under which they might share part of their profits with airlines in return for some guaranteed level of service. If small airports and the communities they serve fail to recognize the new model, according to the report, they risk sharing the fate of the 10 scheduled-service airports that lost their regional jet service entirely between 2006 and 2010.

The report asserts that airport managers need to understand more clearly the evolving economics associated with the governing system of contemporary RJ operations–the “Capacity Purchase Agreement” (CPA). While such agreements have historically generated profit margins for the regional airlines that have far exceeded those of their major counterparts, the network carriers have gradually managed to “level the playing field” as each contract expires or becomes amendable. Some have even returned to old-style pro-rate agreements, under which the regional partners assume virtually all the risk for the flying.

Now overwhelmingly structured for CPAs, however, regionals must retool their marketing and distribution systems to perform at-risk flying. Largely for that reason, according to IAG director of business development Doug Abbey, CPAs will continue to hold sway, but likely never generate the level of profit they once did.
Although CPAs still guarantee reimbursement of certain “direct” expenses, the proliferation of low-fare airlines on what once constituted traditional regional markets has lowered margins to a point where 50-seat jets can no longer compete.
Regional airlines that loaded their fleets with 50-seat jets during the type’s heyday in the 1990s now find themselves scrambling to shed the jets as fast as they can as their major airline partners insist on larger equipment. Of course, under the CPAs, the major airlines determine for their regional partners what types of airplane they fly. As small airplanes–most notably 50-seat jets– fall out of favor among the major airline managers who ultimately decide on such matters, still more communities risk losing service.

“What I’m trying to say here is that airport managers probably have no idea what it is that the majors are paying out for the [regional] service, let alone what they’re receiving in the way of revenue and flow,” said Abbey. “These communities are at the whim of the major carriers, and with 50-seaters going away and the need to serve every spoke with every hub inexorably getting less and less, I think airport directors are going to find themselves having to manage a discontinuation of service and they’re not going to know why.”

In fact, nearly 200 U.S. airports have already lost all scheduled air service since schedules reached a peak in the mid-1980s, largely due to incremental shifts in equipment type, according to the report.

Soon after the dawn of deregulation in 1978, 19-seat turboprops such as Fairchild Metroliners, Jetstream 31s, Dornier 228s, Embraer Bandeirantes and Beech 1900s replaced nine- and 10-passenger piston-powered Cessna 402s and Piper Navajos. During the following decade, 30- to 50-seat turboprops such as ATR 42s, Saab 340s, de Havilland Canada Dash 8s and Embraer Brasilias supplanted many of the 19-seaters. Then, once the first small-capacity turbofan-powered equipment arrived in the 1990s, even the larger turboprops began to fall from favor, particularly in the U.S.

With each step, said the report, more and more airports join the growing list of “has been” airports, despite the existence of the Essential Air Service (EAS) and Small Community Air Service Development programs. The former, according to IAG, subsidizes airports least likely to provide sustainable economic returns to the airlines that serve them. The latter program, by the DOT Inspector General’s own accounting, has failed 70 percent of the time.

Turboprop Solution ‘Elusive’

“Reliance on 50-seat RJs (and 70+-seat jets going forward) puts many communities in economic peril if local schedules cannot support real-world business conditions,” according to IAG. “Sadly, an optimum solution in the U.S.–the use of turboprop aircraft–remains elusive. Only a handful of code-sharing regional airlines still operate them, and their number in service has decreased in the small-jet era, ever since RJs became a modern-day aviation phenomenon.”

Notwithstanding the relatively strong sales showing over the past three years compared with regional jets by the Western world’s last two regional turboprop makers, much of the resurgence has occurred as a result of a robust market in
Asia, for example. Although a few North American airlines have introduced Bombardier Q400s during that time, ATR has experienced virtually no sales success in the market, and in February Republic Airways announced plans to replace all 11 Q400s flown by its Denver-based Lynx Airlines subsidiary with Embraer E170s and E190s.

With a residual distaste for turboprop service still apparent among U.S. major airlines, communities in jeopardy of losing their 50-seat jets will need to start subsidizing the service, in effect. “Perhaps there’s a better business model out there,” submits Abbey. “If that is more toward the at-risk, whereby the communities, the airports and others have a guarantee or provide some minimum level of passenger numbers, that’s the model I see as being the most equitable to all concerned. Otherwise, these airplanes are going to come out of service and all you’re going to get as an airport director is 30 days’ notice.”

Port Columbus Approach

The report cites a program instituted January 1 by Port Columbus International Airport in Ohio as an example of the kind of “proactive” approach smaller airports could emulate. The five-year deal guarantees 10 signatory airlines a 75-percent share of the airport’s annual net profit after debt service and capital fund requirements in the form of rent credits.

The question of whether or not smaller airports can afford such a program looms large. Abbey asserts that some airports can’t afford to do nothing, however. “I don’t know that there’s a fixed model,” he said. “But I think that all the constituencies, all the relevant players, have to come to the table. The default is painful. The economic impact of losing a flight is significant to a community generally. If you know what the economic impact of service is if you lose it, you have sort of
a default number that may identify what the cost of the service is, and what you may need to bring to the table.”

Branson, Mo., recently “came to the table” with a readiness to, in effect, buy service from Houston-based ExpressJet. Marketed under the name Branson AirExpress, the service started May 17 and plans call for direct connections from Branson Airport to Houston and Austin, Texas; Shreveport, La.; Des Moines, Iowa; and Terre Haute, Ind., using ExpressJet’s 50-seat Embraer ERJ145s and crews. Advertised by Branson Airport as a new concept in air service development, Branson AirExpress emerged after Branson Airport offered the five partner airports “unprecedented” input into the many decisions affecting customer service, including pricing, marketing and travel packaging abilities. 

“Businesses and local employers recognize that having an airport with scheduled service is a huge economic development tool,” said Abbey. “When that last flight leaves, that’s a bragging right you lose.”