Regional Airline Types

There are various types of Regional Airline agreements and models. Fortunately for us we can organize these into a scale to better illustrate the pros and cons of each types. Each one is a different animal with different risks/rewards and benefits/downsides. The following chart illustrates this.

As you move down the chart for Regional Airline types from wholly owned carriers to independent carriers you will see the changing scales of risk, reward, and independence. The following are definitions and examples of each type of carrier or agreement. It is possible a single carrier may employ many of these models at the same time.

• Wholly Owned Carriers – American Eagle, ComAir, Piedmont, Horizon. These carriers typically do not have “contracts” in the same sense independent regionals have. Whatever there costs are, the parent company hast to pay, because they are part of there corporation. In this sense their is always money in the bank to cover this regional carriers cost, no matter how expensive they become or how empty their planes are.
• Fee For Departure Agreements – Pinnancle, Republic, Skywest, ExpressJet. Many of these carriers have employed these types of agreements. They are guaranteed a certain payout for completion of a flight, regardless whether the seats are full or empty. Most carriers that use these are independently owned, and the only thing they need to do is ensure the aircraft makes it from point A to B. They do not need to worry about selecting good routes, schedules, seat pricing or marketing. These contracts typically guarantee a certain amount of flying for a given period of time.
• Pro-Rate Agreements- Skywest, Mesa, Pinnacle, ExpressJet. Many of these carriers have employed these types of agreements. They are agreements where the Regional gets a portion of the ticket sales for the flight. In many cases in these agreements the Regional gets to do its own market research to see what routes might be profitable, and what the schedules should be. Even though they bring a new level of freedom for the Regional and potential rewards, if the market simply wont bear the costs of doing business, the Regional suffers a great deal, or must pull out of the market.
• CodeShare Agreements- Alaska/ Horizon, JetBlue. These carriers are independently owned and marketed to customers. In the process of selling seats to customers they also sell seats to other carriers that may not have sufficient passengers to support flying the market themselves. This allows these carriers to stay in the market and offer a larger selection of destinations to their travelers while at the same time driving more traffic into their networks. These agreements are likely more flexible than Fee for departure and even pro-rate agreements.
• Independant Carriers– SouthWest, Spirit, Virgin America, SkyBus. These ones go at it all alone, and some do very well in the process, while others fail spectacularly.

Summary:

For a Regional to jump from a lower level of Risk model to higher one requires quite a bit of learning. To make multiple hops quickly is even more challenging. For example for Wholly owned carrier to go to an independent carrier operating fee for departure agreements, requires a whole new level of company discipline to insure company costs do not go above what the contractual agreement has agreed to pay. Without this discipline it will not be long before this company finds themselves in bankruptcy.

In the same sense a carrier that has grown fat depending on a flat fee for departure, will have difficulty developing the skill and capacity to research markets, determine new schedules as well as keep costs in line to support a Pro-rate regional agreement. The rule of the game is its difficult to enter a new level of competition and compete against carriers who have been doing something for a long time and have gotten very good at it.

Hopefully, your getting a sense of the difficult nature it is for one Regional to move through the chain of risk/reward. It also helps explains why Eagle may have such a challenge ahead as they soon face competitors that have competed hard and well for decades, while Eagle has not had to develop the same set of talents or competitive nature. Or, why Republic has struggled so much after acquiring Frontier, with a management team that has never had to run at an Independent level, only at a Fee for Departure, or Pro-Rate.

The list is long of airlines who have struggled to make this shift, in some sense this is the story of Deregulation and it continues to play out today on a more micro level with the Regionals.