A frank conversation about Regional Airline sustainability.

In the past two years regional airline executive management teams have started to take notice of the fundamental problems in the business model that were created over ten years ago.

At the time having guaranteed income seemed attractive. In the regional market this “fee for departure” model benefited the regional airlines in multiple ways

1. Access to quick company growth. (Huge growth, doubling in size over a few years as the majors readjusted their markets and dumped capacity into the regional airlines in an attempt to maintain access to routes, and reduce capital exposure among other things. All of this done in a period of market correction and financial stress for the majors.)
2. Turn Key operation. (The regional airlines no longer had to worry about marketing to customers, market planning routes, and connection times.) All that the regional airlines now needed to worry about was D:0, A14, aircraft leasing/mx and flight completion. This is a small list compared with what is required of a full fledged airline.
3. Allowed larger aircraft operation that would never have been possible under the old model.

Unfortunately, there was a catch and the more dependent an airline became on the drug of “fee for departure” the greater the vulnerability. For sure there was a short term benefit to this security, that was so attractive to the small regional airlines that often struggled with market and industry instability. Eventually, the realization that they had also sold their freedom to the majors came a little to late, as the difficulty of renewing good contracts began to be a reality. The problems created are as follows but are not exhaustive.

1. Access to quick company growth – Caused these newly enlarged companies to be almost completely dependent on their one or two major partners for most everything. In the short run this model seemed good, but in the long run this new found addiction would have destructive results as airlines could easily impose their own terms since they operated from a position of greater strength.
2. Turn Key operation– It commoditized the regional airlines, thus reducing their ability to be set apart on almost anything but the three fundamentals of performance (D:0, A14, Completion) and cost. This also reduced their marketing know- how and strength. There is a reason the Republic airline team was unable to make Frontier successful. They frankly did not have the know-how necessary to run a true airline with all the standard trappings that go with it. Why? Because they run a business that focuses on operating and staffing aircraft, not running an airline. Running an airline requires a lot more than just operating aircraft.
3. Larger aircraft operation– Naturally employees want to be paid more for the operation of these larger, faster and more advanced aircraft. They create career expectations, unfortunately the regional airlines desperate to win this “fee for departure” flying bid upon this flying with different expectations(This is the nail in the coffin for many regional airlines). At the same time many of these operators pull out of flying markets (19-45 seat) where they once had a significant advantage and competitive edge to now focus on what they perceive as a great deal (fee for departure) . These smaller markets are back filled by other smaller and nimble airlines (Cape Air, Georgia Skies, etc).

The nail in the coffin alluded to in the last paragraph is interesting and I think should be explored more fully. Why are the different expectations between the employees operating these aircraft and the management teams bidding for this flying the fundamental fulcrum upon which these airlines will live or die? Simply costs must be less than revenue for a regional airline to survive.

Employees expect career earnings and progression. Both are a form of compensation, one is reflected on the balance sheet more than the other. So it is possible for an airline to compensate (earnings & progression) a pilot more than a competitor while being less “expensive” financially than that said competitor. The key is career progression. The major airlines hold this card which trumps most others, placing any independently owned carrier at a distinct disadvantage in the long run. The majors can offer what a regional simply cannot, career progression.

Unfortunately and frustratingly this is what these management/expert teams have come up with.

So what is to be done?

For an airline to survive they will likely need to choose one or both of a couple paths.

First, they would be wise to re-look at their old business models, that were forgotten about 15 years ago. Where these airlines operated into cities with smaller planes with little to no competition on something close to their own terms. It is true that this path offers greater risk, since airplanes that fly empty don’t earn as much revenue (In the authors opinion this is how business is suppose to work). This path will likely be a path of fleet reduction. At the very least an increased diversification into these areas would be of benefit.

Second, find a way to control expected labor costs. Hoping senior and more expensive people leave is not a rational solution. Even Walmart and McDonalds don’t tell their employees the first day of work they hope or need them to leave sooner than later. There are two ways to do this

• reduce the slope of the pay scales at the regional airlines. This creates better predictability for everyone and is what is implemented at the Major Airlines. For example United airline CRJ 900 CA rates are 111$ to 121$ per credit hour over 12 years. For those not familiar with pilot compensation you can expect about 2 hours of time at work working for every hour of credit time (checking wx, checklists, etc). At ExpressJet airlines on the same aircraft it ranges from 63$ to 108$ per credit hour over 18 years creating a large cost difference between losing a new pilot verse an old pilot. The airlines get better predictability while the pilots get a more rational compensation structure.
• Create a way for pilots to be facilitated/incentified to leave, by providing true career opportunities beyond the current job.

 

For regional airlines finding an approach grounded in these fundamentals will be critical for their long term success.