Mainline Mergers Affect U.S. Regional Market

By Sean Broderick
Source: Aviation Week & Space Technology
May 06, 2013
Credit: U.S. Airways

Mainline carrier mergers have led to shrinking or disappearing hubs. Rising fuel costs have sucked the profitability out of the 50-seat regional jet markets. The rapid increase in passenger count of the last 15 years is over. In short: The U.S. regional airline industry has to look outward for new opportunities to grow.

But the environment, while challenging, is not without opportunity. Changes in airline scope clauses mean shifts to larger regional jets (RJs)—just what regionals need as rising oil prices render 50-seaters uneconomical. And mainline carriers typically benefit from having multiple regional partners, so while there are fewer majors, there is still plenty of work to bid on. Some industry observers even suggest that the rapid decline in 50-seater demand could make those aircraft attractive once again at least for some, in much the same way that ValuJet built its fleet on the back of aging, unwanted McDonnell Douglas DC-9s.

In the bigger picture, there is little doubt that the era of rapid growth among U.S. regionals has paused, if not passed. Regional airlines carried 160.7 million passengers in 2011 (the latest full-year figure available), according to the Regional Airline Association (RAA). While nearly double the number carried in 2000, the total fell slightly from 2010, and was up just 5.3% from 2005, when the annual passenger count first topped 150 million.

Available seat miles underscore the trend. After jumping 123% from 2000's 42.8 billion to 2005's 95.6 billion, they grew just 5.1% through 2011, hitting 100.4 billion.

Now that growth through growing is off the table, regionals are, much like their mainline partners, emphasizing cost control. American Eagle parent AMR Corp. used the cloak of bankruptcy to help cut the regional arm's aircraft costs. AMR returned 18 Embraer ERJ 135s and cut a sale-and-leaseback deal on 21 more, with terms that end this year. It also slashed lease payments 49% on its 58-plane ERJ 140 fleet and cut leases on 68 of its 118 ERJ 145s by 34%.

The moves are part of AMR's plan to increase the size of its regional aircraft, including outsourced flying. A recent expansion of American Airlines's scope clause, which limits variables like aircraft size or the number of aircraft that partners can fly for the major carrier, made it possible for the carrier to boost its maximum RJ capacity to 76 seats from 50.

American is not alone. Similar expansions to the scope clauses of Delta Air Lines and American Airlines mean that regionals have significant opportunity to add larger RJs to their partner agreements. Demand is so great that American, fearing a rush on regional jet orders, pushed hard to complete a deal with Republic Airways Holdings earlier this year that adds 47 76-seat Embraer 175s as outsourced Eagle capacity.

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