Mainline Mergers Affect U.S. Regional Market

By Sean Broderick
Source: Aviation Week & Space Technology

And shed the routes they don't—often at the expense of regional partners. “The growth in the fixed-fee business for regional carriers [that] occurred over the past decade has significantly diminished in recent times as major carriers have reduced capacity and as increased fuel prices have limited the cost efficiencies of small regional jets,” Republic Airways noted recently. “We believe as fixed-fee contracts come up for renewal, there will be competition for market share, which may lead to lower margins and higher risks for regional carriers.”

Republic's analysis has about 1,150 50-seat RJs and 600 larger RJs flying on behalf of U.S. majors. “It is our belief that over the next four to five years, we'll likely see about 600 of these small 50-seat regional jets replaced by about 300 additional large RJs,” Bedford says.

Bradford Rich, president of SkyWest Airlines, also sees bright skies. “We do think there are still hundreds-of-aircraft worth of opportunity out there.”

Engel, the Bank of America Merrill Lynch analyst, expects the majors to keep divvying up work among the regional players. “You want to diversify your flying because you want to play one RJ guy off another,” he says. “American had too much concentrated in one player,” its own subsidiary. “If you have everything in one basket, you lose leverage.”

As the largest regional airline operator in the U.S., SkyWest has deals with everyone. The SkyWest group, which includes carriers ExpressJet, Atlantic Southeast and SkyWest Airlines, flies for United, Delta, US Airways, American and Alaska Airlines. The group carried 58.8 million passengers in 2012, up 5.3% year-over-year. The group's annual operating margin rose 3.3 points to 4.4% in 2012. While an improvement, it is still the second-lowest figure in the last six years, and far off the 2006-07 days when operating margins were more than 10%.

SkyWest is not alone. “Cost pressures are rising on RJ operators as their growth has stalled,” says Engel. “Meanwhile, the price increases are limited. That is why margins are half of what they used to be.”

SkyWest had some extra help. The carrier's challenges incorporating ExpressJet—purchased in 2010—into its Atlantic Southeast Airlines subsidiary contributed to its financial challenges. A series of cost-cutting efforts, ranging from reducing maintenance expenses to eliminating customer service staff, helped the group swing a 2011 net loss of $27.3 million to a $51.2 million profit in 2012.

Meanwhile, the carrier has positioned itself for an anticipated boost in large regional jet demand. It is the U.S. launch customer for the MRJ90, Mitsubishi's new 90-seat regional jet, having a completed a 100-aircraft order last December. Deliveries are slated to start in 2017.

Delta has taken several innovative steps to hedge its bets against a large RJ capacity crunch, including agreeing to take on bankrupt Pinnacle Airlines as a subsidiary. Under a court-approved restructuring agreement, Pinnacle will dump its 140 Bombardier CRJ200s and take delivery of 40 CRJ900s by 2015, leaving the carrier operating 81 CRJ900s—all in Delta colors.

Comments On Articles