Over the rest of the decade, it seems like a safe bet that U.S. regional carriers—either by choice or necessity—will be doing more pro-rate rather than fixed-fee flying. The questions are to what extent that will be the case and, most importantly, whether they can make a profit by taking more responsibility for their own sales but also covering their own fuel costs. The most recent pro-rate results at SkyWest and Pinnacle are mixed at best, which might give other carriers pause. So I'll be interested to hear what other regional carrier executives have to say on the topic as they gather for the Regional Airline Association annual convention in Nashville this week.
SkyWest, the parent company of SkyWest Airlines, Atlantic Southeast Airlines and ExpressJet, already operates about 60 of its 700-plus aircraft on pro-rate deals. The financial return on that flying has experienced its ups and downs, but the carrier lost $6.9 million pre-tax on that flying in the first quarter of this year after managing a $1.5 million pre-tax profit on it in the fourth quarter of 2010. A big part of the reason was the unanticipated $6 million increase in fuel costs.
There always is some mismatch in adjusting fares for rapidly rising fuel costs, SkyWest President Brad Rich said in the carrier’s first quarter earnings conference call this month, and he said the airline is seeing good fare increases and yield strengthening on the routes.
But SkyWest is planning to make some adjustments to the flying, and emphasizes that it is doing the pro-rate flying by choice, not because it has to: the carrier insists it does not have lease commitments on aircraft that have no place else to fly, so it can stop the pro-rate flying whenever it decides it is in its best interests to do so.
For now, Rich says, the airline still believes “unique opportunities” exist for such flying, including in some markets that until recently were served with larger mainline aircraft. Russell “Chip” Childs, president and COO of SkyWest subsidiary SkyWest Airlines, says the pro-rate flying helps with the overall utilization rate of the fleet, and he remains “cautiously optimistic” that the pro-rate flying is going to at least break even through the rest of this year. But he adds that SkyWest will be watching closely for the developments on Essential Air Service funding, which subsidizes some of the service.
At Pinnacle Airlines, the parent company for Pinnacle Airlines, Mesaba Aviation and Colgan Air, pro-rate flying accounted for about 12% of revenue for the first quarter. Pinnacle subsidiaries have some interesting twists to some of their pro-rate agreements. For example, Colgan’s pro-rate deal with United for Houston operations contains a semiannually-adjusted connecting passenger incentive payment designed to maintain a base level of revenue for Colgan in those markets, and its deal with United for Washington Dulles operations includes a fixed connecting passenger incentive payment.
The markets would not be profitable without the connecting passenger incentive, Pinnacle says.
Also, one Pinnacle subsidiary’s pro-rate agreement with United Airlines provides for an adjustment to the pro-rate revenue based on projected changes in fuel prices.
Nonetheless, it’s not clear whether Pinnacle’s pro-rate operations are making a profit or a loss. During the first quarter earnings conference call, Pinnacle CFO Peter Hung said pro-rate is doing well on revenue, up $1.9 million on 6% less capacity, for a unit revenue gain of 13% year-over-year.
Fuel costs for pro-rate, however, increased $1.3 million. Hunt also says the airline may need to do some things to get the core cost of those operations to improve, such as transitioning some of the Colgan Saab 340B aircraft to newer 340B+ to lower the maintenance costs.