"Regional airlines break out of 50-seat shell"

Sunday, November 14, 2004

Regional airlines break out of 50-seat shell
By Tim McLaughlin 
The St. Louis (MO) Post-Dispatch


Little is getting bigger at Lambert Field. 

Nearly three out of 10 passengers there board the smaller planes operated by
regional airlines, a 42 percent increase over last year. 

The shift at Lambert mirrors a growing national trend in which major
carriers outsource flights to regional airlines to slash costs. And while
regional carriers work hard to live down a perception that they fly only
propeller-driven puddle jumpers and bug smashers, they're using a growing
clout and financial muscle to buy new, roomier jets. 

Still, the image of the smaller planes flown by regional airlines took a hit
last month when an AmericanConnection flight that left Lambert crashed on
the approach to the airport in Kirksville, Mo. Two crew members and 11
passengers aboard the turboprop plane operated by Corporate Airlines Inc.
were killed. 

Last year, regional airlines recorded 0.05 fatal accidents per 100,000
departures. In 2002, there were none, according to federal statistics
compiled by the Regional Airline Association. 

RAA spokeswoman Debbie McElroy says the traveling public has become more
comfortable with regional jets because they've learned that the planes are
modern and comfortable. 

"I really think a lot of those misconceptions have gone away because
passengers are experiencing the amenities of these modern regional jets,"
she said. 

Expansion of regional-jet fleets will continue into the foreseeable future
as the major carriers reduce their number of narrow-body planes, James
Parker, an airline analyst at Raymond James & Associates Inc., said in his
2004 overview of the industry. 

Last year, the number of jets in service among regional airlines increased
30 percent to 1,349 while the number of turboprops fell 9 percent to 834,
according to RAA data. 

Doug Oliver, a spokesman for Brazilian planemaker Embraer, said the fastest
growing segment in the regional-jet market is for 70- to 110-seat planes. 

"This new size of airplane allows you to go to routes where the (Boeing 737)
doesn't work," Oliver said. 

A recent example of this demand came last week when the parent of Trans
States Airlines Inc., the biggest regional-jet operator at Lambert, said it
would start another airline so it could fly jets with more than 50 seats. 

The new airline, with the working name New Corp Air, is considering 70-seat
jets, including the Embraer 170. Trans States, a privately held company
based in Bridgeton, can't fly planes with more than 50 seats because of a
contract restriction with one of its major airline partners. Even so, Trans
States has joined other regional airlines in replacing turboprops with 19 to
30 seats with 40-seaters and 50-seaters. 

"In this business, if you don't get bigger, people will just pass you by,"
Trans States spokesman Bill Mishk said. 

At midyear, Trans States ranked No. 13 among U.S. regional carriers,
boarding 1.5 million passengers. It represented 2.4 percent of the total
market share among U.S. regionals, according to RAA data. At Lambert, about
73 percent of American Airlines' more than 200 daily flights are operated by
American Eagle and independent regional carriers that fly under the
AmericanConnection banner. 

This trend will continue, Parker said, because legacy carriers are not going
to become low-cost. Regional jets generate substantial profits in markets
where they compete against low-cost carriers such as Southwest Airlines, he
said. 

AMR Corp., the parent of American Airlines and American Eagle, had labor
costs that represented 43 percent of its total revenue at the end of
September 2003, according to the Raymond James report. In contrast, labor
costs at regional carriers were substantially less. 

For example, at Pinnacle Airlines, which flies passengers for Northwest
Airlines, labor costs were only 20 percent of total revenue, the report
said. 

Regional carriers boarded 28 percent of Lambert's passengers during the
first nine months of this year, compared with 19.5 percent in the
year-earlier period, according to airport data. The big jets operated by
American and Southwest carried 31 percent and 24 percent, respectively, of
the 5 million passengers who boarded planes during that nine-month period. 

Trans States ranked third, boarding nearly 600,000 passengers at Lambert,
operating and maintaining its planes, but under the banners of American,
United Airlines and US Airways. Chautauqua Airlines Inc. ranked fourth with
nearly 310,000 passengers boarding its planes. 

Chautauqua is bigger than Trans States. Its parent, Republic Airways
Holdings Inc. of Indianapolis, raised $58.2 million in June through an
initial public offering. During the nine months ended Sept. 30, it acquired
15 aircraft for its operations, according to its financial filings. 

The regional carriers like Republic use fixed-fee agreements with the major
airlines to reduce their exposure to fuel-price fluctuations, fare
competition and passenger volumes. Parker said most of the contracts
regionals strike with major airlines call for operating-profit margins of
about 10 percent. Regional airlines can do even better if they bring their
costs below the levels targeted in the contracts, he said. 

"We have grown. The major airlines have shrunk. But we can't forget the same
revenue stream is supporting the regionals and the majors," McElroy said.
"The regional carriers only remain valuable if we continue to be the
low-cost producer." 

Meanwhile, many of the major airlines are hemorrhaging cash and
restructuring their labor contracts to avoid bankruptcy. 

In the case of United Airlines, the bankrupt carrier is seeking bids from
regional airlines to provide up to 70 regional jets to the United Express
network. United expects that under the terms of the bids it receives, the
cost of the capacity operated by Air Wisconsin probably will be reduced. The
request for proposals also will provide United with an opportunity to
fine-tune the mix of smaller and larger regional jets in the United Express
fleet. 

"Every aspect of our business has got to be competitive," Peter D. McDonald,
executive vice president and chief operating officer at United, said in a
statement last week. "We will meet the goal of lowering our costs by an
additional $2 billion, about one-third of which we expect to come from
non-labor costs."


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