Republic (RJET) CEO Bryan Bedford outlined why the regional business is a brutal one in my interview last week. It's a mature industry with little to negative growth and shrinking margins. With that kind of challenging environment, the regionals have had to step out of their comfort zones to find a business model that works.
One of the great things about the Regional Airline Association convention is that the CEOs of many of the regionals give 15 minute briefings to the media that includes a question and answer session. It's not long, but it gives great insight into where the airlines are going. Here's a roundup of the different strategies being used.
Great Lakes Airlines Great Lakes (GLUX) CEO Chuck Howell told us how the airline is one of the few in a status quo position right now. Great Lakes is the largest operator of government-funded Essential Air Service (EAS) small market routes, primarily but not exclusively out of Denver, so the airline goes as the government goes. And right now, things look good for them. The ill-advised EAS program will see its funding nearly double if the new FAA reauthorization bill passes. That can only mean more opportunity for Great Lakes.
Is it seeing any changes? Yes. It's pulled out of some east coast markets that just didn't work for it, and it's walked away from St Louis now that American offers little to no connectivity any more. On the other hand, it's seeing booming business in the Dakotas, where oil is taking off.
American Eagle American Eagle's outgoing President Peter Bowler told the tale of an airline that's actually growing. It's a rare story to be heard these days. Eagle, of course, does its flying for American and the growth is happening in the 70 seat market. Today, Eagle operates 25 CRJ-700 aircraft for American, but that's going to nearly double to 47 with the first new delivery coming in August.
These planes are not just additional flying, but a different type of flying for the airline. American has opted to put First Class on these planes, most likely to compete with guys like United (UAUA) who have an armada of 70 seaters with a mainline-style product. So far, 18 of the CRJ-700s have First Class and the rest will have them soon. Eagle really is at the beck and call of American and right now, that's good for it.
Pinnacle Pinnacle (PNCL) had Douglas Shockey there to speak with us, and he told the story of a rough year. Pinnacle owns Colgan Air, which is the airline that lost a Q400 in Buffalo last year. That has led to a great number of questions about the airline's training and fatigue procedures, and it's certainly been an unwanted spotlight. As you can imagine, much of the discussion was about the commitment to safety going forward.
But on the commercial side, Pinnacle is positioning itself to win more flying. Pinnacle knows that it may lose 50 seat jet flying as contracts come up and demand shrinks, so it has moved more aggressively into the turboprop world with Colgan. It flies 30 seat Saabs for United in Washington and it is growing its 70 seat Q400 flying for Continental. That agreement expands into Houston soon. So that's where Pinnacle sees its growth potential, in the turboprop world -- and the airline is looking to find new partners in that niche.
Republic The Republic story has been discussed at length in the Bryan Bedford interview, but he reinforced his beliefs about the industry at RAA. Bryan saw the shrinking market and decided to jump into branded flying, not by starting his own airline, something that has failed multiple times in the past, but rather by purchasing existing brands. Those are now consolidating under the Frontier name.
SkyWest SkyWest (SKYW) is the largest regional out there, and it has no plans to follow down the road that Republic is taking. President Chip Childs said that without question the future they see is flying for another airline, just as they do today with United, Delta, and others.
Where SkyWest sees changes is in the way contracts are structured. The traditional contract which gives them a guaranteed margin is still in place but it has been relatively stagnant of late. So the airline has started to get more adventurous. It has expanded its at-risk flying where it takes responsibility for the costs and also gets the revenue. This shifts risk from the major partner to SkyWest, but it enables it to keep its planes in the air.
Right now, it have 40 turboprops under that model and another 23 regional jets that have started to fly that way. Its most recent deal was with AirTran (AAI) in Milwaukee. SkyWest was confident that it would be able to help AirTran's efforts to grow that hub, but AirTran wouldn't want to take on the risk. So SkyWest did and apparently the partnership has exceeded AirTran's expectations.
The upshot here? The SkyWest fleet is flying more block hours than at any time in its history, but the company isn't content with how things are going. It's also reaching out globally and investing in airlines in places like Brazil and Southeast Asia where there's more opportunity to grow its business.
Atlantic Southeast Brad Holt, President of Atlantic Southeast, spoke to us about an airline that's evolving. Formerly tied solely to Delta (DAL), ASA has grown up and is starting to fly for other airlines. This has meant a big rebranding effort (to be covered in a later post) to distance itself from Delta along with a renewed investment in the operation. ASA, which is now owned by SkyWest but run separately, has had a long history of poor performance, but it's making strides in changing that in order to expand the business.
ExpressJet Nobody from ExpressJet (XJT)gave us a briefing but this is an airline that's had its share of troubles. Originally solely a feeder for Continental (CAL), ExpressJet has done just about everything it could to branch out including the launch of a now-shuttered branded division as well as a shrinking corporate division. Its latest move has been to buy its way into flying for United, but now it's likely that will be merged with Continental so it'll be back to square one.
ExpressJet has been losing money for awhile and it faces the potential loss of flying if the merger goes through. Most people expect Cleveland to shrink dramatically, and ExpressJet does much of that flying now. So this is a picture of an airline that has tried many different strategies with none having worked to help diversify their business so far. It'll rise and fall with Continental.
Mesa Air Group Ah, Mesa (MESAQ). They weren't there either, and in fact I don't believe they're even a member of the RAA, but they are also an airline in trouble. In bankruptcy since last year, Mesa has lost much of its flying and, as has been discussed here recently, is really dependent upon US Airways (LCC). If US Airways decides not to renew its flying with Mesa in the next few years, the airline will have little reason to exist.
Horizon Air Horizon didn't present, but as a wholly-owned subsidiary of Alaska Air Group (ALK), it hasn't really seen many changes lately. The airline continues to try to consolidate around its Q400 fleet with limited jet flying. There are likely going to be expansion opportunities along with Alaska up and down the west coast, but there hasn't been any discussion that I've heard about shifting strategies.
As you can see, there are many different strategies being employed here. The boldest one is the branded strategy from Republic. Pinnacle's move into turboprops should be good for them, and SkyWest's global ambitions are undoubtedly going to help them grow as well. For many others, it's still a struggle to find a strategy that works in this shrinking industry.