Wieffering: Regional air carriers not immune to tough times

  • Article by: ERIC WIEFFERING , Star Tribune
  • Updated: April 3, 2012 - 8:48 PM

The future of the airline industry is beginning to look a lot like its recent past.

Carriers like Pinnacle Airlines, with their smaller planes, lower labor costs and less restrictive union work rules, were supposed to represent a more efficient and profitable way to ferry people from here to there.

But even regional airlines seem destined to land in bankruptcy.

Pinnacle, the Memphis-based carrier that bought Mesaba Airlines in 2010, filed for Chapter 11 protection on Monday. That means former Mesaba employees, who endured a bankruptcy in 2005, get to do it all over again.

They will have plenty of company. Last year, American Eagle was dragged down by the Chapter 11 filing by its owner, American Airlines. In 2010, Mesa Air Group went bankrupt, and a desperate ExpressJet sold itself to SkyWest Airlines for $50 million less than it was offered in 2008.

Turns out that being a smaller airline doesn't make you immune from the forces that played havoc on the big carriers. And in some cases, the affects are worsened by the one-sided nature of the relationship between the major carriers and the regional ones they hire to operate the smaller jets.

If names like SkyWest, Mesa and Pinnacle don't mean anything to you, that's part of the problem confronting the industry: Most of players have little or no brand identity with passengers. You don't ever see their livery on the runway. You won't ever see a pilot or gate agent striding through the terminal in a Pinnacle uniform.

They dance to the tunes called by Delta, United, and other major carriers -- or at least the most important notes, such as schedules, fares and the outsourcing fee it's willing to bestow.

In the early days, the smaller carriers were entitled to a fixed margin on their expenses. Those are now referred to as the industry's salad days.

But now it's flying for a fixed fee, and intense competition for the business among regional airlines is pushing rates down. Utah-based SkyWest, for example, reported that a new contractual rate with Delta reduced its 2011 passenger revenue by $22 million. The airline also received lower incentive payments from its big airline partners, for things like on-time departures and arrivals, that sliced 2011 passenger revenue by another $19 million.

"It's really become a race to the bottom," said William Swelbar, an airline industry consultant who also teaches at the Massachusetts Institute of Technology. "The cost squeeze on the regional carriers has been significant."

The big airlines can afford to bargain hard because there's a glut of seats available on regional jets. Delta, for example, has more than 300 50-seat aircraft in its regional airline network -- far more than it needs or can use, at least profitably.

"With fuel at its current prices, the revenue from a 50-seat jet does not make economic sense," Swelbar said.

While the business model for regional airlines depends on major airlines using them, the big carriers also can own and operate their own regional jets. In one three-year period, for example, the former Northwest Airlines sold Pinnacle for almost $300 million, bought Mesaba and launched a third regional carrier, Compass, before selling itself to Delta.

Today, Delta's business accounts for 80 percent of Pinnacle's flying, but not all of its woes can be laid off on the bigger airline. Last year, for example, Pinnacle signed a new contract with its pilots that "will materially increase our pilots' salaries, wages and benefits costs."

"It was a contract they couldn't afford," Swelbar said.

Two months ago, with losses mounting, Pinnacle invoked a 5 percent permanent pay cut for all pilots. CEO Sean Menke insisted the measure was necessary to prevent the company from filing for Chapter 11 bankruptcy protection. But that rationale rang hollow when Pinnacle filed documents revealing that the board had boosted the base pay of Menke and Chief Operating Officer John Spanjers by 60 percent and 45 percent, respectively.

Using smaller jets remains a viable strategy for the major airlines. The number of people flying on regional jets doubled, to 164 million, between 2000 and 2010, and regional carriers now represent almost half of all departures in the United States.

But those numbers mask some incredible turbulence, as well. The number of departures completed rose by less than 5 percent, fleet flying hours fell by more than 12 percent, and the number of regional carriers shrunk by a third, to 61.

Swelbar expects more consolidation in the months and years ahead. He thinks it's likely another airline could buy Pinnacle during bankruptcy or after it restructures.

Too late to benefit Pinnacle's shareholders, but not too late to learn a lesson about investing in a company that's almost completely beholden to the decisions of another.

Don't.

ericw@startribune.com • 612-673-1736

  • get related content delivered to your inbox

  • manage my email subscriptions

ADVERTISEMENT

Connect with twitterConnect with facebookConnect with Google+Connect with PinterestConnect with PinterestConnect with RssfeedConnect with email newsletters

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

 
Close