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March 22, 2012

Regional Jets: The Cure or the Disease?

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By: Phil Derner Jr.
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Dollar Dollar Bills, Y’all

The contracts negotiated by regional carriers with the legacy carriers provide a guaranteed source of revenue: Regional carriers are paid a fixed rate regardless of the number of passengers carried, the amount of fuel burned, or even level of service provided. The ticketing, fuel, baggage and other associated costs are all borne by the legacy carrier, leaving the regional carrier to focus solely on the flight itself.

The CASM for regional jet service was widely reported to be far less than that of the legacy service it replaced or augmented. But for some regional carriers, the CASM was as much as half again higher than the legacy carriers they served. These regional carriers generally did have higher labor costs, but the reason for these high costs was that they included peripheral costs, most notably fuel.

Quarterly business reports from airlines that employ the services of regional carriers commonly report a consolidated CASM, a CASM specific to the carrier’s own flight operations, and the CASM for the regional service that does not include fuel. Calculating a CASM for regional service that does include fuel can be calculated with data provided in the quarterly reports. In some quarters, the carriers have also elected to report this figure directly. The CASM for regional service for these carriers, including fuel, is typically fifty percent higher than the carrier’s own service.

Though the cost of providing regional service is high, it had be justified by the revenue it created. Reviewing quarterly reports, one finds that the Revenue per Available Seat Mile, or RASM versus the CASM can be much higher than that at the carrier’s own operations. This is evident in the high ticket prices in communities that are served exclusively by regional carriers.

But the strength of a carrier utilizing vast amounts regional service may soon become a carrier’s Achilles heal.

Paying at the Pumps

For most of airline history, the cost of fuel was not a high priority. Like diesel, jet fuel had a low demand and a corresponding low cost. During the last decade, diesel has rapidly replaced gasoline as an automotive fuel source worldwide, and the prices have correspondingly increased. With the explosion of air travel worldwide, jet fuel has also witnessed an increased demand and price. Labor had been historically the largest expense for an airline, but now fuel is typically a carrier’s largest single expense.

Air carriers have been replacing older fuel inefficient aircraft with modern aircraft burning as much as sixty percent less fuel. The carriers also have undertaken projects to reduce fuel burns and incorporated them into their operations. The pilots of these carriers have also had a vested interest in reducing their employer’s fuel costs.

The fuel provided to regional carriers is entirely paid for by the legacy carriers that engage their services. Since this economic pressure is all but eliminated from the regional carriers, the desire for fuel efficiency is greatly diminished. In addition, the regional jets flown at these outsourced carriers have similar fuel burn rates (per available seat mile) to the aging aircraft retired by the airlines in the last ten years. This aspect became evident when fuel prices spiked in 2008.

Limited Operations, Limited Revenue

Another problem faced by carriers utilizing the services of regional jets are the operational abilities, which are limited compared to the legacy carrier’s own equipment. Often these aircraft have limitations on the amount of weight that can be safely and legally be carried. As a result, passengers, cargo, or baggage may be left behind in order to abide the weight restrictions. During deteriorating weather conditions, excess fuel that must be carried further reduces the payload capabilities of these aircraft. Oversold aircraft may leave the gate with as much as fifteen percent of the seats vacant. These regional aircraft are also more likely to cancel when visibility at the destination deteriorates; larger aircraft and their crews are typically certified to land in visibilities less than one quarter mile, whereas the regional service is typically limited to one half mile of visibility. The increased costs of the payload restrictions, as well as the loss of customer service is a hidden cost not reported in a carrier’s quarterly report.

After the downturn of airline travel in late 2001 and 2008, airlines were able to reduce capacity by parking aircraft and laying off employees. Capacity at some carriers shrunk by nearly one half, replaced in part by contracting with regional carriers. The freedom to now rapidly downsize is limited by these contracts.

Carriers with large outsourced regional operations could be in a precarious situation. A spike in fuel prices will have a greater effect on them, and an economic downturn could saddle them with the inability to easily shed the contracts of these regional carriers. Their service at smaller communities is also vulnerable, for if another carrier with larger aircraft enters this regional market, it could decimate ticket sales with the lower CASM on equipment more desirable to the traveling public.

The effort to expand service and limit costs in the last ten years with regional jets has been highly successful, but the benefits may not be benevolent. The costs and risks of outsourcing continue to rise, and both may limit a carrier’s profits and control. Carriers without the large outsourced flight operations have generally seen better and more consistent revenue. The shift to regional jet flying in the last decade was critical to the survival of the legacy carriers, but it is now becoming the Edsel of air travel.

 
 

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    Awesome freaking post and great insight on this.  Keep up the good work!