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May192011

« Regional Airline and Small Community Air Service: It’s Time to Regionalize, Not Marginalize, the System »

There are dark clouds looming around the regional airline industry that threaten small community air service and the regional airline industry as we know it.  This could be one hell of a storm.

On Wednesday I had the honor of moderating a panel at the Regional Airline Association’s 36th Annual Convention in Nashville, TN.  The panel consisted of representatives of many diverse, yet critical, relationships to the industry’s regional sector.  Mike Ambrose of the European Regions Airline Association offered perspective and cited some of the differences/similarities between the US and European regional sectors; Greg Principato, long-time Washington aviation and political veteran and now head of the Airports Council International – North America provided the airport view of the importance of the regional carriers; and the current head of oneworld, Bruce Ashby, provided insight from the global alliance perspective as well as from his front row seat watching the US regional airline industry transform itself into what it is today.

The storm begins with fuel.  The equivalent price of a barrel of jet fuel is nearly $130 per barrel compared to $30 per barrel when the explosive growth of the US regional industry began in the late 1990s.  With regional economies around the US performing unevenly and demand down on top of soaring fuel prices and less capacity, it is no longer economically sound to fly to some markets.

As retirements of mechanics and pilots increase at the mainline carriers, talent is being plucked from the regional airlines to fill those vacancies.  Maintenance costs are escalating at rates that will test even the most optimistic and work to assure that current contracts between the mainline and the regional partners for 50-seat flying will likely not be renewed. 

All of these structural issues are compounded by the heavy hand of government regulation that will only increase costs to the regional sector.  This government intervention ensures that the regional sector will be smaller tomorrow than today, bringing economic carnage for affected communities.

Analysis of Large Hub Airports

The FAA defines an airport as a large hub if it accounts for at least one percent of all enplanements.  But an analysis by MIT graduate student Joe Jenkins that assesses individual airport’s domestic origin and destination (O&D) traffic reveals some interesting trends about air traffic, inflation-adjusted fares and the quality of individual airport access to the air transportation grid in the United States.

According to Jenkins’ analysis, between 2000 and 2010, the nation’s 29 large hub airports grew a paltry 1.1 percent. In terms of O&D, the fastest growing airports were New York – JFK, Charlotte, Denver, Ft. Lauderdale and Orlando.  Those losing the most domestic O&D traffic were Newark, Detroit, Los Angeles, Atlanta and Chicago.  In each case the trends are pretty clear:  Traffic declined at 15 of the 29 large hub airports over those ten years.

The main factors at play were capacity reductions by the network carriers, which depressed demand in hub markets, and a meaningful low cost carrier presence in the fastest growing markets.

In 1980 Orlando ranked 22nd among the large hub airports; in 2010 it ranked number 3.  Only Los Angeles and Las Vegas are larger in terms of local traffic.  On the opposite side of the scale, Miami ranked number 9 in 1980 and number 29 in 2010 (no doubt a function of the growth of Ft. Lauderdale, which ranked 24th in 1990 and 13th today.)

Jenkins also determines whether a market is experiencing improved access to the air transportation grid by looking at how much traffic is traveling nonstop versus connecting.  Only nine of 29 large hub airports saw decreases in access quality for each passenger.

Meanwhile, domestic fares fell on average 30 percent when adjusted for inflation between 2000 and 2010. Airports with the largest decreases in real fares during the period at Ft. Lauderdale, Denver, New York – JFK, Philadelphia, Boston and San Francisco.  Honolulu is the only one of the 29 large hub airports that realized an increase in real fares, which can be explained by the increase in longer distance flying between the US mainland and Hawaii and the liquidation of Aloha. 

Imagine that in the course of one decade, average real fares in the largest US domestic markets fell 30 percent.  And the regulators worry about too little competition? 

Analysis of Medium Hub Airports

At medium hub airports which handle between .25 percent and less than one percent of domestic enplanements, O&D traffic declined by an average of 6.2 percent over the 2000 - 2010 period.  Southwest is almost entirely responsible for the creation of medium hub airports.  During the carrier’s infancy (1980s - 1990’s), the “Southwest Effect” stimulated new demand by offering lower fares than were prevalent in the market before the LCC’s entry.  Today (2007 – present), the “Southwest Effect” diverts demand from surrounding airports more than creating new demand.  Maybe someday the regulators will understand this.  But I digress.

Of the 35 airports medium hub airports, 20 experienced a traffic decline. While Ft. Myers and Milwaukee grew over the decade, San Jose, Reno, Cleveland, Hartford, Providence, Ontario, Cincinnati, Pittsburgh and St. Louis all lost traffic.

The economic troubles confronting the industry have not been solely relegated to the network carrier sector. The drawdown of network carrier hubs at Pittsburgh and St. Louis have been the subject of much discussion within the industry, as has Cincinnati, a hub for Delta.  But many medium hub markets were hurt much more than Cincinnati.  Jenkins’ analysis makes clear to this analyst that Delta is doing nothing more than rightsizing Cincinnati to meet local demand - a prudent business decision. 

Clearly, the loss of air service is problematic to any community, and no two markets were more affected that Pittsburgh and St. Louis.  But Pittsburgh and St. Louis were also among the airports that realized the largest decline in average fares, along with Milwaukee, Orange County, CA, Cincinnati, and San Jose.  Those experiencing the greatest increase in average fares between 2000 and 2010 were Dallas Love Field, Burbank, Reno and Houston Hobby which, interestingly, all are markets that Southwest calls home.

Analysis of Small Hub Airports

Only the small hub airports – those that handle less than .25 percent of traffic and more than .05 percent -- realized a significant increase in traffic between 2000 and 2010.  The airports with the biggest gains were Orlando Sanford, Long Beach, Newport News, White Plains and Akron/Canton.  Of the 63 small hub airports, one-third of the airports enjoyed a double digit increase in traffic despite the most difficult decade for US airlines ever.   The worst performers in the group were Greensboro, Tallahassee, Colorado Springs, Corpus Christi and Stewart Airport in New York.  With the exception of Corpus Christi, there is no meaningful LCC presence in this group.

Among the 36 of 63 small hub airports with improved access to the national air transportation grid most were Springfield – Branson, Akron/Canton, Stewart (despite seeing below normal traffic growth), Flint and Long Beach. The airports realizing their quality of access declining the most were Gulfport-Biloxi, Tallahassee, Santa Barbara, Fresno and Syracuse.

Only the large hub airports realized a fare decrease between 2000 and 2010 more than the small hub airports.  This will certainly come as a surprise to those that claim smaller airport markets have not shared in consumer benefits brought on by competition.  Average fares declined the most in White Plains, Allentown, Long Beach, Richmond, Atlantic City and Wichita, in part because of the influence of AirTran. The merger Southwest and AirTran makes even more sense to me now as Southwest’s 72-point network is significantly augmented by a network of small hub markets.  But what happens in catchment areas like Akron/Canton and Cleveland? There are many of these shared catchment areas when the merged route maps of Southwest and AirTran are examined. Only time will tell.

Analysis of Non-Hub Airports

Where the rubber hits the road in the next few years is at the very small, non-hub airports.  

Here, those most successful in generating traffic were Ft. Collins and Laughlin, AZ.  Among the worst performing were Pocatello, Sioux City, Toledo, Muskegon and Lansing.

Among these mostly small communities, some did gain better access to the US air transportation grid, including Hot Springs, Rockford, Western Nebraska, Laramie, Peoria and Toledo. But others are losing service, with Pocatello, Klamath Falls, Elko and Columbia, SC atop that list.

All the discussion of Essential Air Service in Washington underscores the importance of revenue economics in this sector.  When I looked at the traffic performance relative to the trajectory of the inflation adjusted fare line, only one non-hub really shined: Aspen Eagle.  This explains the relative levels of new service being started there.  Of the low performing airports not yet closed, Toledo and Muskegon, MI are the worst.

As a significant number of regional contracts expire through 2016, the real question will be whether it is economical for airlines to continue to serve some of these markets. The prospects are not good. In addition to punishing regulation and fuel prices, the regional sector already suffers from a pilot and mechanic shortage sure to be compounded by a coming wave of retirements at the network carriers. Further compounding manpower issues for the nation’s regional airlines is the dubious impact of new legislation that mandates 1,500 hours of qualifying flying time for regional pilots.

In keeping with Tennessee vernacular:  In coming years it will be difficult to “perfume the pig”. 

The Southwest Catchment Area and the Impact on Small Airport Markets

Let’s face it: the enemy of the small airport is the high cost of oil, a poor local economy and, yes, the presence of Southwest Airlines within a two hour drive.  Consider the facts.

With service to Pittsburgh do we really need service to Latrobe, Youngstown, Morgantown, Franklin, Akron, Johnstown, Clarksburg, DuBois, Altoona, Parkersburg, Cleveland and Erie?  For some of these markets the highway is already the first mode of access to the air transportation system.

With ample service to Raleigh/Durham, do Pinehurst, Fayetteville, Greensboro (remember their bad traffic performance), Kinston, Greenville, NC, Winston-Salem, and Jacksonville, NC need their own airports? Raleigh/Durham has been shown to be outperforming most in their peer group of airports.  The catalyst for that outperformance is because the best service in the “air service region” is offered at RDU.  Jacksonville and Greenville will never be able to offer passengers the air service menu that is available in Raleigh/Durham no matter the number of frequencies or the number of hubs served.

Some of these airports are, simply put, ripe for closure.  But some should also be candidates as tomorrow’s “essential.”  Bills doing away with the Essential Air Service Program as defined in 1978 are unfortunate.  What’s needed instead is legislation that better defines “essential” in today’s airline revenue system.  Secretary LaHood visited the Regional Airline Association Convention on Tuesday.  He said that no Reauthorization bill will exclude Essential Air Service as we know it.   And that’s a mistake.

It is high time that we begin talking about the regionalization of air service.  The market is already causing that to happen in places like Bloomington, IL.  With no replacement airframes in the pipeline to replace the flying done with 50-seat and smaller aircraft, we need to talk about air service regions.  But no one in Washington will have the guts to say that the local airport should close even if its customers would fare better (pun intended) by driving to a better performing airport in the region to access the system.  We should be investing in infrastructure at the best performing airports within regions rather than building monuments to Congressmen and local politicians that will not add value to the overall system.

There is much more to write, and I will.

 

[Note:  Thanks to MIT graduate student Joe Jenkins for his excellent analysis of domestic air service contained in this blog.  Mr. Jenkins plans to complete his analysis and thesis of airport network access in August 2011.]

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Reader Comments (4)

Interesting data points by Joe Jenkins. I think the conclusions repeat what has largely been stated in the past by analysts (did Mike Boyd help write this?), but I guess the troubles that the regional airlines face down the road are worth repeating.

I would also like to state that there is nothing "dubious" about the impact of the 1500 hr. rule that is FINALLY making its way through the FAA and the Hill. Low time pilots have no business being in the cockpit of a passenger carrying jet, and as a user of public airline transportation I am glad to FINALLY see this issue addressed. If I was wealthy enough to own my own jet that was carrying my friends and loved ones around, there is NO WAY I would hire an inexperienced pilot (i.e. less than 2000-3000 hours for a co-pilot, double that for the Captain) for either seat of my jet, and no pilot in his right mind would either. The airlines, in particular the regional airlines however, put dollars before common sense.

To make an analogy you might understand better William, I am sure Mr. Jenkins is a very bright fellow. I imagine that since you make a statement that he is working on this thesis, that he is probably young and working on his Masters Degree (I could be wrong, but let's make this assumption). I doubt you would hire him as CEO of Hawaiian Airlines in order to "save a buck" on executive salaries, would you? Of course not. Because he is likely young and inexperienced you would not want to risk the well being of the company in order to save a buck on CEO salaries and bonuses. For the same reasons, regional airline management should not be trying to "save a buck" on airline wages by placing a low time, inexperienced pilot in the cockpit. It's a shame that airlines have to put profit before safety and something as fundamental as this concept even has to be legislated. Had there been two experienced pilots in that Colgan cockpit, that accident most certainly WOULD NOT have happened and 51 people's live would have been spared.

As far as the labor shortage the regional airlines are likely to face, that is completely self inflicted and easily addressed. Regional airlines have a long history of treating their labor poorly and paying them just as poorly. There is no shortage of young people who would love to partake in the perceived glamor of being an airline employee. There will be, though, a shortage of young people willing to spend tens of thousands of dollars (or in the case of pilots, a high 5 figure or low 6 figure sum) to pursue a career that has a history of long hours, low pay, and lack of respect from airline management. There are internet forums (like flightinfo, airlinepilotcentral, and pprune - read them William) and internet blogs (like the truth about the profession - Google it William) that readily highlight the low pay and poor working conditions regional airline pilots, mechanics, and flight attendants endure. The advent of the internet makes it easy for young people and their parents to see the inequities in the airline business, and they simply decide to pursue a different direction with their young lives and scare education dollars. I can't say I blame them.

When regional airline management decides to (easily) fix those problems, they will have all the labor that they need. Then they can concentrate their efforts on the more difficult challenges in their future, some of which are mentioned in this article.

05.21.2011 | Unregistered Commenterglobalexpress

Globalexpress

As is typical with your reading of this blog, you miss most of the points intended by the article. It had some to do with pilots, but actually very little. You really do not need to spend time commenting here unless you absolutely insist as you add very little value to the discussion. To the extent your wisdom is value added, just sign your name like most do when they have something of value to offer.

As for my reading list, I do read the emotional and often nonsensical commentary on many sites. I might suggest that you pick up a finance textbook. Then you might just understand why I write what I write.

Swelbar

05.22.2011 | Unregistered Commenterswelbar

I insist.

No, I get the points made in the blog. It's a rehash of what many analysts have stated in numerous articles, papers, and seminars, with a thorough analysis of supporting BTS data by a graduate student. Further, my bookshelf already has a "book or two" on various financial topics, both airline and otherwise, thank you very much.

What I don't enjoy about your blogs, however, are these "little jabs" you take at labor, and as you continue to make them, I will defend and set the record straight. For example, you state, "Further compounding manpower issues for the nation’s regional airlines is the dubious impact of new legislation that mandates 1,500 hours of qualifying flying time for regional pilots." Dubious? Really? I guess it's "dubious" until you lose a loved one in an airliner piloted by a kid fresh out of flight school? What is "dubious" is the hiring practices of regional airline management in order to "save a buck" on salaries. Their behavior has become so flagrant that it has attracted the need for legislation. I then wrote an analogy so that a non-pilot type management person could understand why the legislation isn't "dubious" at all.

The rest of my comments concerning the (skilled) labor shortage regional airlines will likely face during either the next significant economic upturn or when major airline retirements start again (whichever comes first), was fully relevant to your narrative. I was simply stating that any labor shortage affecting skilled labor (pilots and mechanics in particular) could be simply solved by paying salaries that will attract young people into the profession and treating said employees with respect. If the regional airline industry suffers from any labor shortages, it is completely self inflicted and will be a result of the sins of their past. If you would get past the "nonsensical commentary" written on the forums I mentioned, you would understand the underlying message being conveyed by many frustrated regional airline professionals and perhaps as a consultant you could advise guys like Cohen (is he still running the RAA?) to get their act together and (easily) fix one of the looming problems mentioned in your blog.

Sorry if you don't think I add value to the discussion, William. Tell Mr. Jenkins I wish him well with this thesis. I'd be interested in reading it when it is finished. You should post it on your blog.

05.22.2011 | Unregistered Commenterglobalexpress

Globalexpress,

It is interesting that you'd say that you cannot afford your own jet for travel and that you like to have a pilot with 2,000+ hours, but the two things don't mix. If you want a more experienced pilot, you have to pay more for the service. Besides there have been more accidents from major airlines than regionals.

The biggest issue is not experience, it is fatigue! Pilots need rest between flying and the rest requirements are out-dated and the airlines are trying to stall the measure that requires them to give their pilots more rest because "it costs too much".

So...let's pay more for our airline tickets so that the pilots can have more pay and rest before they fly your loved ones through the airways.

05.24.2011 | Unregistered CommenterAirline Pilot

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