Tuesday, March 30, 2010

End of the Regionals?

In the airline industry, the last ten years could well be known as "The Decade of Regional Airlines." To be sure, they had been around for many years prior. The 1960s and 1970s saw the beginnings of the industry, the 1980s bore airline proliferation, air service agreements, and express branding, and the 1990s witnessed the introduction of the regional jet and the fee-per-departure model still prevalent today. All this was mere prelude to the decade between 2000 and 2010, when the regional airline industry underwent explosive growth that surpassed even the vaunted low-cost carriers. Regional airline traffic doubled over this period, to the point that they now account for 53% of all U.S. departures. Regional airline capacity increased even more, with larger aircraft driving a 178% increase in available seat miles (ASMs).

This expansion is all the more startling when one compares it to the retreat of the legacy carriers, who shrunk from 534 billion domestic ASMs in 2000 to 408B ASMs in 2009. Even when you add in the burgeoning LCC sector, mainline capacity has decreased slightly. Financially, the regional airlines have been consistently profitable in a period that saw the legacy carriers lose money six out of nine years, for a net loss of over $63,000,000,000. Ironically, regional airlines flush with profits have proven a ready source of lending for their cash-strapped major airline partners. This occasionally results in tail-wagging-the-dog situations, such as Republic Airways Holdings' purchase of its customer and debtor, Midwest Airlines, and subsequent replacement of all Midwest aircraft and employees with those of Republic Airlines. Republic even had enough money left over to pick up ailing Frontier Airlines thanks to tony contracts with American, Continental, Delta, United, and USAirways - all ostensibly competitors of Frontier.

By its very success, however, the regional airline industry may have sown the seeds of its destruction. Barring one exceptional contingency I'll discuss later, it is quite possible that the coming decade will see not only an end to regional airline growth but perhaps also a steep decline in regional airline capacity and a winnowing of the existing carriers.

Most of the growth in the 37-50 seat regional jet segment prior to 9/11 was replacement of existing 29-38 seat turboprop service. Most of these short-haul flights were used primarily to feed transcontinental and international service, the most profitable flying for most legacy airlines. These high-value customers strongly preferred jets to turboprops, and in the era of cheap fuel it seemed like replacing turboprop aircraft with regional jets would give a carrier a strong advantage. Most major airline pilot scope clauses allowed a only limited number of regional jets to be outsourced prior to 9/11, although there were a few exceptions: WidgetCo, for example, ordered hundreds of CRJ-100s and CRJ-200s in the mid to late 1990s.

After 9/11, the legacy airlines aggressively cut capacity in a vain attempt to boost yields (it was all for naught because expanding LCCs aggressively filled the void). These capacity cuts were achieved both by reducing frequencies between city pairs and downgauging equipment. In the case of routes flown by the smallest narrowbodies like DC-9s, B737-200s, and Fokker 100s, the next smallest equipment that could be used were CRJ-200s. All the legacies obtained much looser scope limits on 50-seat RJs as part of the post-9/11 concessions, and a number of regional airlines exploded in growth as the majors retired their aging small narrowbody fleets.

The problem was that even when fuel was cheap and yields high, 50-seat RJs were marginally profitable airplanes at best; remember, they were only intended to feed more lucrative flying. They were poorly suited to replace mainline jets twice their size on major routes, particularly as fuel became more expensive and yields stayed depressed. Bombardier and Embraer responded by developing 70-90 seat jets. The post-9/11 scope clauses allowed only limited numbers of these airplanes, but the 2003-2005 round of airline bankruptcies gutted these clauses and the airlines ordered large numbers of these big RJs. Most of these went to regional airlines; only a few 90-100 seat jets were ordered at mainline carriers (USAirways and jetBlue). It was this two-part wave of 50 seat and 70-90 seat outsourcing that allowed nearly continuous growth at the regional airlines throughout the last decade.

This growth, however, has now all but stopped, and in several cases reversed. All of the major airlines are at or near the limits on outsourced large RJs allowed under scope clauses, and few pilot groups seem inclined to make further concessions on scope (one group, the American Airlines pilots, are demanding that all jet flying be returned to mainline). Meanwhile, the 50-seat RJs are starting to get long in the tooth and are proving both overly expensive to operate and unpopular on long routes. Many airlines are aggressively cutting 50-seaters as their air service contracts expire (or, in the case of wholly-owned regional airlines, retiring 50-seaters as the leases expire). Some regional airlines have managed to replace expiring 50-seat flying with new 70-90 seat flying, making mere stagnation the best-case scenario over the last two years. Others have been unable to do so due to high costs (Air Wisconsin, Comair, ExpressJet) or a record of poor service (Mesa), resulting in significant shrinkage at those airlines.

The plight of Mesa is a good example of the challenges posed by this shrinkage. Throughout the 1990s and early 2000s, Mesa grew from a small turboprop airline flying EAS routes to an absolute giant of the industry flying everything from B1900s to 88-seat CRJ-900s for airlines including American West, USAirways, United, Delta, Midwest, and Frontier. They did this by aggressively underbidding other regional airlines whenever major airlines put out an RFP. The rapid expansion kept crew and maintenance costs low, as did the company's notorious emphasis on low overhead and minimal infrastructure. The airline got a reputation for poor service early on, but this did not slow its growth as long as it was the cheapest option. Once there were few new contracts to bid for, however, Mesa's costs rapidly grew to parity with other regional carriers, resulting in an absolute dearth of new flying and existing contracts being allowed to expire. Desperate to keep these sidelined aircraft flying, Mesa entered the cutthroat Hawaiian inter-island market by starting go! Airlines. Like ACA and ExpressJet before it, Mesa discovered than making money as an independent airline while flying regional aircraft is a very tough proposition. The venture continued to lose money even after a vicious fare war started by Mesa resulted in Aloha Airlines' demise. Ultimately, Mesa Air Group filed for bankruptcy in January of this year. They are proposing to return half from their current fleet of 136 planes to their lessors; in 2006 they had 216 airframes. Their future business plan is unclear, as there are few costs they can cut in bankruptcy aside from rejecting unused aircraft leases, and it seems unlikely there will be new major airline contracts up for bid anytime soon.

Regional airline CEOs must look upon Mesa's fate with horror. Mesa went from being the 800 lb gorilla of the industry to near extinction in four short years. All it took was a slight maturation to set off a viscous cycle of increased costs and reduced flying - and this is a prospect every regional airline faces. The only reason major airlines ever chose to outsource small jet flying rather than do it themselves was because the regionals had such a cost advantage, even after duplicating infrastructure and management and taking their guaranteed profit. That cost advantage no longer exists; not only are the regionals getting much more expensive as their fleets age and employee longevity increases, but the mainline carriers' own costs are far, far lower in the post-bankruptcy era than they were at the height of the outsourcing craze. Meanwhile, increased government and media scrutiny of regional airlines in the wake of the Colgan crash have made outsourcing less palatable than it once was.

Most current air service agreements expire between 2013 and 2018. It is seeming likelier that this will occur in a period of economic growth, when mainline carriers are upgauging service, potentially making the 50-seat contracts even less likely for renewal. As regional carriers shed 50 seaters, their 70-90 seat costs will increase significantly. As these contacts come up for renewal, existing regional airlines will not only be competing with other regionals for the flying but likely against mainline itself, as well as the possibility of mainline forming brand new wholly-owned carriers to perform the flying a la NewCo. Many airlines will face the unsavory choice between signing contracts for flying below cost and shrinking into oblivion. One suspects that this is the scenario that Republic management was thinking of when it made the otherwise inscrutable move of snapping up not one but two national airlines that directly compete with its erstwhile mainline partners.

I think the regional airline industry will always be around in some form, as there will always be some role for 50-seat RJs as well as small turboprops, and the chances of mainline pilots expending the negotiating capital necessary to recapture all currently outsourced flying seem rather remote to me. I do think, however, that the industry will look drastically different 10 years from now.

I did mention that there is one contingency that would avoid the "doomsday scenario" laid out above. That is if mainline pilots give up 100-seat scope in the next round of contract negotiations, presumably for some restoration of pay and benefits. If this happened, you would see the wholesale replacement of MD80, B737, and A320 mainline flying with outsourced next-generation aircraft like the forthcoming C-Series. This would help offset the 50-seat retirements and give many regional carriers a new lease on life. It would, however, result in the loss of thousands of mainline pilot jobs, and mainline pilots will have rendered themselves irrelevant and exposed to other schemes such as the outsourcing of widebody international flying, an early example of which is United's joint venture with Aer Lingus. I find it difficult to imagine mainline groups hoisting themselves by their own petard in such a manner, but it's happened before.

Friday, March 05, 2010

Two Letters

[address redacted]

5 March 2010

The Honorable Al Franken
320 Hart Senate Office Building
United States Senate
Washington, DC 20510

Dear Senator Franken:

I am writing to you in regard to Senate Bill S.3048, recently introduced by Senator DeMint. As an airline captain and professional pilot with 16 years of flying experience, I have very grave reservations concerning this bill's impact on aviation safety, should it become law. These concerns are hardly mine alone: much of the aviation industry is united in opposition to this bill, including airline pilots, aviation safety organizations, many airline managers, and the entirety of the airline labor movement. The only aviation organization that has spoken in favor of this bill is the Regional Airline Association, which has been fervently attempting to deflect public attention from deficiencies in the regional airline industry exposed by the tragedy of Colgan 3407 for many months now.

The introduction of S.3048 appears to be a response to a recent recommendation by the National Transportation Safety Board that Cockpit Voice Recorders (CVRs) be made accessible to and regularly reviewed by independent safety experts to ensure that airline pilots are complying with standard operating procedures and Federal Aviation Regulations, particularly those regarding sterile cockpit. This recommendation was made within the framework of the existing Flight Operations Quality Assurance (FOQA) program, which uses Flight Data Recorder (FDR) data in much the same manner. A major cornerstone of the FOQA program is the anonymity of the data derived from it; there are multiple layers of protections in place to ensure that nobody but an independent "gatekeeper" knows the identity of the crews involved. Thanks to these protections, the data can be freely shared between management, union volunteers, line pilots, and FAA overseers. The Air Line Pilots Association (ALPA) and other pilot unions were heavily involved in the development and implementation of FOQA, and have provided critical support for what would have been a very controversial program without the necessary protections for pilots.

As a result, FOQA has been a resounding success. After 90 years of reacting to crashes, the aviation community finally has a tool that allows it to proactively address negative trends before they result in tragedy. These include not only pilot errors but also unsafe procedures and inadequate systems and facilities. The main problem with expanding FOQA to include CVR data is that the very nature of a voice recording undermines the confidentiality of the program. Another is the element of ambiguity usually present in such recordings; even in the context of accident investigation, the NTSB begins all CVR transcripts with a warning that "the transcription of a cockpit voice recorder audio recording is not a precise science but is the best product possible from a Safety Board group investigative effort." These problems are not insurmountable; given the potential to enhance FOQA and increase safety, it's likely they could be overcome in time through the sort of close cooperation between management, unions, and the FAA that launched FOQA in the first place.

Senate Bill S.3048, on the other hand, does not enhance the usefulness of FOQA but completely destroys its very basis. The bill calls for both FDR and CVR data to be completely accessible to airline management and FAA personnel at any time, without any of the protections of FOQA. Indeed, the lack of such protections is the very point of the bill: it specifically calls for airlines to use the data to discipline or discharge pilots, evaluate and monitor the judgment and performance of pilots, and justify or require pilots to submit to unscheduled proficiency checks. It does nothing to address the ambiguities inherent to FDR and CVR data. This is not some small distinction from what the NTSB recommended; it is entirely against the spirit of their recommendation. In fact, S.3048 strikes at the very foundation of a safety culture that has been carefully cultivated through so much painstaking work over the last 20 years. Whether it be FOQA or the Aviation Safety Action Program (ASAP) or Line Oriented Safety Audit (LOSA), the foundation of every successful aviation safety program over the last decade has been the open participation of line pilots in a non-punitive environment. This has been a revolution in aviation safety, with results that speak for themselves; the proposed Senate bill sweeps all that away like so much detritus.

As a captain for Minnesota-based [redacted] Airlines, my performance is already evaluated on a regular basis. I am given comprehensive checkrides in a flight simulator every six months, and a check airman sits in on regular line flights at least once a year. The high level of skill and professionalism I exhibit during these events is the same that I bring to every one of my regular line flights, and the same is true of the other crew members I fly with. The one difference I notice during checkrides is that we tend to be much less vocal. I do not mean this in a chit-chat sort of way; I mean that on a regular line flight, when one of us makes a small mistake or deviation from procedures, the other is generally quite quick to point it out. This openness is the result of a painstakingly cultivated safety culture where all participants know they can speak freely without fear of repercussions. On checkrides and line checks, however, our jobs are potentially in jeopardy, and I've noticed that the result is that crew members are much less likely to point out an error on the others part, as this will highlight the error for an evaluator who may not have otherwise noticed it. The practical effect of Senate Bill S.3048 is to make every flight a checkride, with the attendant stifling of the free flow of communication. It takes aviation safety backward 30 years, when airliners regularly crashed with at least one crew member fully aware that something was not right, but was afraid to speak up.

I have been flying since I was 13 years old. Aviation is not just my career, it is my life. I take my responsibilities as a Captain with the utmost seriousness, and have a deep commitment to the safety of my passengers. As the person responsible for the lives of those entrusted to my care, safety takes precedence over my own comfort or convenience, my airline's financial interests, over my very career. I therefore cannot in good conscience continue in this role under the conditions proposed by Senate Bill S.3048. I have drafted my letter of resignation and will submit it in the event that this bill becomes law. I have talked to other pilots - true professionals all - who intend to do the same. It is my fervent hope that such measures will be rendered unnecessary. Therefore, I ask for you to stand with us in opposition to S.3048.

If there is any way I can be of assistance to you or your staff in this matter, please do not hesitate to contact me at the address above, by emailing [redacted], or by calling [redacted]. If you desire it, I would be pleased to meet with you at a time and place of your convenience. Thank you for your time and attention to this matter.


Captain [redacted]
Minneapolis, MN


[address redacted]

5 March 2010

Captain [redacted]
Chief Pilot, [redacted] Airlines
[address redacted]

Dear Captain [redacted]:

This letter will serve as notice that I intend to resign my position as a captain with [redacted] Airlines effective two weeks from the date of receipt. This notice will only be in effect if the bill currently known as S.3048, the "Pilot Professionalism Assurance Act," becomes the law of the United States of America. The law as currently proposed is a serious detriment to aviation safety, and I cannot in good conscience continue to serve as a captain under its provisions.

I intend to give this notice to my ALPA representative, [redacted], upon the bills passage from the Senate. He is under instructions to safeguard the letter and otherwise use it as he or his successor sees fit until S.3048 becomes law, at which point he is instructed to give it to you, thereby tendering my resignation. If S.3048 is defeated or substantially changed so that CVR and FDR data may not be used punitively against individual pilots, Mr. [redacted] or his successor are under instructions to destroy this letter.


Captain [redacted]