Regional aviation is often overlooked when air transport markets come under discussion, but it is an invaluable market segment, as Bernie Baldwin reports.
Low-fare airlines, urban air mobility solutions, widebody retirements, electric aircraft. Look at the agendas of so many of the online webinars and conferences involving aircraft – rather than subjects like booking, distribution IFE, onboard services and so on – and only rarely do regional airlines get a mention.
The work of the regional carriers is not seen as glamorous, the relatively short sectors which they mainly operate simply being seen as providing connections on routes with lower traffic levels connecting secondary cities and towns either with each other or to a hub. Patrick Edmond, managing director of Altair Advisory, has a slightly different way of emphasising the contribution and value that regional airlines provide, especially at a time when a market recovery is required.
“When someone is suffering from hypothermia or exposure, it’s the blood flow to their extremities that is cut off first: the small capillaries – the thinner blood vessels – are the ones to lose blood flow before the major arteries, and the blood vessels at the extremities are the ones affected before those near the heart,” Edmond begins.
“Why are we talking about blood flow? Because the world’s airline network is a large circulatory system, and during the COVID-19 crisis, the flow of passengers has been impeded much like the flow of blood would be impeded in a person marooned on a mountaintop.
“Regional airlines represent the capillaries of the world’s air transport network: they connect to the main arteries and ensure that the network reaches all parts of the world. They connect remote communities to central hubs, reducing isolation and enabling regional development,” he declares.
“Within Europe, there has been much talk of how trains can replace short-haul aviation. While that may be true in places with a high-quality rail network, try explaining to someone in Ireland or Malta or Greece that they can conduct business across Europe without flying, or that they can attract tourism or inward investment without air services.
“In a world marked not only by increasing environmental awareness, but also by a growing acceptance of Zoom, flying needs to demonstrate its value. Arguably, regional flying does that better than most: this isn’t a business model built on unsustainable low-fare-driven city breaks, it’s about connecting harder-to-reach areas together and facilitating economic development,” Edmond explains.
He also indicates a second way in which regional airlines can bring notable value to a post-pandemic aviation industry. “As countries reopen gradually, it will take time for passenger numbers to return to anything like pre-COVID levels. That means that airlines will be flying a lot of fresh air around for quite some time, unless they can right-size their fleets.
“We are already seeing many long-haul airlines cutting back on their larger aircraft and focusing on smaller long-haul aeroplanes. But a hub carrier needs short-haul feed for its long-haul fleet, and in turn, many of the A320s and 737s which provide that feed are likely to be over-dimensioned for several years to come. That’s where regional carriers come in: they already fly smaller aircraft such as Embraer 190s, Bombardier CRJs, and ATR 72s; they are accustomed to flying in challenging operational conditions; they typically have more flexible labour contracts and lower cost bases than mainline carriers; and they represent an ideal capacity provision solution for the post-COVID recovery phase,” Edmond posits.
The point is not lost on Faye Malarkey Black, president of the Regional Airline Association (RAA) which represents 17 airlines from the USA and Canada. In 2019 – the last meaningful year for traffic statistics – the US-based members provided 40% of all US scheduled passenger airline departures. At 66% of US airports with scheduled passenger service, regional airlines provided the only passenger air service that year.
“Regionals will serve their partners well during recovery, not just due to their size but because of the flexibility they offer,” Black confirms. “Regionals can be deployed to sustain a route where demand is dampened, develop a route that holds promise, or provide a long-term fit for a community that lacks the passenger volume to sustain air service by larger carriers.
“With the pandemic still receding and the industry recovering, but not recovered, some markets – including those feeding international gateways still largely closed – have lagged behind others. New behaviours like driving preference or less business travel or even remote worker relocation, may influence demand further out in a way we’ve yet to understand fully,” she acknowledges. “Regional airlines offer a right-now fit for many markets; perfectly sized to retain passengers during a downturn, to add service during an upturn, and add frequency and destinations as demand returns.
“As carriers compete in the post-pandemic environment, where business travel has been slow to wake up, it’s going to be more vital than ever to ensure that passengers who do wish to travel for business may do so with ease – this means frequency and destination options. Flexible regionals help the mainlines deliver squarely here,” Black remarks.
“I would not be surprised to see regional aircraft being deployed similarly to the early days of the RJ, where regional airline partners deploy the asset to strengthen networks; hub building, linking smaller markets with non-traditional hubs or adding new service or adding frequency into a competitor’s hub,” she continues. “Obviously these strengthen and protect mainline networks, but expanded service and competition strongly benefit passengers as well.”
Montserrat Barriga, director general of the European Regions Airline Association (ERA) – which currently has 56 airline members – is also convinced of regional aviation’s important role in the industry’s recovery. “ERA’s airline members provide vital connectivity, often operating routes with limited demand or connecting small communities. But further to this, the flexibility gained from flying small to medium-size aircraft to adapt to changes and customise their offers to passenger needs is unparalleled, particularly during the uncertain and depressed demand of the current market,” she comments.
“Equally, our members support Europe’s regions by contributing hugely to economic growth, promoting social and territorial equality and cohesion, as well as increased tourism, investment and job creation. That is why this business model is still highly relevant and hence, whilst we are still far from recovery, domestic passenger traffic is predicted to be quicker than that of international,” Barriga adds.
There has already been mention of the aircraft used by regional airlines, and in a post-pandemic air transport market, the significance of right-sizing aircraft to routes with regional aircraft cannot be underestimated. Barriga concurs, saying, “Ensuring an airline and its fleet is right-sized is more important than ever. Whilst it is expected that COVID-19 will have an effect on Europe’s competitive landscape for years to come, how it will look in a post-crisis-world is still unclear. What is clear, though, is that as the market begins to recover, fleet deployment will need to ensure high load factors in order to build operations without burning cash and spiralling into further liquidity traps.
“In cases where demand has dropped, airlines can look to introduce smaller aircraft which enable frequency to be maintained, or alternatively, right-sizing can mean an increase in frequency to optimise connections at major hubs. Either way, this offers customers greater choice which, in turn, enables higher fares and yields for point-to-point passengers,” Barriga states.
Altair’s Edmond takes an even stronger view. “I don’t think it’s an exaggeration to say that rightsizing feeder routes will determine whether hub carriers can recover or not in the wake of COVID,” he asserts.
“Network airlines, already suffering under the burden of the debt they took on to survive this far, will be unable – on either financial or environmental grounds – to justify flying short-haul networks at low load factors over the coming years. The challenge for the regional airlines is to ensure that they can offer capacity cost-effectively enough for mainline carriers to choose to continue flying these routes, rather than simply cutting them completely,” Edmond advises.
For the North American regionals, Black also believes right-sizing will be key and has a very positive take for them. “I anticipate we’ll see a continued strong return to capacity for regional jets this year. Mainlines will continue to need regional partners operating rightsized aircraft to maintain the integrity of their networks in a reduced capacity environment, which still exists in pockets. Carriers will want to operate efficiently and without waste.
“Frequency and convenience is essential to attract business travellers back to the network and such customers are a key component of how airlines balance inventories and hold the key to a positive revenue environment,” the RAA president continues. “Every effort will be made to serve those business travellers flying today and to protect the frequency and reliability that will attract even more of them back. Meanwhile, demand may remain somewhat depressed in some markets, in particular those feeding international gateways. Airlines won’t want to surrender these business travellers over what is inherently a short-term problem; flexible regional airlines offer a means of keeping these passengers connected even when they are travelling in smaller numbers.
“Recovery won’t end this advantage,” she adds. “In fact, I would expect to see even more frequency added with smaller aircraft as the larger markets recover and the triggers of restrictive scope clauses are obviated.
“When mainlines are free to deploy their regional partners where they fit best, they will find plenty of opportunities. Domestic markets are more important than ever in North America, due to lingering travel restrictions as well as the fact that some people are going to be most comfortable travelling domestically as long as vaccine rollout continues to be uneven between countries or regions. You can always tell a major airline is committed to its domestic network when it expands regional air service,” Black notes.
Expanding on that observation, Black assesses how the full service carrier–regional airline relationship will develop, be it with regional subsidiaries or through ACMI/CPA operations. “Flexibility ruled the day during the pandemic, but carriers were writing the script as the movie was shot – neither the regional nor the mainline could have ever contemplated the bottom falling out when the underlying contracts were negotiated,” she observes. “Thus, each tried to be a good partner while protecting their own business and assets.”
Not all US regional airlines made it through. Black believes that in some cases this was due to unilateral decisions by a major airline partner. “In other instances though, it’s possible that some mainlines would have liked even more flexibility from regional partners. While nobody contemplated a scenario like 2020’s, we now won’t unlearn what we know. I would anticipate major airlines looking for more flexibility and a relief valve from regional partners, with the latter looking to articulate more protections for their business, employees and assets.
“There are plenty of analysts who predict mass consolidation events or a lot of industry transactional activity of the type we saw after 9/11,” Black reports. “I don’t see that we’ll repeat that; the shakeup of the pandemic narrowed the playing field considerably and survivors have shown their mettle. I think partnerships will evolve and be about achieving growth and expanding networks or creatively solving problems – less about buying a weak competitor and more about achieving mutual strength.
“Throughout my career – which is now 23 years long in the regional airline industry – I’ve heard one industry analyst after another make sweeping predictions about the regional industry. The only universal truth I’ve learned in that time is that the airline industry is a large machine, with some parts capable of moving more quickly and adapting to the needs of a market more rapidly than others,” Black says.
“North American regional airlines are among the industry’s nimblest operators, with a business model centred around flexibly meeting partner and passenger needs precisely and in real time. All that was invaluable – I would go so far as to say irreplaceable – in protecting the US aviation network throughout the pandemic. And the partnerships that drive this value will endure long into the future,” Black concludes.
Over in Europe, Barriga thinks that ACMI operators could see a busy period as restrictions on air travel ease. “Airlines that had significantly scaled back their operations may not be in a position to scale back up in line with market recovery – from struggling to return parked aircraft to service due to overdue maintenance or issues around pilot training following furlough, to simply having downsized and cut capacity,” she notes. “In these cases, this flight-ready solution enables airlines to seize opportunities, bridge the capacity gap and start flying again at short notice.
“Nonetheless, when the pandemic hit, the effects on those with owned fleets could be considered less severe. Lessors, of course, still required payment from the airline, as they had their own costs to meet and those with owned aircraft were able to downsize and adjust to the market conditions. Therefore, whilst in the short-term, utilising ACMI airlines can decrease operating losses and add strategic capacity, the ideal plan for airlines to survive a crisis such as COVID-19 remains to have a mix of owned and leased aircraft, particularly for scheduled passenger airlines,” Barriga suggests.
In his take on the future major carrier–regional airline relationship, Edmond believes it will be hard to see full service carriers choosing to expand into regional operations in their own right. “The coming years are likely to see airlines doing everything possible to return to profitability and to generate sufficient cash to pay down their COVID-related debt burdens, rather than launching into new business areas for which they are not well suited,” he declares.
“One of the big advantages of independent ACMI carriers is that they can offer a more flexible cost structure which is not tied to the mainline carriers’ legacy cost base,” he adds. “Of course, another advantage for a network carrier in keeping its ACMI provider at arm’s length is the ability to make regional airlines compete to win a contract. But ultimately, regional feed is so important to a mainline carrier that it can’t just treat its ACMI partners as easily replaceable, it has to foster longer-term relationships.
“I believe we’ll see continuing development of full service–regional partnerships: one of the limiting factors in the past has been scope clauses and restrictive agreements with mainline pilots unions, and in a post COVID world, network airlines are likely to have more negotiating leeway and more freedom to bring in ACMI flying as a tool, if not a requirement, for survival and recovery,” Edmond summarises.
Unglamorous or not, regional aviation will continue to be vital to keep the heart of the global air transport network beating.
Author: Bernie Baldwin
Published: 15th June 2021
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