Regional puzzle

US regional airlines are dominated by two behemoths

In the United States, 13 times larger in population than Australia, yet only 20 per cent larger in area, there are two main contributors to the landscape in which regional airlines exist.

First, the federal government, with its double-edged sword of subsidies and regulation, is both irritant and balm to regional carriers. Second, the world’s three largest airlines by passengers carried, American Airlines, Delta Air Lines and United Airlines, hold the trump cards of regional airline economics, leaving unaffiliated carriers (and many affiliated ‘United Express’ and ‘Delta Connection’ airlines) the sole option of playing a finesse game.

Essential Air Service is anything but essential

Airline service to some 117 communities in the continental US and Hawaii is extensively subsidised by the US Essential Air Service (EAS) program. A further 43 EAS services operate in Alaska, the northernmost US state whoserequirements and regulation are different, and are mostly served by sub-ten-seaters. (Numbers are taken from the US Department of Transportation, at year-end 2013. ) EAS is roughly analogous to Australia’s Remote Air Services Subsidy Scheme but far more generous, and so not surprisingly the overall state of the US version is an increasingly costly political boondoggle – the very worst of pork-barrel politics.

Excluding Alaska, most subsidies range between one and three million US dollars, with a subset of nine routes receiving under a million, and eight over three million. The total subsidy has jumped from US$131. 5 million in 2011 to $241 million in 2014.

Just over 30 routes are operated either by or for mainline-affiliated regional brands like Delta Connection, United Express or American Eagle, mostly by smaller regional carriers like Silver Airlines and Great Lakes Airlines that also operate independently on other routes.

The majority of services cover out-of-the-way towns with names that are the American equivalent of Woop Woop: Devils Lake, White Sulphur Springs, Fort Dodge. And routes are usually connectors to larger hub airports like Atlanta, Boston, Denver, or Chicago.

For the most part, services use nine-seater Cessna 208/402, 19-seater Beechcraft 1900/1900D, 34-seater Saab 340, or 50-seat Canadair CRJ200 aircraft. Of these, only the Saab 340 is operated – by Regional Express – in any numbers by scheduled regional airlines in Australia.

And just as in Australia, finding the right sized aircraft to fit between the rock of regulation and the hard place of operating economics is incredibly difficult.

Most of these aircraft (let alone the routes) would be uneconomical to operate without significant subsidies, which has led most mainline-affiliated regional carriers to abandon this kind of metal in favour of faster turboprops or larger jet aircraft. This has particularly been the case for the 50-seater jet sector in the US, where turboprops are inexplicably anathema, but by the same token, there is now a glut of those smaller Canadair or Embraer regional jets available for redeployment to fill a niche.

Yet pilots to fly them are an entirely different matter – particularly at the smallest end of the market.

Regulations are a significant part of the picture

In the United States, most airlines are covered under the FAA’s more restrictive FAR Part 121 regulations, while the more permissive Part 135 covers “commuter and on demand operations”.

Until 1995, Part 135 covered aircraft with up to 30 seats; following a change in the rules, it covered only nine-seaters and under.

Yet the seismic change in US regional flying came in the last year, with the FAA releasing two new regulations: one in August 2013 requiring Part 121 first officers to have 1,500 hours of flight time, and another in January

The EAS is an increasingly costly political boondoggle.

2014 mandating an eight-hour uninterrupted sleep period during a ten-hour rest window between each block of duty time.

The 1,500-hour rule seems to have had the greatest effect on the smallest end of US regional commercial scheduled aviation, the niche between single-pilot piston-engine and turboprop aircraft flying fewer than 10 passengers and the slightly larger turboprops flying fewer than 30. Great Lakes Airlines, for example, pulled 10 seats out of its Beechcraft 1900D aircraft, turning them from Part 121 19-seaters to Part 135 nine-seaters.

If Great Lakes can earn the best part of 1. 7 million EAS dollars for its daily 207km service from Show Low, Arizona (population approximately 11,000) to Phoenix (and a one-stop milkrun to Denver in the other direction) where demand is probably more for fewer than nine seats rather than 19, the subsidy-driven economics of transporting those passengers and freight add up.

In an Australian context, is there a sweet spot that ensures regulations are data-driven and risk-based, yet also take into account objectives for rural development, regional access, safe skies and a balanced budget? But at the other end of the regional airlines economic spectrum, 50-seater Canadair CRJ and Embraer ERJ regional jets are disappearing in favour of the Embraer E-Jet family, which starts at 70 seats. These aircraft, resembling mainline jets, are now operating an increasing amount of US mainline flights.

The definition of mainline flying — and of mainline aircraft — is changing

In the same way that Qantas has outsourced a significant amount of domestic mainline flying to itsQantasLink-branded operations, the US airlines use Delta Connection, United Express and American Eagle to operate a significant part of their domestic network.

An interesting parallel is the use of Delta Connection partner Compass Airlines to operate comfortable, popular Embraer E175 aircraft, including on the high-frequency Delta Shuttle between Los Angeles and San Francisco.

Compass sounds just like Qantas using QantasLink to run an increasing part of its own mainline operations. Of 18 Qantas-branded flights between Sydney and Canberra on October 20, Qantas’s schedule filings show just one QF-operated flight on a Boeing 737‑800, compared with 11 Sunstate-operated Bombardier Dash 8 Q400s, five Cobham-operated Boeing 717s, and an Eastern Australia-operated Dash 8 Q300.

Yet imagine if Cobham was also operating flights for Virgin Australia – a commonplace situation in the States, where regional airline companies operate branded subsidiary flights for all three majorUS airlines.

Delta Connection partner Compass is owned by Trans States Holdings, which also owns GoJet Airlines (operating as Delta Connection and United Express) and Trans States Airlines (operating as United Express and US Airways Express). Compass itself will start operating as American Eagle next year.

The same batting-for-all-teams situation exists with Republic Airlines Holdings, which owns Republic Airways (American Eagle, United Express, Delta Connection), Shuttle America (Delta Connection, United Express) and Chautauqua Airlines (Delta Connection).

In Australia, the closest parallel (and you have to squint to see it) is Alliance Airlines, the Brisbane-based Fokker 100 FIFO operator on occasion called upon by both Qantas and Virgin Australia for some regional, charter and contract flying.

Is there an opportunity, at a time when both Qantas and Virgin Australia are on track to report losses driven primarily by overcapacity, for a smart regional operator to undercut mainline operating costs while operating mainline-style services on newer regional jets? Will the rise of large regional jetliners like the Bombardier C-Series, Mitsubishi MRJ and the Sukhoi Superjet, plus moves in the Netherlands to update the Fokker 100, provide a sweet spot in the segment currently filled by less efficient older airliners to allow a new entrant to flourish? European airlines have certainly decided so in their own context.

Europe is fragmented, but mainline-to-regional outsourcing continues apace

In Europe, and particularly in western Europe, the situation is significantly more fragmented than either the US or Australia, with nation-states significantly smaller than Australia yet often significantly more populous, and with even the most sparsely inhabited areas of Europe more densely populated than most of Australia.

Europe-wide safety regulation combines with differing national incentives and policies for domestic aviation, plus the relatively widespread availability of what Australians (though perhaps notEuropeans) would consider high-speed rail, to create a backdrop that might not initially look relevant to Australia.

But regional aviation is still alive and kicking, particularly in the less densely populated parts of Europe.

British airline Flybe operates its own flights, as well as franchisee and franchised services, in several areas of Europe. Founded as a Channel Island-hopping carrier in 1979 as Jersey European, and then known as British European between 1983-2002, Flybe acquired BA Connect, the British Airways subsidiary founded as Brymon Airways, to form the UK’s largest regional airline in 2006.

Flybe now operates in three distinct models: first, it flies its own short-haul services to, from and around UK regions; second, it franchises out Scottish Highland and Island flying to Glasgow-based Loganair, plus a half dozen regional and international flights to London Southend-based Stobart Air, the former Aer Arann; and third it operates Flybe Nordic, a 60:40 joint venture with Finnair, which flies ATR turboprops and Embraer E-Jets around Finland, the Baltics and alongside Finnairmainline jets to a dozen other European countries.

The existence of lower-cost, nominally regional airline subsidiaries and franchisees operating under an existing or separate brand is a model not unfamiliar to Australians. Much as Air France is planning to abandon its second Paris airport Orly to subsidiary Hop! and Lufthansa has retreated to Frankfurt and Munich, leaving the rest of Germany to Germanwings and its new tentatively-titled Wings group that also plans a long-haul service, Qantas has ceded leisure services – and entire destinations – to Jetconnect and Jetstar.

Etihad Regional Australia – the logical conclusion?

But what is its logical conclusion in the Australian context? An Etihad/Virgin Australia-style part-ownership of Qantas by an international airline? Or even the Etihad Regional model? Swiss carrier Darwin Airline has flown Saab 340 and ATR 72 turboprops under the Etihad Regional banner from bases in Switzerland since the beginning of 2014. With only one connecting hub with service from part-owner Etihad, in Geneva, and even that not seeing Etihad service at the same time each day, the potential options for feeding Etihad services from smaller European cities are clearly in their infancy.

Yet with an equity alliance in, among others, Air Serbia, Airberlin, Aer Lingus and now Alitalia, it isn’t hard to see the pillars of a future European trans-regional operation. If the smaller carriers feed Etihad and the larger carriers for flights eastbound to Abu Dhabi (and, indeed, beyond, given Etihad’s equity in Virgin Australia, Airberlin, Air Seychelles and Jet Airways), is there an Australian model that could be similar? At first glance, Regional Express would seem to be the airline with the closest symmetry to the Darwin Airline model, both to feed Etihad’s long-haul international services and Virgin Australia’s domestic services.

With no foreign ownership restrictions on ownership of Australian domestic airlines, unlike the Air Navigation Act’s restrictions on Australian international airlines, the Etihad Regional model could well be part of Australian regional airlines’ future.