A Race to the Bottom

I shouldn’t have been surprised to read that the Air Line Pilots Association (ALPA) has joined forces with several U.S. carriers in fighting a foreign carrier permit for Norwegian Air.  After all, in ALPA’s view, the Ireland-based carrier is in a “race to the bottom” in establishing wage rates and working conditions for its workers.

This blog isn’t, however, about Norwegian. It’s about the race to the bottom that has been a part of the network carriers’ DNA for decades.  It is about the relationship between mainline and regional carriers.  It is about the fact that low labor rates at regional carriers cross-subsidize the higher rates paid at the mainline, and what that could mean to hundreds of communities.

I need more than fingers and toes to count the number of smaller airports that are deeply concerned about their future as a dot on the airline network grid.  Many of these communities have strong underlying economics that suggest that their place on that map is safe.  But as the industry evolves, that is not necessarily the case.  The real question is whether the network carriers will actually need all of the feed from their regional partners to fill those mainline tubes as they serve only bigger and bigger markets?  At risk is service to smaller communities as airlines gravitate to only the largest markets in a network map that could look much like it did when deregulation began with the primary difference being a map that is hub-centric.

In my opinion, the industry went too far during restructuring in its use of third-party providers in the out stations. It made sense when the industry was trying to bank every possible nickel and, perhaps, makes some economic sense today.  But the fact is that no third-party provider really cares about an airline’s customers the way an in-house employee does.  As airlines compete more on service, this has to change.

I fear that, in investing in this industry, the focus on the mainline ignores the critical piece of the network served exclusively by regional carriers.  When it comes to regional lift, business still goes to the lowest bidder.  And one result is that regional pilots get whipsawed despite the fact that there is a real live pilot shortage that will impact the industry well beyond the regionals. 

Part of the blame goes to Congress which, in its infinite wisdom, now requires 1500 hours of flying to qualify for a commercial pilot license.  And while Congress mulls more hearings, the regional carriers are suffering the consequences, intended or otherwise.

New flight and duty time rules only compound the problem.  With the day’s last inbound flight often canceled, the first departure in the morning is also affected. And in small communities, these are the flights that allow business to be conducted in a day. This is not the fault of the airlines any more than it is the fault of employees who are “timed out” for the day. The customers, however, pay the price, as do the small communities so reliant on reliable air service.

Meanwhile airfares for service to those small communities continue to rise even as larger markets gain the benefit of more competition. Those customers are not, however, getting more for their money.

Don’t get me wrong. I am a fervent believer in the direction the mainline airlines are going.  Recent investments in the fleets, cabins, services and people of the mainline carriers are making for a much better product– domestically and internationally.  But I am disgusted with the price the regional carriers and their people are paying, be it through the whipsaw or the general neglect of a critical component of our domestic air service.

When a market doesn’t fit, it’s time to attrite. So let’s start trimming back that service now rather than delaying the inevitable.  Let’s begin to build a pool of pilots to service the 250 or so markets that will make the cut – a pool big enough to meet the demand driven by Washington’s arbitrary regulations. ALPA advocated for consolidation for all of the right reasons, first and foremost a stable industry. So why is it only the mainline pilots who should enjoy that benefit?

ALPA cannot make its race to the bottom case against Norwegian without first addressing the race to the bottom here at home – a downward plunge the union itself created. The economics of the regional market are distorted, influenced by middlemen and unresponsive to consumer demand. Now is the time for the industry to work with ALPA to fix the problem – and that probably involves bringing some, if not all, of the work back in-house. 

WITTMAN AND SWELBAR: DESPITE SMALLER INDUSTRY, NETWORK CONNECTIVITY REMAINS

This post contains excerpts from Modeling Changes in Connectivity at U.S. Airports [it is available online here: http://hdl.handle.net/1721.1/79091] the second paper in MIT’s Small Community Air Service White Paper Series. The aim of the paper series is to examine and analyze the past, current, and anticipated future trends of small community air service in the United States. The authors of this paper series hope that these reports will serve to inform the policy debate with relevant and accurate statistical analysis, such that those responsible for deciding the future of small community air service will do so armed with factual basis for their actions.

The authors of the MIT Small Community Air Service White Paper series are members of the Massachusetts Institute of Technology’s International Center for Air Transportation, one of the nation’s premier centers for aviation, airline, and airport research. Financial support for study authors has been provided in part by the MIT Airline Industry Consortium, an interdisciplinary group of airlines, airport councils, manufacturers, suppliers, policy makers, and advocacy groups dedicated to improving the state of the practice of air transportation research in the United States. However, any views or analyses presented in this and all future reports are the sole opinions of the authors and do not reflect the positions of MIT Airline Industry Consortium members or MIT.

The first report in the series, Trends and Market Forces Shaping Small Community Air Service in the United States, reviewed changes in capacity at U.S. airports from 2007-2012. It is available online here: http://dspace.mit.edu/handle/1721.1/78844.

Acknowledgements

The authors wish to thank Peter Belobaba and the members of the MIT Airline Industry Consortium for their helpful comments and suggestions during the completion of this study.

Executive Summary

As described in the first paper in the MIT Small Community White Paper Series (Wittman and Swelbar 2013), the U.S. air transportation system has undergone a series of changes in response to the financial crisis of 2007-2009, high fuel prices, and a new wave of profitability-focused “capacity discipline” airline management strategies. More than 14.3% of yearly scheduled domestic flights were cut from the U.S. air transportation network from 2007-2012, mostly due to actions of the network carriers. Smaller airports were disproportionally affected by the cuts in service, losing 21.3% of their scheduled domestic flights as compared to an 8.8% decline at the 29 largest U.S. airports.

However, simply examining gains or losses in flight volumes does not provide a complete picture of the strength of commercial air service at an airport. For instance, many smaller airports lost service from network carriers from 2007-2012 but saw new service from ultra-low cost carriers (ULCCs) like Allegiant Air or Spirit Airlines. These ULCCs typically serve vacation destinations and offer limited connecting service to other U.S. airports or the global air transportation network. The small airports that lost network carrier service only to receive replacement service from ULCCs may not have seen significant decreases in flight volumes, but their connectivity was likely adversely affected.

As the pace of globalization has increased in recent years, commercial air service that provides connections to the global air transportation network has become increasingly important for economic, social, and demographic reasons. While air connectivity is important for communities of all sizes, research has suggested that small communities can obtain significant economic benefits from well-connected commercial air service. However, recent work has shown that small- and mid-sized airports have been disproportionally affected by cuts in commercial air service in the U.S. over the past six years.

An airport’s connectivity to the global air transportation network is challenging to measure because it cannot be observed directly through published statistics. There is currently no industry-standard metric to assess an airport’s connection to the global air transportation system. This creates challenges for airport managers and policy-makers in interpreting the effects of gains or losses in flights or seats on an airport’s connectivity. On a regional level, it is also valuable to analyze which airports have seen increases or decreases in connectivity over a given period. Previous attempts at defining connectivity metrics have often not taken into account the quality of connecting destinations, been too complex for non-technical audiences to understand and adopt, and have often included no analysis of connectivity at smaller airports. The discussion paper introduces a new, relatively easy-to-compute metric that can be used to assess these changes in connectivity to global air transportation service at U.S. airports.

The Airport Connectivity Quality Index (ACQI) introduced in the paper computes airport connectivity as a function of the frequency of available scheduled flights, the quantity and quality of destinations served, and the quantity and quality of connecting destinations. Unlike other connectivity models, the ACQI model considers connecting opportunities from a given airport as well as the quality of destinations served, such that an additional flight to a large city or a major connecting hub is more valuable than an additional flight to a smaller community with limited connecting options. The analysis also pays particular attention to connectivity at smaller airports, which have been largely ignored in previous work. The report computes ACQI connectivity scores for 462 U.S. airports for each year from 2007-2012; the ACQI scores for these airports are available in several appendices.

Similar to the capacity reductions in flights and seats discussed in the first white paper, medium-hub and small-hub airports suffered the greatest losses in connectivity over the last six years. ACQI connectivity scores at medium-hub airports fell by 15.6% on average between 2007 and 2012, compared to a 11.0% decline in connectivity at small-hub airports and a 3.9% decline at large-hub airports. The decline in connectivity can be attributed to airlines cutting capacity and destinations as a result of challenging macroeconomic events and more restrictive capacity management strategies.

It should be noted, however, that percentage changes in connectivity at most airports were less than percentage changes in flights or available seats. This suggests that some of the service cuts as a result of recent “capacity discipline” strategy did not directly harm connectivity, but instead removed redundant flying to secondary hubs. At many small airports, removing a flight to a secondary hub would not result in a substantial loss in connectivity as long as flights to other, larger connecting hubs remain. However, connectivity at the secondary hubs themselves (which are often medium-hub airports) was adversely affected over the last six years. Future changes in connectivity in the United States will largely depend on whether the capacity discipline equilibrium remains in place or if a new capacity management paradigm evolves in response to ongoing changes to the structure of the U.S. airline industry.

Computing ACQI Scores for U.S. Airports

Data sources

ACQI scores for each of 462 U.S. airports from 2007-2012 were computed using schedule data from the Diio Mi Market Intelligence Portal. The Diio Mi data is sourced from Innovata SRS, which provides up-to-date schedule data for 99% of airlines worldwide.

Data was collected for all airlines, domestic and international, with scheduled flights from the United States. Code-share connecting destinations were included by grouping appropriate airlines into each of the three major alliances: Star Alliance, Skyteam, and Oneworld.

ACQI Score Overview

In 2012, large-hub airports were roughly three times more connected than medium-hubs, six times more connected than small-hubs, and about fifteen times more connected than non-hubs. Each of the top 25 most connected airports in the U.S. in 2012 was a large hub.

The average ACQI score fell for each airport hub type during the study period, suggesting that airport connectivity as a whole in the United States has declined during the events of 2007-2012. However, just as capacity discipline strategies were not applied evenly across all airport types, all U.S. airports did not feel the reduction in connectivity equally.

Connectivity at medium-hub airports fell the most between 2007 and 2012, with these airports’ ACQI scores declining by 15.6% over those years. On the other hand, large hub airports did relatively well, only losing 3.9% of their connectivity over the same period. In all, connectivity declined by 8.3% across all airports in the United States between 2007 and 2012, compared to a 12.8% decline in connectivity at smaller airports alone during those years.

The pattern of connectivity of medium-hub airports is different than that of large-hub airports. While both large-hubs and medium-hubs lost connectivity during the economic slowdown of 2007-2009, medium-hub airports did not undergo the same recovery in 2010 and 2011 that large-hub airports did. Instead, connectivity at medium-hubs continued to fall after 2010 as a result of capacity discipline strategies that targeted these airports as a primary focus for service reductions.

Small-hubs have also been hit hard by airline capacity discipline. As with medium-hub airports, small-hubs are retaining their scheduled domestic service to large-hubs (albeit at reduced frequencies) while losing direct service to other smaller destinations. Much of this previous point-to-point service between nearby smaller airports has started to disappear as the network carriers and Southwest continue to consolidate service at their connecting points. However, the number of destinations reachable with a one-stop connecting itinerary has increased over the last six years at many airports.

In the aggregate, fluctuations in connectivity at non-hub and Essential Air Service airports have been relatively minor compared to the significant decreases in ACQI at medium- and small-hubs. The average ACQI score at non-hub and EAS airports decreased by 8.2% from 2007-2012, compared to a 15.6% decline at medium-hubs and an 11.0% reduction at small hubs. This is likely due to federally mandated levels of air service at Essential Air Service airports; these airports have so far avoided the wide-spread capacity cutting that occurred at slightly larger airports.

However, the relatively flat slope of the aggregate ACQI score decline for non-hubs and EAS airports masks some significant changes in connectivity at individual airports. Some of these smallest airports were successful in luring one or more network carriers to start service between 2007 and 2012, increasing their connectivity by many multiples. Other small airports lost all network carrier service over these years, causing a devastating drop in connectivity to an ACQI score of 0 in some years. Many of these airports have been able to win back service in recent years, often from an ultra-low cost carrier like Allegiant Air or Spirit Airlines. However, the resulting level of connectivity with ULCC service is often less than with network carrier service, since ULCCs generally provide point-to-point service to vacation destinations with few connecting itineraries available. The appendices of the report show how some airports gained or lost significant portions of their connectivity score throughout the last six years, highlighting the volatility that small airports face and the importance of each and every flight and destination in maintaining attractive levels of connectivity for potential passengers.

Capacity Discipline and Airport Connectivity

As a final question, the paper examines the extent to which capacity discipline in the form of reductions in scheduled domestic flights and available seats has directly impacted connectivity. If there is a direct correspondence between capacity discipline and connectivity, we should expect to see decreases in connectivity similar to the declines in flights and seats at these airports.

For each airport type, the percent change in connectivity was significantly less than the percent change in both domestic seats and domestic flights over the study period. This suggests that a significant portion of the airlines’ capacity discipline strategies did not directly decrease passengers’ access to the global air transportation network, and instead involved cutting redundant service. Service could be called redundant if the connecting options from one hub overlap nearly completely with connection options from another hub that is already served.  In the aggregate, these repeated cuts of redundant service at “duplicate hubs” explain the large decrease in connectivity at Memphis, Salt Lake City, Pittsburgh, and Cincinnati over the last six years.

Conclusions: Future Trends in Small Airport Connectivity in the U.S.

The Airport Connectivity Quality Index (ACQI) developed in the report provides a straightforward way to compare connectivity between multiple airports or at a single airport over a period of time. Airport managers and policy makers will likely be interested in examining the appendices of the report, which show how the connectivity scores and rankings of their local airports have changed over the past six years. In the aggregate, however, what trends can we extrapolate from the ACQI to anticipate changes in connectivity over the next five years?

Capacity discipline does indeed appear to be a dampening force on airport connectivity, particularly for smaller airports. On the whole, small community airports have struggled to gain back connectivity since airline capacity discipline started in earnest in 2011, as airlines kept domestic capacity deliberately restricted despite the start of macroeconomic recovery in the country and stability in fuel prices. Barring any significant positive or negative macroeconomic shock, the downward trend in connectivity at small- and medium-size airports will likely continue, but the pace will most likely slow as airlines have already removed most redundant flying from their networks. However, the American Airlines/US Airways merger could place further downward pressure on connectivity as schedule and route redundancies are removed from the combined airline’s new network.

This assumes that airlines will continue to practice capacity discipline strategies by adding little net nonstop service over the next five years. However, the question certainly remains whether capacity discipline is a stable competitive equilibrium. In a game theoretic context, capacity discipline could be examined in a classic prisoner’s dilemma construct. It would appear that individual airlines each have an incentive to deviate from the capacity discipline equilibrium and increase capacity in order to gain more market share and, ostensibly, increase profits. It is possible that in the near future, an airline will decide to bolster capacity in key markets, breaking with capacity discipline and perhaps causing other airlines to feel compelled to follow suit to avoid losing market share. However, if all airlines shift to a capacity expansion strategy, too much capacity will likely be introduced into the market, leading to lower profits across the industry.

In this outcome, connectivity at smaller airports would likely increase as airlines begin to compete once again on the sizes of their networks. However, this scenario currently appears unlikely. Airlines have been able to return to profitability as a result of capacity discipline, and as of early 2013 appear unlikely to break with the strategy in the near term in an effort to gain market share. Yet it only takes one airline making a move to add capacity to cause the entire equilibrium to destabilize.

Hence, we expect to see small community airport connectivity to continue to stagnate in the near future. Individual airports may, through clever packages of incentives, continue to induce airlines to provide new service, boosting connectivity on a case-by-case basis. However, only service that can prove itself to be profitable will remain a long-term part of the U.S. air transportation network. Airports that win new service should expect to see their connectivity continue to fluctuate as airlines evaluate the economic merits of the new flights and incentive packages.

The Ultimate Unintended Consequence: Government Proposals Will Kill Small Community Air Service

Ten Reasons Why

I’ve been on the road for six weeks, traveling to communities large and small to discuss the grim future of small community air service in the face of economic pressures on regional airlines.

Those pressures only begin with jet fuel at a price equivalent of $120 per barrel, but the factors are many. They include the reality that: 

2) There are no aircraft of 50 seats or less in the production pipeline

3) All regional flying contracts will come up for bid between now and 2017 and likely will not be renewed by the mainline carriers

4) Low Cost Carriers in a regional market’s catchment area are drawing traffic to larger airports at the expense of smaller airports

5)  A growing pilot shortage will hurt the regional carriers first as regional pilots will find work on the mainline

6) Proposed FAA flight time/duty time regulations that put new limits on pilot flying hours will force regional carriers to hire more pilots to do the same amount of flying the sector is doing today

7) Congress, in a questionable response to the Colgan crash, passed a law requiring 1500 hours of training time for a commercial pilot

8) Most manufacturers won’t produce commercial airplanes smaller than 100-seats as most airlines can’t afford to sustain many routes with smaller planes

9) Negotiations between mainline pilots and management over new scope language is as emotional and contentious as it has ever been.

10) Proposed tax increases certain to punish the smallest of markets.

The Administration’s 2012 budget proposal already levies a $100 fee for every airplane departure in controlled airspace, costing passengers and the industry more than a billion dollars a year.  It also seeks to double the “security tax” paid by passengers to $5 per one-way trip, and triple the tax to $7.50 by 2017.  The total price tag for that proposal: $25 billion – $15 billion of which would be diverted for deficit reduction. The proposals together will cost passengers and the industry $36 billion over the next 10 years.

Air Transport Association of America CEO Nicholas Calio said it best when he said Washington is treating the airline industry like it treats  alcohol and cigarettes – taxing the hell out of it  as it does with “sin taxes” as if Congress actually wanted to discourage flying.  While I assume that’s not the government’s intent, it may well be the result.”

I do find it ironic that the government is seeking to tax an industry an incremental $36 billion over the next ten years after it lost $65 billion over the past ten years.  But I digress.

Let’s not forget that the airline industry ranks as the third greatest producer of economic activity in the US.  In my view, there is no way the industry can absorb these financial and regulatory pressures imposed by Congress without negatively impacting airlines and their role in driving economic activity. And the industry’s first response would be to remove marginal capacity from the system of production.  Where will they look to trim capacity even further – San Francisco to New York or Cincinnati to Des Moines?

Of course, airlines might try to pass new costs onto passengers, just as most industries do when faced with higher costs and limited opportunities for expansion. In this market, however, it is hard enough to simply add a few bucks to the price of a ticket to cover the rising cost of oil.  Imagine the impact of trying to pass on costs that will total billions at a time business and leisure travelers are counting pennies.

Typically, excise taxes like sin taxes work best in industries that have more control over the pricing. That is not the case in the airline industry.  Sin taxes are most successful on industries that produce products with price inelastic attributes.  The airline industry can hardly be termed an industry that produces a product with inelastic characteristics.

The ATA estimates the proposed taxes would lead to a 2.3 percent reduction in capacity at a possible cost of 9,700 airline and related jobs – and that’s just the impact from a tax increase.  Still unknown is the cost of the other factors outlined above, which alone would inevitably lead to fewer flights and fewer routes flown.

The mainline will hurt some. With fewer regional jets feeding the big carriers, how many larger aircraft do we need?  Some traffic will be captured at airports that continue to receive service within the catchment area of an airport losing service - but not all.  Some traffic may find its way onto competitor aircraft. And some demand may fall out of the system entirely.  In any instance, overall demand will suffer over the long term as marginal supply is removed from the system.

But the brunt of the damage will be felt in the small communities that rely heavily on regional carriers.

One of the things that bothers me most about Washington’s view of the airline industry is the clear bias in favor of the so called low cost carriers.  These airlines have been brilliant in cherry-picking profitable routes and creating networks designed for profitable flying. But it was the legacy carriers, not the LCCs, who invested in the assets to serve the nation’s smallest airport markets and sustained routes that, were subsidized by other flying.  It is the network carriers that keep small markets connected to the global air transportation grid. 

Unfortunately, the economics serving all these small cities are fast eroding because of factors the airlines don’t control, oil costs at the top of the list. But the lawmakers and regulators should step back and fast and realize how their well-meaning proposals could result in a loss of service to small markets across the nation.  The politicians will probably find a way to blame the airlines for cutting service while the real blame falls with those proposing “easy” fixes now that will do far-reaching economic damage  in the future.

Update on 10.25.2011 by swelbar

The good folks at ATR remind me that the ATR42 comes standard at 48 seats.  The company believes that it is a replacement for the 50 seat jets.

Scope Yet Again; Commenting to a Commenter

There is often some very good reading over at www.airliners.net inside their civil aviation forum with some very good commenters and very interesting threads to follow.  This week, one asked:  “United/Continental Conceding Domestic Market?”  Another speculated about the future of the Air Line Pilots Association (ALPA).  Another asked which is the next US carrier to file for bankruptcy? That speculation is rightfully focused on the regional sector of the industry.  But much of the discussion fails to recognize the tangled web called the domestic network business, which includes mainline carriers, regional carriers and the unions. The players in this web are inextricably intertwined - but too often discussed in silos. 

United-Continental Holdings’ CEO Jeff Smisek once said something I now quote in every presentation I make. Of the world’s now largest airline, he said:  “We’ll have the domestic operations sized solely to feed the international traffic.”  That quote and its derivatives are sprinkled throughout the airliners.net thread focusing on whether United/Continental is conceding the domestic market.

In my view, the US domestic business is at a crossroads.  Do iconic names like United, Delta, American and US Airways continue to make pure domestic flying a significant portion of their route portfolio, or do they continue to attrite pure domestic operations away because cost structures can no longer support mainline flying in what has become an ultra low fare market?

Some in the thread note that Smisek’s words worry some pilots, as they should. And those concerns shouldn’t be limited to the flight deck.  In a ‘be careful what you ask’ for scenario, there are forces at work that ensure the regional sector of the business as we know it today will be smaller tomorrow.

There is a virtuous circle of events at play:  with in the wing oil in excess of $100 per barrel; no 50 seat and less replacement aircraft in the pipeline; regional flying under contract that won’t be renewed because of economics; the prevalence of low cost carriers in the primary and secondary catchment areas of small and non hub airport markets; a pilot shortage that will impact the regional sector; flight time/duty time regulations that will require more regional pilots to perform the same level of flying being performed today; a new law requiring 1500 hours of flying for new pilots; and the fact that the smallest aircraft coming to market will be at least 100 seats. 

And so the circle spirals downward for the regional sector of the business.

I think scope is a cancer because it has been used as a bargaining chip.  It has been, and is, a Ponzi scheme as I wrote in US Pilot Unions’ Dirty Little Secrets.  There has been a B-Scale in place supporting the rich mainline contracts since 1984 when new hires were offered positions at lower rates of pay.  When it was deemed wrong for unions to do such a thing, regional airline code sharing relationships were formed.  This “outsourcing” was agreed to by the union in return for higher wages and benefits for incumbent mainline pilots.   

After my last two posts on scope I expected, and received a lot of interesting mail.  Much of it emotional but some as ugly as the commentator who suggested “a certain poetic irony to the image of you[Swelbar] in a smokin' hole and another Captain Renslow at the controls.  Be careful what you ask for.”

Now it is my turn to say:  Be careful what you ask for.  If no B-Scale for domestic flying is possible and a phasing out of regional jobs is the goal in this round of negotiations, then what is going to cross-subsidize the wages, benefits and work rules at the mainline? By my calculation then, there is even less money to go around to for mainline pilots to win in a new contract.  And with the loss of feed traffic from a smaller regional sector, the real question is just how many mainline narrowbody aircraft does a carrier need?  In a point-to-point world, the answer is a whole lot less. If 14,000 mainline pilot jobs were lost in a decade of downsizing then more job losses are on the way from a loss of feed.  And the effects of a pilot shortage are even less.

And so the virtuous circle spirals downward for the mainline sector of the business.

Commenting on a Commenter

I received the following private email from John, which encompasses the views of many other commenters (public and private). He writes:

I read your blog because I know management does, I’m not your biggest fan.  However, I would like to see your opinion on the consolidation of regional carriers.  To me, scope is synonymous with outsourcing, which you say allows for flexibility.  But the real advantage of outsourcing is the low cost entry into markets (and exit). 

Things have changed, wouldn’t you agree?  Cash strapped regional airline are a thing of the past because consolidation has honed the market down to three: Republic, Skywest, and Pinnacle.  With size came assets, more loan opportunities, and market dominance.  In my opinion, I believe that regional airlines have reached a size where they have serious power over code sharing agreements or have the option to go many markets alone, Skywest is already considered a major airline with a MC of $6B.

I know you love to blame labor, because your audience isn’t.  I understand you have to make a living, and the ATA may not want to hear this, but they are screwing up.  The majors better start thinking of in-sourcing or face another round of upstart airlines entering the market with low cost structure and plenty of established routes thanks to the majors giving them business.

After all, outsourcing worked so well on the 787 it aught to do equally well for the airlines…right?

For the record, I do not see scope as outsourcing as it was agreed by both parties that a certain number of smaller jets can be used within the domestic system carrying a certain airline code.  After all, the mainline pilots did not want to be bothered with those little jets.  As for John, the real advantage of deploying small jets under the airline code is to maintain presence in feed markets that the mainline cost structure could no longer support.  Mainline aircraft in markets like Charleston, WV is a thing of the bygone years that immediately followed deregulation, yet they unfortunately still comprise a disproportionate size of the memory bank called entitlement. 

Yes, things have changed and are changing.  There are haves and have nots within the regional industry today as there were in mainline industry of yesterday.  There is one airline, SkyWest, which stands alone in the industry because of stellar management that understands the carrier’s place in the industry and their role in building a balance sheet that ensures Skywest will be part of the discussion for years to come. While I am sure that SkyWest would love to have a market capitalization of $6 billion that you make fact – on Friday the market capitalization of SkyWest was less than $650 million.

To make a valid argument, John would need to produce economics at the mainline that allow the company to serve Ft. Wayne, Indiana with non-regional (77 seats and more) equipment.  And my guess is that he could not. How many of those 737s/A320s/MD80s are filled with traffic coming from 50 and 70 seat jets?  How could he produce the same economics on the flying without having to make wholesale changes to his existing collective bargaining agreement in order to keep the flying in house? 

I get this argument often from other commenters that look back before looking ahead. Yes you can bring the flying in house - but not until the terms of the collective bargaining agreement reflect the B-Scale terms and conditions the mainline pilots found, and find, appropriate for their regional brothers and sisters.

Many claim I am too quick to blame labor.  In this case, it is the unions that create this purported “outsourcing” to support bloated mainline salaries, benefits and work rules.

John is right in his comment that “the majors better start thinking of in-sourcing or face another round of upstart airlines entering the market with low cost structure and plenty of established routes thanks to the majors giving them business”  -- at least on one front.  Today, the use of the regional industry is a defensive weapon used by networks to curb encroachment into mainline markets.  By forcing regional carriers to fly fewer 76-seat aircraft and less as well as limit their ability to fly anything bigger (again assuming the pilot unions would not change their collective bargaining agreements to meet or exceed the terms available from the regional provider), any airline network will begin to vacate certain markets that may then become an opportunity for a start up or an inroad for an incumbent like Southwest or jetBlue. 

Scope is as much as regulator of the business as is government at a time this industry does not need any more regulation.  Regulation often results in unintended consequences, one of which will be to create market vacuums that an upstart might willingly fill. Nature abhors a vacuum.

And John and many of his fellow mainline pilots end up over-regulating the business of feeding the aircraft they fly.  No feed – assuming that airlines cannot get to the right economics to fly certain routes – will likely result in significantly less mainline narrowbody flying – perhaps just enough to support the international operation.  And that may not be the consequence that mainline pilots have intended.

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 36^th 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.]