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Joined: Mon Apr 04, 2005 2:11 am

Regional Airlines RFPs And The Future Of Them

Wed Nov 15, 2006 3:39 pm

In my companies weekly newsletter, there was a lengthy article about existing RFPs from major airlines. The most noteworthy RFPs out there right now are from Delta and Northwest, and obviously Midwest and Frontier have RFPs out as well. Other than Midwest, which Air Wisconsin is probably the front runner for in everyones mind, the "expert analysts" think that in the end, it will be more the same with Republic, Mesa, and Skywest all winning more flying. I started thinking about this for a second and I began to find it deeply troubling. These three companies are already the largest regional carriers in the industry (not including American Eagle), and in some cases, they have bigger fleets than their mainline counterparts. The three companies might be the cheapest bidders right now which is why they are getting all the flying. Now lets say they end up getting flying being flown by other regionals currently. Mesa and Skywest pretty much got most of the Air Wisconsin flying that United betrayed ZW out of. And Chautauqua, one of the Republic companies, has been awarded Continental flying that was done by ExpressJet. Now the Delta flying is presumably flying being done mostly by Comair at the moment, with some Mesa mixed in. The NW flying is probably some of the old Avro flying from Mesaba, and possible upgrades on existing pinnacle flying.

So where am I going with this. If everything comes to light, then the three biggest regionals get bigger at the expense of some other regionals, which were only guilty of being in the wrong place at the wrong time. Whether or not it forces these other regionals out of business I don't know. But Comair is looking like it will be a ground handling, MX company primarily, with not much flying. Even with the recent concessions from Mesaba unions, I don't think that company is going to last long, and the old flying will end up with one of the big three I mentioned. This process nearly forced ZW out of business, the only thing that saved ZW was the US bankruptcy that was conveniently timed. DH was a casualty of this process. ExpressJet isn't in a great position either.

So how is a Tripoley bad. Well, the airlines were so competitive to bid down the costs to get where they are. But if only three carriers are major players, suddenly there are more mainline carriers out there then regionals, competing for services of too few regional carriers. This is going to drive the cost of doing business with the regionals up. And the mainline carriers are going to suffer again. Naturally I want ZW to have more flying, but I think some competition is healthy for the industry, and I am worried that if only a few regionals are left, its going to cause problems in the industry. Thoughts?
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RE: Regional Airlines RFPs And The Future Of Them

Wed Nov 15, 2006 4:11 pm

Well, like any other industry, consolidation helps drive down costs. The larger one of the regionals can be, the cheaper it can do the job due to economies of scale. If they can cut their costs that way, all the better. Cutting costs and using resources this way more efficiently makes you stronger and more profitable. In an airline, there are many pieces of fixed capital which can always be better utilized, bringing down the cost overall. For example, a flight simulator costs the same amount to own whether you barely use it or have the thing going 24 hrs a day. If you buy a second flight simulator and one is always busy, but the second one sees very little use, either you need to rent out the time on it to some other airlines or hire more pilots to use the thing! A MX hangar costs the same to own and operate whether you fix one airplane in it tonight or 20. There is this neat equilbrium that happens when there is too much competition - the smaller, weaker players who can't do the job as effectively or cheaply simply can't survive. This allows larger players to grow, which makes them more efficient, which drives down costs, which in the long run reduces the cost of providing that service in the first place. Three players is still enough competition for there to be true control of costs. Two wouldn't be enough. More than three, all the competitors do is worry about competing with each other, which drives down quality.

Oh and as a company gets bigger, it's ability to provide more little things for its employees tends to increase, as once again, economies of scale make it easier to cost effectively spread a cost over a larger number of employees. In the reverse, when there is not enough competition and the prices get too high, someone will inevitably step up to the plate and offer a competing service, as the opportunity is now available.

Also, the more customers they have, the less likely they are to be affected by problems with one. Skywest, who flies for many airlines, is much more resistant to problems than say, Mesaba, who has one customer, Northwest.

If one of the regionals was "at the wrong place at the wrong time", that was their decision to go there. Nobody put a gun to their head and made them do anything. If a company signs, say, an exclusive contract with a sole customer, what can be beneficial at one time can take a dramatic 180° turn in the future. That is what business analysts and financial analysts are for. If a regional runs into trouble because it can't compete in the current market, it had faulty advice from its analysts or made a decision to take too big of a gamble. Of course there are market conditions that nobody can control (ie. high fuel prices, 9/11, etc.), but these contingencies must be weighed before committing to something. What looks great today could be a terrible deal in 5 yrs. Businesses have to be flexible enough to change with the times and if they can't, their competitor will gladly provide a better service or value to the customer. Something like an exclusive contract 10 yrs ago is now a pretty lousy deal.
Ich haben zwei Platzspielen und ein Microphone
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Joined: Thu Jan 27, 2005 1:45 pm

RE: Regional Airlines RFPs And The Future Of Them

Wed Nov 15, 2006 4:27 pm

You are correct, what will happen most likely is that there will be 3 or 4 regionals left. Most likely Mesa, Skywest, AE and Expressjet. As far as Mesa, the industry knows they are cheapest but also one of the most unreliable regionals out there. That's fine right now because airlines such a United and Delta don't have the cash to look for a quality operation but once they get back some cash they will replace Mesa with a better higher quality regional. Mesa does have a problem right now although it doesn't have to be permanent if management agrees to change their ways. You have to give some credit to Air Wisconsin, that airline must have changed like 3 airlines in the last 5 years yet they still have a very loyal employee group with a good industry reputation.

[Edited 2006-11-15 08:35:07]

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