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Airline Mismanagement

After some ridiculously profitable years, regional carriers are now struggling under the constraints of much less generous contracts with their major airline partners.

Perhaps they need to respond by developing a new type of airline service.

 
 
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Airlines vs Airlines - A Crucible that may Forge a New Airline Business Model?

Are Regional Carriers the Source of a New Airline Business Model?
 

A Delta Connection flight operated by ASA

Atlantic Southeast Airlines, a subsidiary of SkyWest, has operated flights for Delta and also for Delta's competitor, United.

The difference between partnership, cooperation, and competition is at times very obscured in the interlocking series of deals between major and regional airlines.

 

 

The major airlines have been putting the screws to their regional carrier 'partners' to such an extent as to threaten the ongoing viability of the regional airlines.

But maybe this is a blessing in disguise - maybe the adversity the regional carriers are currently suffering might force them into adopting a new business model that could result in profit for them and better service for us.

We look at two possible 'outside the box' approaches that the regionals could consider in their desperate and necessary struggle to redefine their role and ensure their survival.

The Evolving Relationship Between Regional and Major Airlines

Even in the former days of airline regulation, regional carriers - operating small planes on short routes, typically within one state or possibly spilling over into adjacent states - were largely unregulated entities, other than of course needing to comply with the usual safety type provisos.  After some extended time operating independently from the major airlines, a shift in thinking occurred, starting in the 1980s (ie not all that long after deregulation).

The major airlines decided that it would work better for them if they concentrated their resources on flying 'big' planes and on longer routes, and rather than ignoring the small little regional carriers, they started to work with them, using regional services to feed people in and out of their main long-haul routes.

The major carriers have also experimented with operating their own regional subsidiaries.  The big appeal of a separate subsidiary is as a way to separate out the labor issues and costs that had grown in their traditional business.  A semi-independent subsidiaries could be established with totally different labor contracts (ie paying their staff less and making them work more).

 The major carriers also arranged for independent regional carriers to brand their planes on behalf of the major airline, so that if you were flying on what appeared to be a United (or any other airline) flight, you were never quite sure if it was actually a mainline United flight, a United subsidiary (ie United Express) flight, or a flight operated by a totally different company in a plane and with a crew wearing United colors, or, of course, a flight operated by any other airline that simply adopted a United flight number as well as possibly half a dozen other flight numbers for other airlines too.

There was a lot of good sense in this and the arrangement - in theory and for a while in practice too - worked well for both the major and the regional airlines.

Income from multiple competing airline sourcesThere was an interesting additional component that evolved too.

Regional airlines would provide services for multiple competing mainline carriers - for example this chart shows how 'in the good old days' Republic Airways was providing services for AA, DL and US concurrently, and even a tiny slice to UA as well.

While this seemed like an insignificant bit of behind the scenes trivia, it showed the start of the separation between airline operations (flying planes) and airline marketing (selling flights).  The organization operating the planes no longer needed to be the same as the organization selling the tickets, and more to the point, 'competing' marketing organizations felt able to contract with the same 'operating' organizations.

We talk about this further, below.  This is an enormously important concept that has yet to be fully developed.

The pendulum swings from one extreme to the other

The major airlines were as careless with the contracts they negotiated with their regional partner airlines as they were with their own labor contracts.  The situation skewed so that the regional carriers were making lots of money, while the major airlines were losing money overall.

Clearly, this arrangement was inappropriate and unlikely to continue.  Unsurprisingly, and again mirroring the major airlines' approach to taking a sharp knife and trimming back their own costs and employee remuneration, the major airlines have now massively cut back on the terms and rates they pay to their regional contracting airlines.

The other side of the 'flexibly providing generic services to all airlines' coin - a concept that originally seemed so wonderful - is now sabotaging the regional carriers.  They are stuck in a situation where their only way of competing with each other to get major airline contracts is to be the cheapest priced operator.  That is an impossible business model to succeed with, as the regional carriers are discovering.

The pendulum has now pretty much fully swung in the opposite direction.  Major airlines are more or less profitable, while regional carriers are now struggling to make ends meet.

Here's a good article that details the current situation for the regional carriers.

What Can We Expect for the Future?

There's a real danger that the major airlines may become 'penny wise and pound foolish'; or, if you prefer, they may kill the goose that lays the golden eggs.  They may destroy many of the regional carriers, which will either shift the balance of bargaining power back to the few remaining regional carriers, or they may simply abandon regional feeder services without considering the true implications to their mainline routes.

It is possible that executives at the major airlines - those people who are so focused on cutting back on routes and services wherever they feel they can - might think 'who cares if we loose connecting service from (eg) Bakersfield to San Francisco, we only make $10 per passenger on that flight anyway'.

But - and here's the two subtleties that may be overlooked.  First, the passenger from Bakersfield to San Francisco might then continue to fly on to Chicago or New York, or even to Tokyo or London, and when they get out of the crowded cramped cabin of the regional jet or prop plane they flew on the short leg to San Francisco, they might then enjoy a high yielding seat in business or first class.  So rather than representing a $10 annoyance, that passenger might actually be a $5000 profit source.

Second, a passenger who regularly flies a mainline route - perhaps Chicago to Los Angeles - chooses his preferred carrier not only for the routes he generally flies, but also for the possible other routes he might occasionally need to fly as well.  An airline with a more extensive route system can generally compete better on all routes than one with a skeletal route system.  Cutting back on 'non-essential' routes weakens the airline's route structure and appeal as a whole.

Can the major airlines really succeed without the secondary and tertiary level feeds in and out of their primary routes?  It is clear that the regional carriers will struggle without being able to coordinate their services with the major longhaul carriers, but it seems this is a case of 'one hand washes the other' - both types of airline risk losing out if they don't work together in a fair and balanced manner.  Oh - it won't do us as passengers any good, either.

But opportunity can spring from adversity, too, and being a regional carrier is not a dead-end.

Our nation's largest airline - and most consistently profitable airline - evolved from being a small regional carrier, operating in the gaps and cracks of regulation.  It commenced operations in 1971, prior to deregulation in 1979, and even today shows evolutionary signs of its earlier short-haul regional focus by operating primarily point to point services rather than hub and spoke services, and with a presence at many secondary airports.

The airline in question is, of course, Southwest Airlines.

A New Type of Airline - Version One

Could there be an opportunity for a new airline - perhaps owned by a coalition of regional carriers - to start service offering long haul flights to connect with their member airlines' regional hubs?

This would be the opposite startup process to the traditional one, which sees a new carrier trying to cherry pick a few selected high traffic routes to start with, and then adding successively to their route network and growing into less and less central routes over time.

There's a lot of appeal to this concept, because the new carrier's main focus wouldn't be so much on operating (eg) Los Angeles to Chicago flights, but rather on operating flights from San Diego, via Los Angeles, to Madison via Chicago, and so on.  While there remains the potential of intense cost competition on a core LAX-ORD route, there's much less competition on a SAN - MSN service.

Furthermore, the new airline isn't just operating this one example route.  It is operating perhaps 100 different routes - ten different feeder cities at both ends of the core LAX-ORD route, so it has immediately started not with one or two vulnerable 'easy' routes for major airlines to match fares on, but one hundred 'hard' routes.

In other words, the new airline couldn't be so readily squashed by the major dinosaurs who love to compete against new entrants by dropping their fares briefly on routes where the new entrant operates.

And - here's another really appealing thing that would switch the competitive dynamic entirely with the major carriers.  This new airline, after filling as many seats as it could with passengers connecting to or from their original departure city and final arrival city, could then discount any remaining seats on the core (eg) LAX-ORD flight without damaging their overall revenues or fares, and hurting the majors if they choose to respond to the low LAX-ORD fares.

Yes, there are a lot of challenges to such a business model, for sure, and airline executives in particular are great at seeing reasons not to do anything.  But for a person gripped with a vision illuminated by possibilities and willing to work through the challenges, this could see the rise of the country's next truly successful airline.

A New type of Airline - Version Two

For some more 'out of the box' thinking, there's another possibility that the regional carriers should consider as well.  Rather than establishing their own cooperatively owned/operated long haul airline, why not flip the current situation.  At present, the major carriers contract with the regional carriers for feeds in and out of the major cities they serve on their mainline routes.

Flip this around.  Have the regionals contract with the major airlines to provide longhaul feeds in and out of the regional airline hubs instead.

We've been noting for some time that with the increased prevalence of code sharing in its many public and private forms, there is increasingly a disconnect between airline operations (ie flying planes) and airline marketing (ie selling tickets to travel someplace).  It is as much a historical legacy as anything else that the same companies that operate planes also sell travel, even in cases where there is an increasing divergence between the routes they operate planes on and the routes they sell tickets on.

This is a scenario that begs to be developed further and taken to its logical next step - marketing/air travel service companies that offer flights under their brand, but which don't actually operate any of the planes the passengers might fly on.

For most of us, we really don't care who operates the plane we fly on.  What we do care about is the fare we pay, the schedule we fly on, our chances of getting upgraded, and the frequent flier miles we receive.  These are all marketing type issues removed from the essentially generic sameness of Brand X's 737 compared to Brand Y's 737, or even compared to Brand Z's A320.

Currently, airlines have no hesitation in 'diluting' their brand in two ways.

Airline A's brand is first diluted when it allows Airline B to also sell seats on Airline A's plane, with Airline B's flight number.  Haven't you sometimes thought, when hearing an in-flight announcement 'This is flight AA 234 and also flight BB 654 and also flight CC 890 and also flight DD 147' or 'We'd also like to welcome those passengers on our partner airlines, BB, CC and DD who are traveling with us today' - doesn't this make you think 'I wonder if I could have got a better deal on one of the other airlines selling tickets on this flight?'

Airline A's brand is secondly diluted when it places its flight number on Airline B's flight.  Doesn't that make Airline A passengers, when discovering they must check in at the Airline B counter and fly on an Airline B plane - doesn't that make Airline A's passengers think 'So why did I choose Airline A in the first place if everything is being done by Airline B'?

And, in both cases, there's a clear derivative thought - if airlines A, B, C and D are all sharing the same flight, what difference is there between the airlines except the fare cost and other frills/benefits?

So let's take this to the logical next step, and now create a 'virtual' airline - an airline that owns no planes at all, but just contracts for space, at the best prices it can.

And possibly the path to this new virtual airline might evolve from necessity, with regional carriers needing to change their business model to survive into the future.

The Future Needs to Split from the Past

All airlines - regional, major dinosaur, and low cost new startups - have constrained their business models and thinking by past industry practices.

This is particularly inappropriate in view of the oft-cited (albeit dubiously accurate) statistic that the airlines, as a whole, have lost more money than they've made in their overall operational history.

Past practices, it would seem, have never worked very well.  The time has come for a totally new approach to providing air travel on a basis that works for passengers as well as the companies operating the flights and selling the tickets.

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Originally published 17 Feb 2012, last update 19 Dec 2013

You may freely reproduce or distribute this article for noncommercial purposes as long as you give credit to me as original writer.

 
 
 
 

 


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