Airlines - A Crucible that may Forge a New Airline Business
Are Regional Carriers the Source of a
New Airline Business Model?
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
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
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.
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.
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
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
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
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
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
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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17 Feb 2012, last update
28 Nov 2012
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