Indianapolis, IN – And then there was Great Lakes, who, thanks to the fact that most of its Essential Air Service contracts have been negotiated in the last three to six months, is actually making money by serving EAS markets. “We are the last guy standing, at least in the West,” said COO Chuck Howell who briefed reporters during the RAA meeting. In the past year, he has taken on the flying once done by the 12 aircraft at Regions Air which went bankrupt. In addition there is the 17 aircraft Big Sky once flew in EAS meaning Great Lakes is now serving 44 markets predominantly centered on the Denver hub. “Our competition is the car and, with $120 a barrel for fuel, it makes our fares look cheap,” he said. “Our traffic is up double digits in the western states.We do one thing and have done it extremely well in all years we’ve been around. One man's junk is another man’s treasure.”
Great Lakes sees a need for an additional $50 million to $70 million just to address the fuel escalation for the consistenty underbudgeted EAS program which is now at $110 million. In addition, Howell wants the current two-year contract lengthened as well as a fuel escalation clause. He indicated the current method of notifying the Department of Transportation of its intent to leave the market in order to cover fuel costs by renegotiating the rate is administratively burdensome, for both the carrier and DOT. “All it allows you now is a five percent margin and they need to raise that to a cost-plus deal the other regionals have [through their capacity purchase agreements.]"
The airline made a profit in 2007 and 2007 and is on track to repeat that in 2008. We are in the enviable position where we can raise fares. Its growth rate is nearly double the modest five to six percent or less expected for larger regionals this year.
Great Lakes is also benefiting from the oil boom in the upper west. It is expecting 15 1900s and six Embraer Brasilias by summer to serve its growing network. It is also looking for additional aircraft but finding the market fairly tight for the 1900. Most of the 1900s on the market are controlled by Mesa but are encumbered with debt financed through Raytheon. “There were 10 subleases out to Big Sky but the aircraft are still in the custody of Mesa,” he said, adding the dearth of used equipment has put a strain on the airline which has been awarded 16 new EAS points. “The squabble now is who will make up the difference of what is owed, Mesa or Raytheon. We are re-aligning our existing fleet schedule to increased revenues by 15 percent. We took delivery of two aircraft from Skyways on short-term lease as a bridge before getting a deal done on a broader base of aircraft.”
Seventy to 80 percent of Great Lakes’ business is EAS service or 30 of its 44 cities. “We’ve been able to contain costs and are fortunate that we have hedged our EAS bidding and gotten a lot smarter. We won in some cases and lost in others. Because these are two-year relationships, we virtually had 30 cities come up in last 6-12 months so can build in the fuel escalation and impose a double digit increase in revenue to offset bite out of fuel. It is a little bit of a stab at the dart board in terms of what we think fuel costs will be. But [President Doug Voss] shops world fuel constantly and knows what is trending. We are hedged for where we think fuel will ultimately end up – at $4.50 per gallon.” Great Lakes has also been able to “top up” its EAS contracts with subsidies from points that get the Small Community Air Service Development Grants. This has led to the purchase of a third round trip to Dickenson and Williston, N.D. It is also adding a fourth roundtrip to the oil fields.
In addition to aircraft, Great Lakes has experienced a dearth of crews to fly them but it is “finally ahead of the curve,” said Howell. “We were never short but we were running on the ragged edge at times. We didn’t have an abnormal number of cancelled flights – onesies and twosies -- but we did have a lot of flag stops as opposed to leaving a passenger stranded. We try not to flat out cancel, even though it shows up statistically as a cancellation, we do complete the mission.”
Howell indicated that since service has been suspended in many of the EAS points, it will be tough to regenerate the traffic as passengers became accustomed to driving. “But one upside to $3.50 per gallon for fuel is a $100 airfare is not expensive any more and when you throw in the small airport experience, it gets even better.”
Howell sees retirement for its aging fleet. “There will always be a role for the 19 seat,” he said. “One of the major benefits is the fact that the airline does all its maintenance in house even engine hot sections. But we do send the engines out to Pratt & Whitney. That is why we are looking at opportunities in creating our own engineering department to take on the refurbishment to keep the program alive. On the other hand we’ve seen several markets upgauged and, when we put the Brasilia in, we saw traffic explode. We’ve made pleas to manufacturers to come up with something new. If the 50 seat rjs ever get down to $2 million to $3 million, we’ll go after them.”
However, he rejected the rebuilt Twin Otter being produced by Viking Aircraft, saying many of its stage lengths are too far for such a slow aircraft and need fast airplanes such as the Beech and Brasilia.