Diversification is the No. 1 business mantra for every regional airline executive as the network carriers continue to operate in a sea of red ink.

Diversification is all the more important if your only client is back in bankruptcy court for the second time.

Colgan Air, a family-owned regional carrier based in Manassas, Va., has been a US Airways Express carrier since 1999 flying turboprops to Northeast locations out of Boston Logan International Airport, New York LaGuardia International Airport, Washington Ronald Reagan National Airport and Washington Dulles International Airport. It has been serving US Airways Express with two Beech 1900Cs, 11 Beech 1900Ds and Saab 340Bs

As US Airways [UAIRQ] struggles to find a new operating plan to exit its second bankruptcy, it has put a greater emphasis on regional flying. At the same time, it has scaled back its long-time Pittsburgh hub, which served as a focal point for a number of turboprop flights from small Pennsylvania and West Virginia communities. The shape of the new US Airways remains unclear as it still has not submitted a new business plan to the court and its new investors. The latest wrinkle of uncertainty became apparent last week when it was revealed that US Airways and America West Airlines [AWAC] are negotiating some form of merger, joint venture or at a minimum an equity infusion.

"We were looking for diversification," said Michael Colgan, the company's president, in an exclusive interview with Regional Aviation News. "We have a great partner in US Airways, but every regional airline needs to diversify."

Continental Airlines [CAL] last December presented the opportunity that Colgan had been seeking.

Continental issued a request for proposals to regional carriers with turboprop fleets seeking a new airlift provider to service routes from small and medium Texas communities to its hub at Houston International Airport. Continental was encountering problems with the Embraer 120s flown on those routes by SkyWest [SKYW]. The planes have been handicapped by the hot Texas weather and new weight and balance requirements which prevent them from flying full loads. Continental wanted its next operator to be able to fly a larger turboprop (RAN, Dec. 13, 2004). "We had worked with Continental in the past and it would be a good fit for us," Colgan said of the matchup. "It gives us diversification."

To handle the new contract, Colgan would have to add 10 new Saab 340s to its fleet, hire 100 pilots, increase its payroll head count by 25 percent and establish a new maintenance base in Houston.

The transition began in March and by July 1 Colgan will be the sole provider of turboprop airlift from 11 Texas, Louisiana and Arkansas communities.

As it submitted it proposal, Colgan said his carrier was working with Saab Aircraft and had a couple plans to add 10 planes to its fleet. "We had gone out and found planes before. We talked to a couple of suppliers."

In the end another airline bankruptcy intervened. ATA Holdings [ATAH], which had filed Chapter 11 in October, began to shift the routes of Chicago Express and began shedding planes. In late January, it announced that it would close its regional unit on March 28 if it could not be sold. Colgan Air has acquired eight Saabs, which once had the Chicago Express livery, former Chicago Express pilots and a maintenance executive.

Colgan said his carrier is buying the planes from the banks and finance companies that once leased them to Chicago Express. It has taken delivery of five of these planes and it has three more on the way.

"We are going to the bank to finance these planes," he noted.

Colgan Air's current fleet is evenly split between leased and owned.

The value of the Saabs range from $1.5 million to $5 million, according to industry averages compiled by Aircraft Value News, a sister publication of Regional Aviation News. In the recent Chicago Express liquidation proceedings, its two Saabs that it owned were sold at auction for $1.2 million (RAN, April 11).

Colgan Air is also leasing two Saabs from Saab Aircraft Leasing.

It takes about 30 days to ready each plane for service under the Continental colors. Colgan's own staff is handling the interior retro-fit while the new paint is applied elsewhere.

When Colgan won the Continental contract, a number of its current pilots asked for transfers from the wintery Northeast to the balmy south, said Mary Finnigan, the carrier's vice president for administration. In the end, 30 pilots are transferring to Texas.

"We got a number of pilots from Chicago Express," Finnigan said. Some Chicago Express pilots with low seniority were part of its first training class in February. Once Chicago Express closed, it got more applicants.

Once Texas is fully staffed, Colgan Air will have 234 pilots.

Five Colgan flight attendants transferred from the Northeast. The carrier is hiring 45 additional flight attendants from the local markets or fresh graduates of the Airline Academy.

By the end of the month, Colgan Air will be handling all the ground station chores in all 11 Continental markets, Finnigan said. At the moment, Colgan and SkyWest are sharing the flying from these communities.

With nearly 100 station employees needed, Finnigan said Colgan was fortunate that "the majority of the SkyWest employees stayed with us. We did lose some in every market so we hired locally. Every station manager was either a station manager or a supervisor with SkyWest."

To instill the Colgan Air culture, the carrier created a position of regional manager of stations based in Houston, she said. A five-year Colgan employee who had been the station manager at Hyannis, Mass., is filling the slot. The new operations coordinator in Houston was the former assistant manager at Nantucket, Mass.

A new maintenance base was set up in Houston. Paul Detiege, a former director of maintenance at Chicago Express who moved to Houston last fall, is now the Texas base manager. To staff the new base, Finnigan said two supervisors, five mechanics and one inspector transferred from other Colgan locations. In addition, a few SkyWest employees stayed on. Houston has proven to be a good market for hiring mechanics. "Unlike the Northeast, where we have a challenge to find mechanics," Finnigan said, "there is a wealth of outstanding people down there."

As Colgan ramps up its Texas operations, it has not hampered its US Airways operations.

>>Contacts: Michael Colgan, Mary Finnigan, (703) 368-8880.<<