As part of its bankruptcy reorganization and in an effort to save $3 billion throughout its operations, Delta (DALQ) released its request for proposal (RFP) to regionals to operate 143 jets for its Delta Connection service. The RFP includes 50 76-seat aircraft, which represents new business for Connection carriers as well as Delta's desire to offer first class service on its Connection flights. The RFP also includes 93 aircraft currently flown under contract with Republic Holdings' (RJET) Chautauqua and Shuttle America, Mesa's (MESA) Freedom Airlines, and Delta's own wholly owned subsidiary Comair. The contract award, expected in mid-October, would replace the contracts currently held by those carriers.

The RFP does not include routes now flown by SkyWest (SKYW) and its subsidiary Atlantic Southeast Airlines (ASA) because Delta reached a separate, 15-year agreement with SkyWest when it acquired ASA last September.

Bids cover 43 70-seat aircraft and up to 50 50-seat jets to replace those covered by existing contracts. Delta and its regional airline partners currently operate 450 RJs. Bids are due September 18.

SkyWest is expected to be one of the bidders. The company noted in June that its major partners fly aircraft with 140 seats and above, leaving plenty of room for smaller aircraft to help maximize revenue. CEO Jerry Atkin indicated that while it is not hard to fill a 140-seat jet, it is hard to fill it with high-yield traffic. "You can substitute a smaller aircraft and gain a mix of higher yielding passengers," he said. "Of course, the smaller jets come with half the cost of a 140-seat aircraft." His analysis indicates that the major operators who provide capacity to mainline carriers are very close in cost, despite claims by each that they are the lowest cost carrier in the business. He also said that it often comes down to more than just cost, to include services such as ground handling, or the national breadth of their operations.

The action puts additional pressure on Comair, now operating in bankruptcy and battling with unions to gain $27 million in union concessions. (RAN, August 21, p.2) In addition, Delta Connection pilot leaders have formed a coalition to mitigate the impact of what the Air Line Pilots Association (ALPA) calls members at different regionals being "whipsawed" by various managements, to gain concessions that translate into more competitive bids for new business. Indeed, ALPA created a Fee-for-Departure Task Force last January, joining pilots from many code-sharing partnerships to address this problem across the industry. (RAN, July 24, p.1) In his report on the RFP, Calyon analyst Ray Neidl focused on Comair's troubles. "As far as the aircraft at Comair are concerned, Delta has not yet completed its fleet restructuring because it does not have an answer yet as to what the long-term cost structure of Comair will be, specifically its labor costs," he said. Comair now operates an all-jet fleet of 168 Bombardier CRJ regional jets, including a mixture of 31 40-seat, 110 50-seat and 27 70-seat versions of the aircraft.

Neidl noted Mesa flies 26 50-seaters (a mix of ERJ 145s and CRJ 200s) and Republic flies 39 ERJ 145s and 13 ERJ 170s. SkyWest is the only regional contract that has been affirmed by Delta in bankruptcy; the regional carrier currently flies 165 CRJ 200s and 40 CRJ 700s for Delta.

"We do not believe Delta will tie the RFP to a particular aircraft type," said Neidl. "Delta is an industry leader in Bombardier regional jets but has recently introduced Embraer products to the portfolio [via its regional partners such as Republic] and has received favorable customer feedback. Any reassigned aircraft would be switched over to a new operator over a transition period of less than 12 months."

He indicated that any of the current fee-for-departure providers -- SkyWest, Republic or Mesa -- have good chances at gaining the Delta deal. "Both Mesa and Republic have continued to maintain a dialogue with Delta since it filed for Chapter 11," he said, cautioning investors. "We view this announcement as posing a risk as well as an opportunity, considering that the carriers can bid for more business on top of the existing one. SkyWest has a good relationship with Delta and a history of acquiring ASA from Delta last fall. However, Mesa and Republic have argued that Delta may not want to have such a large concentration with one regional carrier and that SkyWest already has a big acquisition to digest. We think the bidding will be competitive, although we doubt that margins will go much lower than the current rate of 9-10 percent."