Total regional passenger traffic rose only 3.1 percent in 2006, according to the Velocity Group, which tracks industry data, and said the industry produced the slowest rate of growth in seven years. U.S. regional airline industry traffic growth moderated considerably in 2006 with aggregate scheduled enplanement activity reaching 155.5 million passengers, up only 3.1 percent over 2005 levels, said Velocity Group Partner Doug Abbey.
“The last time regional airlines posted single-digit aggregate passenger gains was in 2001, prior to the current phase of airline industry restructuring which began immediately after 9/11,” Abbey said. Revenue passenger miles (RPMs) in 2006 increased 6.9 percent year-over-year, while available seat miles (ASMs) decreased by a modest 1.1 percent in 2006. Onboard passenger load factor increased four basis points, from 70.4 percent in 2005 to 74.4 percent last year. The total number of departures performed decreased by 3.4 percent. In 2006, the 25 largest individual regional airlines accounted for more than 98 percent of all scheduled passenger activity and 99.2 percent of all RPMs in the sector.
“The regional airline industry today faces the same market conditions as before 2001 which means considerably slower growth,” he said. “And absent a new or sustainable stimulant, traffic will continue to moderate even further. In addition, as aggregate commercial aviation traffic activity returns to pre-9/11 levels, the market share gains made by regional carriers during the past six years, largely at the expense of majors, are now showing signs of ending sooner than forecast. Velocity expects to see the threat of capacity limitations at key airports re-emerge especially at chronically congested New York LaGuardia airport, which likely will become the litmus test for limits on new service by small jets. Velocity predicts there will be renewed calls to limit the growth of regional aircraft operations going forward, leaving regionals few option given their inability top up-guage aircraft because of scope clauses.

Consolidation Update
The number of regional airlines reporting scheduled traffic activity to the DOT fell to a record low in 2006, to a total of 72 separately certificated operators; a drop of 10 percent year-over-year. Of this number, approximately 42 percent (some 30 carriers) were based in Alaska. By contrast, 80 regional airlines reported traffic for some or all of 2005 included the now defunct Atlantic Coast Airlines (doing business as flyi), Chicago Express Airlines, Air St. Thomas, and Chalk’s International Airlines, the longest continually-operated airline in the country until this year, when operations were suspended.

Changing Ranks
Among the very largest individual regional carriers, final 2006 rankings reflected significant change over the prior year. “SkyWest (SKYW) Airlines became the nation’s largest regional operator last year, eclipsing American Eagle Airlines (in terms of passengers enplaned) for the first time,” Abbey noted. Expressjet (XJT) Airlines retained its third-place position while Mesa (MESA) surpassed Comair to become the fourth largest regional.
As for consolidated regionals, an amalgamated Skywest/Atlantic Southeast was the nation’s largest regional operation in 2006 with a combined 31.3 million passengers, followed by a combined American Eagle/Executive Airlines with 21.4 million total passengers. Expressjet ranked third, followed by Mesa Air Group (including Mesa's go!, Freedom Airlines, and Air Midwest) with 15.3 million aggregate passengers, ranking it fourth overall. Republic Airways Holdings (RJET) was fifth largest, with 12.7 million total passengers in 2006, and included its three separate operating arms: Chautauqua Airlines, Shuttle America, and Republic Airlines.
“We have been suggesting for some time that the key drivers of industry growth in the recent past - new aircraft deliveries - have all but evaporated and that cannibalization was likely the new watchword for U.S. regional airlines going forward,” Abbey stated. “The re-allocation of existing code-sharing franchises has already become standard operating procedure between major carriers and the dozen-or-more regional partners which support their brand management efforts at hubs across the country.”
Lacking significant incremental capacity growth during the foreseeable future, a select number of regional carriers are poised to explore all-new business models in the hope of sustaining positive momentum in the near-term. Among the most notable of these experiments, Continental Airlines’ (CAL) decision to scale back on Expressjet-dedicated aircraft has allowed Expressjet to launch new regional jet service between cities that have lacked nonstop flights before now.
“Expressjet has the most comprehensive plan to grow outside-the-box,” Abbey said. “In this case, it has begun as a separately branded, point-to-point, operation to be fully launched nationwide by later this year.” Colgan Airlines, a veteran among U.S. regionals, will soon operate 70-seat turboprops which circumvent Scope Clause limitations imposed on turbofan operations by the code-sharing partner Continental Airlines. “Similarly, Mesa’s newest start-up venture, go! represents a stand-alone company that has already proven to be a considerable challenge for the two Honolulu-based incumbents,” he said.

Huge Opportunity Goes Begging
Unfortunately, U.S. regional airlines are effectively barred from achieving the double-digit growth rates (and subsequent market luster) of the recent past, said Abbey, citing scope clauses. “The natural progression of the regional industry fleet – from 50-seat to 70-seat and ultimately to 90 or even 100- seat turbofan operations – is no more than a pipe dream given Scope Clause restrictions at major carriers,” he said. “This is most unfortunate given that first-ever nonstop service on longer-range routes (1,000-2,000 miles) with smaller jets represent one of the most attractive segments for air service growth in all of commercial aviation.”
Abbey indicated there are several notable exceptions to this constraint, but said the gap between 70-seat RJs and 130- and 140-seat mainline aircraft schedules continues to grow, providing an opportunity for low cost carriers. “Recently announced AirTran (AAI) Boeing 717 flights to Portland (Maine) and JetBlue (JBLU) service with Embraer (ERJ) 190s at Nantucket provide a stark reminder that even the most traditional among regional-type markets are now seeing mainline service and are vulnerable to competition,” he said, adding the Northwest’s (NWACQ) Compass Airlines, offers, perhaps, the only example of a certificated regional carrier entirely free to operate second-generation RJs larger than 76 seats, (albeit staffed with mainline pilots) in 2006 and beyond.

Let the Market Decide
“Absent large-scale deliveries of larger capacity aircraft, regional airlines will be severely limited in their ability to optimize their contribution to the industry at large,” Abbey said. Post-9/11, one of the primary drivers of regional industry growth was the ability to link ever-longer stage lengths, nonstop, for the very first time. It was in this regard that RJs introduced nonstop service on thousands of routes; primarily on short and medium-haul segments at first, and recently between airport-pairs of 1,000 miles or more.
“Airlines with more onerous Scope Clause provisions such as Continental and American (AMR) are already exhibiting signs of limited prospects for regional growth,” he noted. “For example, the average stage length of new domestic RJ routes added from Continental’s Houston hub after 9/11 was only 771 miles compared to 945 for Delta (DALRQ) at Salt Lake City.”
Not coincidentally, the former added 14 new domestic regional destinations during this period and the latter 25, he said. Worse, this disparity will only become greater in time. With aggregate industry traffic and operational levels poised to resume their upward (pre-9/11) trends after a nearly six-year hiatus, Velocity anticipates a resurgent outcry about airport congestion, “So we ask, how insidious is it that the number of weekly operations provided by American Airlines at O’Hare Airport has actually declined since 9/11, and that 44- to 50-seat RJs today account for 48 percent of all AA flights in Chicago today?” Abbey stated, “By contrast, 70 to 80-seat RJs now account for one-quarter share of all United flights at the same airport; another disparity which will also become more pronounced over time.”

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