The seven largest regional airlines reported the highest domestic operating profit margin of all carrier groups - 14.1 percent - as operating margins of the other carriers in each category plunged during the fourth quarter of 2003, according to Department of Transportation (DOT) figures.

Regional carriers led the airline industry in four financial categories during the fourth quarter: operating profit margin, highest revenue per seat mile, highest cost per seat mile and highest revenue yield.

Overall, the 21 carriers, tracked by the highest passenger loads, in the fourth quarter saw their operating margins fall to a 3.5 percent loss compared to a 1.4 percent profit in the third quarter.

The group of regional airlines led the industry with a 13.2 percent operating profit, above the seven low-cost carriers' 6.5 percent profit and the network carriers' 9.2 percent loss.

"These financial results are all the more impressive in light of the continued pressure to reduce costs under fee-for-departure partnerships. This proves, for once and for all, that regionals represent some of the very best managed airlines in the world," said Doug Abbey, an analyst with The Velocity Group.

Regional carriers maintain high costs because expenses are spread out over a shorter distance, but often see the advantage of flying "into cities where there's not a lot of competition, so the average fare can be a little higher," said David Beckerman, director of consulting services for Back Aviation.

The outlook for this year remains positive, but higher costs and industry changes could impact pricing, the analysts said.

"The regionals will continue do fairly well, but price and pressure might begin to affect them a little bit simply because fuel costs will be higher," Beckerman added.

Network carriers will continue to rely on regional aircraft to serve a substantial portion of cities while larger aircraft are reserved for high-end profitability markets, Beckerman said.

JetBlue's [JBLU] acquisition of the 90-seat Embraer [ERJ] aircraft could shake up the industry next year.

"When those [aircraft] come on line, I think there could be a lot of reworking - not just of mainline carriers trying to figure out how to allocate their aircraft against those JetBlue aircraft, but also of using their regional partners to match what JetBlue is going to do," Beckerman said.

"Of more profound importance is the extent to which the distressed majors will continue to put pressure on code-sharing partners to reduce margins even further," he said. "Additionally, the general malaise in aircraft financing - for all aircraft types - may affect the timing of regional jet deliveries still outstanding at U.S. regionals."

>>Contact: David Beckerman, Back Aviation, (202) 783-5052; Doug Abbey, Velocity Group, (202) 338-1727 <<