Beyond the Regs: Commercial Practices Conspiring Against Community Air Service.

Government regulations and ever changing rules are a large part of the problem for community air service. However, the Regional Aviation News investigation reveals that there are many other factors conspiring against the emergence of a new-generation of regional airlines, not the least of which is how the industry has evolved since the early 1990s and the introduction of the regional jet.

 After quantifying the loss of air service in Part I and the role of government regulations have in the loss of air service in Part II, Part III will focus on barriers to entry with both certification requirements and the changing dynamics of the regional airline industry that conspired against community air service.

Regulatory Hangover

There is one more regulatory issue that makes must be discussed. Certification constitutes the largest barrier to entry because it takes so long – as much as three years – and costs a great deal more than it did prior to the commuter rule. Carriers must undergo both a fitness determination from DOT and operational certification to Part 121 standards from the FAA. They can occur simultaneously but FAA is not only looking for financial backing but the right personnel, the right plan and proof the company has the wherewithal to make them work. As outlined in Part II, the commuter rule increased costs for regionals, forcing them out of many markets. For new entrants, however, they proved nearly impossible. 
“Unfortunately, current FAA certification and operational rules represent a significant barrier to entry for small, start-up carriers,” said BAA Indianapolis Airport Planner Neil Ralston, in a recently completed independent analysis studying air service challenges faced by underserved airports.
The average certification from DOT takes approximately four to 12 months, depending on the complexity and the applicant's ability to prosecute the application. DOT has certified 100 carriers since 1997, of which 75 have actually started service. However, 25 of those have since shut down. Certification of smaller carriers, operating equipment less than 60 seats and 18,000 max payload, numbered 52 since 1997, 40 of which launched operations. Eighteen of those have since ceased service, proving once again former Continental (CAL) President Bob Six’s admonition that if you want to make a fortune in the airline business you have to start out with two fortunes. Historically, FAA certification times have varied from six months to three years, depending on the level of applicant preparedness. The certification process is further complicated by the wide variety of acceptable methods for preparing manuals, training programs, and other requirements. The primary reason that certifications fail is because airlinesdid not have the appropriate staff for the certification effort, according to the FAA, but operators cite the protracted process and the fact they need millions of dollars in investment over a long term before they even start operating. Today, it really requires a high-cost, FAA-qualified Part 121 Certification Consultant, which, said FAA, helps expedite the process because they can avoid many time-consuming and costly pitfalls.
“The cost of entry is high,” said Cape Air President Dan Wolf, who has been through several certifications during his career. “You have to develop the manual set required as well as the non-personnel infrastructure which can easily cost $1 million. The real cost comes when you make a commitment which means hiring personnel and the on-going payroll with no revenue coming in. I’d say the investment you need, conservatively is $3 million to $5 million without the aircraft. You used to be able to get an old DC3 and a certificate and start service. Now, by the time you develop the infrastructure, hired personnel and get the aircraft through conformity checks you are easily looking at more than $5 million.”
Wolf pointed to another factor related to the length of time for certification. “I could see a market from point A to point B,” he said. “Financing the aircraft you are looking at seven to 20 years. By the time you get certification, market conditions could have changed and there might be 10 carriers in the market. With the volatility and uncertainty of market forces the risk profile is pretty intolerable.”
The FAA disagrees. “That is all fairly minimal in the grand scheme in what it takes to operate an air carrier,” said Manager, Commuter, On-Demand & Training Center Branch Hooper Harris, who works in the Air Transport Division of FAA’s Flight Standards, Harris denied the increased requirements of the commuter rule had anything to do with the loss of community air service. As recounted in Part II, for those carriers already operating, the increased costs forced many out of even unsubsidized markets. “I don’t see the regulatory requirements as [the barrier to entry] especially if you look at the safety benefits of a single level of safety. We have met our target level. That’s an enviable position to be in and a poor motivation for relaxing the standards.” However, coverage in Part II indicated that the safety goals have not been achieved.
Last fall, Small Community Airlines was in its third year of its certification process for plans to operate BAe Jetstream 31s to points in Texas, Louisiana and New Mexico from Lake Charles, La. Lake Charles was going to use a Small Community Air Service grant to offer a one-year subsidy, providing a revenue stream equivalent to a 47 percent load factor. Owner and President Lewis McPherson, with another investor, already spent $5 million to purchase two aircraft and fund certification. Besides the certification hurdle, it also faces overcoming the Wright Amendment Reform Act, allowing long-haul flights from Love Field. The Act also called for a reduction of gates and a limitation on "hardstand" gates in which passengers debark onto the ramp area. Failure to get gates would preclude the service which would link Lake Charles to Dallas, its top point-to-point destination.
In their struggle for certification, airlines charged FAA with favoring larger airlines. But FAA, citing the certification of Compass Airlines, a subsidiary of Northwest (NWACQ), still in bankruptcy, when it said all new applicants must complete each step of the Certification Process Document (CPD). Compass’s certification project is currently in the process of completing CPD version 7.1, the same as SCA and all other applicants that applied during 2006. However, it begs the question as to whether or not the already-certificated major carriers meet CPD 7.1.
The up-front investment proved too much for JetFirst, which proposed to serve two Minnesota points to Chicago’s Midway Airport with Dornier 328Jets. While it was able to gain $4 million in capitalization, it needed $8 million. Thus, it did not even begin either DOT or FAA certification. It characterized the length of the process and substantial investment involved as overkill for the two points it planned to serve. "We were going Part 135 coupled with a Part 380 public charter carrier,” President Chris Van Den Heuvel told Regional Aviation News. “We felt this regulatory route would help us serve these small markets more economically than if we had to go to Part 121.” Related Story

The Market at Work
While government regulations constitute the single largest reason for the inability of small operators to replace the service abandoned by larger carriers, the evolution of the regional airlines, changing market practices and regional aircraft tell the rest of the story. This has since been compounded by high fuel, security, insurance and increasing average passenger weights, making 19- and 30-seat turboprop aircraft uneconomical. In addition, labor agreements force regional airlines to park turboprops, in favor of RJs, causing otherwise profitable markets to lose service
Perhaps FAA’s Hooper Harris said it best. “I think what regionals faced with the cost of doing business related to their relationship with code-sharing partners and the expectations that must be met from their requirements for pressurized aircraft and other things, were an equal factor,” he said. “That is what forced them to abandon an economic model that was profitable for them. The runway requirement of a regional jet, precluded the ability to serve a lot of airports that used to be part of the system. Add to that flights of 300 miles or more, making turboprops less efficient and [more problematic] from the customer’s point of view. They are noisy and they don’t fly as high so they encounter more turbulence and icing.”
The discomfort cited with the last-generation turboprops was compounded by the impact of the four 1994 accidents covered in Part II. While the two regional accidents occurred at airlines operating Part 121 at the behest of parent-company American Airlines (AMR), the furor against turboprops, all but ended their yeoman service. Their image as a World War II propeller hand-me-down, was compounded by post-accident surveys which indicated passengers would wait up to four hours for a jet rather than take a turboprop. This, despite their state-of-the-art manufacture, systems and operations.
Between August 1995 and August 2005 the number of nonstop routes served by turboprops declined by approximately 56 percent, and turboprop departures dropped by 68 percent, according to BACKAviation Solutions, while the addition of regional jets topped records year after year. Related Story
In a brilliant analysis of the evolution of regional airline service, BAA’s Ralston said, as airlines perfected hubs and developed first, code-sharing, and later, fee-for-departure contracts or acquired regionals, it became virtually impossible for any competitor to serve a major carrier’s fortress hub region. The evolution of these relations took on increased importance as airlines sought to control their captive partners in an effort to ensure regional service met major-carrier standards and to control the feed. Even DOT reported that few airlines compete to serve any given route, principally because the major carriers and their code-sharing commuter partners control entire regions around hubs.
Ralston pointed out the tighter the relationships became, the ultimate decision for the type of aircraft, scheduling, or pricing lay with the major carrier. Many agreements also precluded a captive regional from code-sharing with another major carrier. This has changed, significantly, however. Northwest Airlink just ceded this requirement for Pinnacle (PNCL), one of the last majors to do so.
Ralston also examined the role of regional jets in the erosion of air service. The changing structure of regionals, made them low-cost subsidiaries. By the early 2000s, said Ralston, several regional airlines had replaced many, if not all, of their turboprops with small capacity jets. A 2006 DOT Office of Inspector General study reported that short flights (less than 250 miles) declined 32 percent from July of 2000 to July of 2006. Furthermore, from July 2000 to July 2006 the number of turboprop or piston-engine aircraft declined from 34 percent to18 percent of scheduled flights.
As regional jets were tasked to replace narrow-bodies, regionals stretched their flights to 330 minutes, while the average elapsed time for the 10 longest segments nearly doubled to 291.7 minutes last year, compared to 157.9 minutes a decade ago. Even so, the mode time is still between 40 and 85 minutes, according to BACK Aviation Solutions. Regional jets grew from 157 a decade ago to 1,816 last year, while the number of narrow body aircraft remained steady from a decade ago but dropped significantly from 4,100 aircraft in 2000 to 3693 last year. Related Story
 

 

 

Today, with the wholesale abandonment largely completed, the airline’s marketing decisions further erode confidence in regional airlines as they impose more delays and cancellations on regional passengers than they do on their own. Related Story 
“Although the small capacity jets proved to be popular aircraft with both major and regional airlines for a variety of missions, their relatively high cost and resulting need for higher revenues made them uneconomical to operate in lower-volume markets – even if these markets could economically support smaller turboprops,” said Ralston. “As such, many smaller communities began to lose some, or all, unsubsidized service. However, unlike the environment in the 1960s and 1970s when the commuter carriers were ready to fill in the air service gaps left by the local service carriers, there are now few independent regional/commuter carriers to take the place of the ‘small jet providers’ in smaller markets.”
This massive route transfer and drive toward lower and lower costs, however, comes with risks, as noted by Great Lakes President Doug Voss. The rise of the regional jetliner constituted the fleet replacement the major carriers could not do for themselves. They effectively offloaded fleet replacement debt on to regional balance sheets as regionals acquired the aircraft to substitute for narrow-body equipment. “All these agreements have a 90-day cancellation clause,” said Voss. “So, if a downturn comes, and routes are cancelled, it won’t hurt the major. The regional industry will end up with all the parked aircraft.” For some, continuation of this practice, offers up more opportunities. Republic Holdings (RJET) CEO Bryan Bedford said the majors have already missed their fleet replacement financing cycle which means it is likely they will return to regionals and the hundreds of millions in cash to fill the void.

Furthermore, with the advent of the larger regional jets, the trend is now repeating itself as scope clauses relax and major carriers require larger regional jets to serve markets such as the Embraer (ERJ) 170 at USAirways Express and the Bombardier (BBD) CRJ 700 and 900 at United (UAUA) and Delta (DALRQ). Ultimately, the 50-seat jets will be spun off, as were the turboprops. Delta has already announced such a move which will likely trigger a new round of abandonments.
After enjoying 30 percent to 40 percent growth rates during the early part of this decade, acquisitions of 50-seat jets were nearly flat in 2005 and have actually dropped through the first six months of 2006, according to BACK. The fleet more than doubled since 2000, growing from 516 aircraft to 1,329. In 2004 growth slowed to 13 percent and stabilized with a 1.12 percent growth rate in 2005.
Related Story
Next Week: Customer Services Constitute a Barrier to Entry.