While regulations and aircraft changes as well as evolutionary changes at the majors and regionals, clearly hamper the ability of new entrants to serve abandoned communities, several other factors from unions to the advent of low-cost carriers conspire to keep replacement carriers at bay. In addition, what an airline needs today to be successful is strikingly similar to what they needed in the 1980s with the advent of computer reservations systems proving former Provinctown-Boston Airlines President John Van Arsdale's admonition that the more things change the more they stay the same. The distribution systems and by-gone interline relationships forced partnerships between majors and regionals in the first large market change for the industry.

Today, little has changed, except that much of what is needed is now out of the reach of any independent carrier. In addition, the hub-and-spoke system, as in the past, constitutes a formidable barrier to entry.

These issues are meticulously outlined in a study recently completed by BAAI Indianapolis Airport Planner Neil Ralston, a centerpoint of Part III coverage of the war on community air service.

Market Restructuring

Ralston pointed to the downsizing or complete elimination of airline connecting hubs such as USAirways (LCC) at Pittsburgh and the former TWA hub which disappeared with the acquisition of TWA and restructuring by American (AMR). American also downsized its Raleigh hub, leaving it as an American Eagle operation. Commercial operations at St. Louis (down 44.4 percent) and Pittsburgh (down 48.4 percent) show the largest reductions from pre-9/11 levels, according to the FAA’s latest forecast report.

“Many smaller communities that relied solely on the ability to connect at these hubs face the loss of viable service, particularly those markets that do not generate sufficient traffic to attract service to another carrier’s, more distant hub,” said Ralston, in his study. Compounding the problem of hub downsizing/elimination are airline strategic decisions to transition certain stronger, hubs to all-jet flying. For example, although Chicago O’Hare was once the de-facto connecting airport for many small communities, the regional affiliates of United (UAUA) and American have eliminated turboprop flying into O’Hare completely and left small communities without service since jets are too expensive to operate in them. In fact, as of August 2006, O’Hare had no turboprop departures, although just over 50 percent of all departures were [regional airline operations]. Thus, many smaller markets that once supported United and/or American-coded service to O’Hare have lost some, or all, access to Chicago.”
The cost involved in serving marginal markets, driven up by the 1997 commuter rule as covered in Part II, and the evolution of regional aircraft covered in Part III were not the only consideration for majors. Their marketing decisions even extend to such regulatory initiatives as the slot rules in Chicago and LaGuardia, also covered in Part II. As it did in Chicago, the FAA targeted regional aircraft to squeeze additional capacity out of LaGuardia, with the completion of its latest anti-congestion rulemaking. While FAA exempts service to certain small and non-hub communities from the target aircraft size requirement, such small-community provisions came too late for satellite communities around these hubs since they had already lost service to Chicago, LaGuardia and other hubs; service that cannot now be replaced. In addition, the latest anti-congestion rulemaking created a disincentive to serve small communities, since it would mean permanently losing a valuable slot. Unlike the old High Density Rule or the AIR-21 slot exemption provisions, air carriers would have the flexibility to fly aircraft of whatever size they want to these communities. However, once a slot is assigned as a Small Community Operating Authorization, it will retain that designation whether or not it is sold, bought or leased.
“In response to substantial regional airline growth, some industry stakeholders have sought to blame current and anticipated congestion problems on regional airlines and regional aircraft,” said Regional Airline Association President Roger Cohen, alluding to the O’Hare and LaGuardia congestion rules. Related Story   “…Any proposal which treats commercial airline passengers differently based on size or type of aircraft, airports used, or the level of air traffic during specific time periods, discriminates against passengers from smaller markets.” See related story RAA Expresses “Deep Concerns” Over Reauthorization Plan in this issue which also covers the disproportionate impact of passenger facility charges on small communities.

Economic Boom Times, But No Air Service
Using Joplin, Mo, as his case study, Ralston noted that while the city was growing and experiencing an economic boom, boardings at the airport dropped by 67 percent in the 1995-2005 decade. Meanwhile, he said, enplanements at primary and non-primary airports nationwide increased by 26 percent during the same period. His study pointed to a dozen other communities with the same experience. More coverage after chart.
“As the revenue bar for the preservation of air service continues to rise, many smaller markets that were profitable ventures for the airlines have lost some, or, in extreme cases, all viable service,” he said. “Taking a stand against further erosions in small market air service will involve the assumption of new risk-sharing concepts on multiple levels for local communities, airports, air service providers, and governmental entities in an industry where risk is particularly unsavory and creative endeavors too often end up in failure.”
But that creativity must overcome market barriers that are as high as, if not higher than, the costs for certification and operational costs wrought by the commuter rule as outlined in Parts II and III. Small carriers must also develop independent reservations systems capable of issuing electronic tickets, said Ralston. Carriers will also have to subscribe to multiple Global Distribution Systems (GDS’s) in order to ensure adequate product visibility and distribution.
In a startling reminder of the early days of code-sharing partnerships, once standard industry agreements have disappeared including interline agreements for ticketing and baggage. “Of the two, the ticketing aspect appears to be the most complicated from a technical perspective, particularly given the lack of consistency between airlines in their levels of GDS participation and lack of standardization between the GDS’s themselves,” he said. “These factors are compounded by the mandate set by the International Air Transport Association (IATA) to conduct 100 percent electronic ticketing by the end of 2007,” he said. “There are only two options for independent carriers – entering into code-sharing agreements and paying a per-passenger program fee to access electronic ticketing capability through the larger carrier’s reservations system – or investing in the development of in-house reservations and then subscribing to multiple GDS’s for product visibility and distribution.” With Sabre alone costing $50,000 a month, such subscriptions quickly mounts into the millions, according to one airline.
If the electronic ticketing route is chosen, carriers must then pursue bilateral electronic interlining ticketing (IET) agreements which must be negotiated with each individual carrier” so passengers will not have to reclaim luggage at the connecting airport, be re-screened and then check in at the connecting carrier. For all these reasons, RegionsAir’s Doug Caldwell called a code-share agreement critical, echoing former Air Midwest President Gary Adamson’s reluctant venture into partnership in the 1980s. “The only thing worse than a code-share,” said Adamson, “is not code sharing.”
Caldwell agrees. “In certain markets where there is no service at all, the risk would be less,” he said. “But in the current world of ticketless travel and [online] distribution networks, I think it would be more difficult to operate than before without a code.”
But even a code-sharing deal is not ideal for small airlines because they operate under the old pro-rate system in which a major carrier pays a feeder airline a portion of the ticket revenues, according to the RAA. This, however, leaves the regional at risk for cost increases. Even when the major takes the risks on increasing costs, as they do with fee-for-departure programs, those calculations go into its considerations of the market’s profitability when route and capacity decisions are made. Thus, airlines often have no choice, said RAA, but to eliminate loss-making routes, even if those routes contribute some connecting revenues. Even larger regionals have been forced to park aircraft as a result. Because of the increased costs and continuing financial pressures in the aviation industry, at least 40 additional communities have been forced into the EAS program since 9/11, it said.
Related Story

Is It Really Worth It?
As if all these factors were not enough to beg the question why anyone would bother getting into the airlines business, unions also play their part as their long-held suspicions they would lose jobs to regional airlines came true in the aftermath of 9/11. Even before that, however, they pushed for the commuter rule, although it was entirely unnecessary as recounted in Part II. Because of their job protection interests which, after all, are at the heart of scope closes, they become intimately involved in even the smallest communities in an effort to protect mainline jobs. One need look no further than a North Carolina case which emerged a few years ago in which American’s Allied Pilots Association precluded RegionsAir, then known as Corporate Airlines, from providing service to six small North Carolina airports.
After winning a $1.2 million federal grant in 2003, the North Carolina Department of Transportation and Corporate Airlines tried to establish air service to the six airports under the Small Community Air Service Development Program. The Smyrna, Tenn.-based airline would have flown the routes as an AmericanConnection carrier into Raleigh, where there was little or no service between the state capital and Wilmington, Fayetteville, Hickory, Moore County Airport in Southern Pines, Kinston Regional Jetport and the Craven County Regional Airport in New Bern. The Hickory, Moore and Kinston airports had no scheduled service - the last flight having ended in 2002.
The airports, organized as the North Carolina Consortium, won the third largest grant that year from DOT. The federal money would have been used to provide marketing support for the new service rather than revenue guarantees or subsidies. Each community, he added, was to provide a match in either hard local dollars or service contributions. The community contributions collectively would have amounted to about one-third of the $1.2 million federal grant.
However, under the APA scope clause, part of a contract it signed with American to avoid bankruptcy, Connection carriers could only expand if the markets were on a pre-approved list, which didn’t include Raleigh. "It was not in our best interest, especially against the backdrop of American decreasing in size and American Eagle increasing and taking over our routes," said Capt. Steve Blankenship at the time. "This is not growing American Airlines. This is growing American Eagle. We don't want to cause Eagle to grow and [the mainline] not to grow."
A similar fight is likely to break out at Northwest (NWACQ) which is dropping mainline domestic capacity by more than two percent while increasing regional flying by nearly 17 percent. See related story NW RJ Capacity to Grow Four Times That of Int’l Flying in this issue.

The Advent of LCCs
Over the last decade, low-cost carriers (LCCs) expanded beyond short-haul missions primarily in high-density markets with limited access to low fares. However, LCC service at secondary airports was also the main reason for leakage from small communities. Their service caused a dramatic erosion in high-yield mainline traffic since 1998, when such traffic amounted to 20 percent of all enplanements. Today, it is only nine percent of major-carrier traffic and continues to erode, according to statistics released last year by The Velocity Group. High-yield traffic dropped from 79,879,560 to 40,692,750 in 2005. Related Story
While it is no surprise that low-cost carriers have eroded service at small communities, Velocity Group reported recently that the number of U.S. airports served exclusively by regional airlines dropped for the first time in nearly two decades. The number of airports served solely by regional airlines dropped markedly from 2006 to 2007, from 65 percent of the total to 59 percent, largely owing to Allegiant Airlines' expansion into small communities and provided nonstop flights. Related Story

“Where regional markets were once immune from low-fare and low-cost-carrier competition, that paradigm continues to change,” said Velocity Group Partner Doug Abbey. “The upside is that LCCs tend to stimulate local passenger traffic activity when they enter a new city, and in doing so, encourage greater use of local airports for all carriers. The growth of the Allegiant network to include Abilene, Tex., Kinston, N.C., Idaho Falls, Ida., Knoxville, Tenn., Santa Maria, Calif., Bellingham, Wash. and others like them proves that small communities support enough traffic demand to justify nonstop larger jet flights in major O&D markets, rather than just spoke-to-hub-type service patterns by smaller aircraft.” He estimated that Allegiant serves nearly 30 “regional-exclusive” destinations today and predicted even greater competition for small community passengers as other new entrant carriers gain traction.
In its most recent report, Velocity recounted the leakage of passengers from regional airlines. Previously, regional airlines lost high-yield passengers to their cars, especially in markets up to 300 miles. “This is the first year we’ve seen a decline in the regional-exclusive service trend at small airports in nearly two decades, and I expect this trend to continue,” said Abbey. “Of course, major carriers are not the only segment of the U.S. airline industry to feel the already-considerable impact of LCC and new entrant carrier competition. JetBlue has targeted typical ‘regional’ markets for new flights in recent months using the 100-seat Embraer (ERJ)190 to link, for example, Boston with Buffalo, Richmond, Columbus, and Pittsburgh. New JetBlue flights between New York City and Nantucket, announced recently with Cape Air are a very clear indication that even the most traditional among regional-exclusive markets may see competition from non-traditional carriers.” Related Story
In its first report, Velocity reported the share of discount travel has risen 10 percent since 2000 to 85 percent of tickets, both because of the growth of LCCs and the expansion of discount fares by Legacy carriers. Related story
"We may be at a time when the business model of mixed classes that has served the airlines through most of the post-war period is increasingly vulnerable when faced with competition from both the low-end LCCs and higher-end business, fractional and air taxi operations," Velocity Partner Gerald Bernstein said, citing United's PS transcon service. As an example of legacies developing business models to retain higher-yield traffic.
"LCCs [have] several dimensions," said Bernstein. "First, legacy airlines match LCC fares. The more LCC capacity, the more pressure on the legacy carriers to reduce fares. Second, as LCCs expand into new routes and markets, former legacy monopoly, or near-monopoly markets decline in number, which equals fewer seats at full-coach fares. Third, LCCs are no longer servicing only secondary airports such as Providence and Manchester, but they have now entered major airports with substantial business traffic, including Philadelphia, Pittsburgh and Denver. So again, competition is forcing legacy carriers to offer more seats in more markets at discount prices."
Some of the loss may be going to business aviation, but the business aviation growth is only incremental and steady, said Bernstein. Related Story
All this makes regional partnerships a critical part of legacies new models. While cost pressures on major carriers is good news for regionals since it means they will take over more traditional legacy routes, it is bad news for short-haul, small community markets since it diverts regionals to longer-haul routes as majors concentrate on high-yield domestic and international markets. A growth in longer haul traffic will exacerbate the trend toward short-haul market loss.
Airlines have already deployed regional jets to longer and longer stage lengths as majors wake to their real potential. The advent of mainline jet comfort in regional jets, coupled with the normal economic realities of airline operations which already favor off loading thinner routes to regional partners, are making major carriers realize the real potential of larger 70- to 100-seat regional jets.
For that reason, there are an increasing number of routes on which regional jets fly over 1,000 miles, thanks in large measure to cabin improvements that mirror what passengers are used to in mainline narrow-body aircraft. The creativity of some airlines in using larger regional aircraft may even be the leading edge of finally fulfilling the promise of offering point-to-point service in marginal markets, if what Horizon is doing with Redmond/Bend-LAX is any evidence or ExpressJet (XJT) jet is doing in creating an independent airline entirely devoted to point-to-point service. Related Story
Ithaca has been called the poster child of the impact of low-cost carrier leakage, having lost 30 percent to 40 percent of passengers to JetBlue (JBLU) in both Syracuse and Rochester and Southwest (LUV) at Buffalo. Service from USAir mainline and its express carriers is now down to USAirways Express only. It also lost service to Boston via Continental Connection in the post 9/11 period along with TWAExpress service. Currently, in addition to USAirways Express, Mesaba serves the market over Detroit as a Northwest Airlink.
Ithaca’s recovery from 9/11, when it also lost 30 percent of traffic, began in 2004 and grew 12.2 percent in 2005 but dropped slightly, by 3.8 percent last year, according to Tony Rudy, assistant airport manager. It is now trying to track leakage in its largest market – New York City. Studies indicate that it lost 44 percent of its New York City traffic, 38 percent of which was on JetBlue out of Syracuse.
Raleigh, like Syracuse, has been the recipient of leakage traffic with service from Southwest, AirTran and JetBlue. "We have experienced a 50 percent leakage to Raleigh-Durham," said Brad Whited, Fayetteville's airport director, "based on a variety of differences, including lower fares, non-stop flights and the number of airlines. That is a substantial part of the market." Fayetteville is a 75-minute drive from Raleigh.

Next Week: The Future – Can Anything Be Done to Restore Community Air Service?