Pinnacle CEO Notes The Advent Of The Regional Jet Aids Evolving Majors

Despite the banter of low-fare airlines, the airline industry's hub-and-spoke system will not die. "The network carrier is going to be around a long time," said Philip Trenary, CEO of Pinnacle Airlines [PNCL].

"The regional jets are the essential components in the survival and the future of the network airline industry. Networks work. It does matter if it is data, telecom or airplane seats being distributed across the country. A network is the most efficient way," Trenary said last week in an address to the Aero Club of Washington. In addition to his position at Pinnacle, Trenary is the chairman of the Regional Airlines Association.

While the concept of the network carrier is going to survive, Trenary said the survivors will be those carriers that accept the fact that fares and yields will not return to their pre-2002 levels. "The yield environment is changed forever. The days when employees are told they can fly first class are gone forever," he said. Not only must the major carriers strive to reduce their labor costs to be in line with the low-cost, point-to-point operators, they also need to achieve much more flexible work rules.

As the industry evolves, there is greater market fragmentation as an increasing number of players cut the pie into smaller pieces. Trenary noted that more and more markets are now better suited for small regional jets.

And to those naysayers who are beginning to blame regional jets for new airport congestion, Trenary said, "we should thank God for regional airlines and what they have done. As market fragmentation continues and our network carriers evolve, the regional airlines are a key part of the solution, not part of the problem.

"One of the things I feel very good about is that I have seen an attitude of cooperation by the FAA [Federal Aviation Administration] that I have not seen in a long time. They recognize that this is a tremendous task we have ahead of us and this segment is growing very fast. The FAA needs to stay firm on this and not impose restrictions on us.

"While regional airlines have never been more viable," Trenary said, "we have the same challenges that led the major airlines to the brink of financial disaster. First, we must embrace our entrepreneurial roots. What can we do to innovate and get our costs down? Regional airlines are known for low trip costs - that is why they work. Unit costs are still high. Regional airlines have the challenge before us to get our costs down."

Just like the majors, the regional carriers need to work with the government to cut back on the taxes and security fees levied against the passenger's ticket. "We can't afford to keep putting this burden on the customer."

But one area that needs to be changed is the labor climate between the pilots and the major airlines. "Scope has to be reformed dramatically or eliminated," Trenary said. "Scope is an albatross around the neck of the regional industry. There may have been a time when it made sense. I know that today it hurts the employees of Pinnacle Airlines. It hurts all people at major carriers. It hurts the consumer."

The labor contracts at the major carriers effectively prevent the pilots at regional partners from flying larger regional jets. The mainline pilots view the ever-increasing size of the regional jets as threats to their jobs.

Because the Northwest Airlines [NWAC] contract precludes regional pilots from flying planes with more than 70 seats, Pinnacle flies Bombardier [BBD] CRJs with 44 seats (CRAN, March 15). Until last November, Pinnacle was a unit of Northwest until it was spun off in a deal to fund the Northwest employee pension funds. In addition, the Northwest pilots' contract also prevents Pinnacle from flying larger planes for any other major carrier that it might sign as a code-share partner.

"Network carriers are denied the opportunity to put the most efficient planes in the right markets," Trenary said. "At the end of the day, scope helps no one. Long-term, for carriers to be successful they must deal with scope."

The airline industry is now "running on at least one engine. We have a long way ahead of us before we are running on all four again. As the network carriers evolve, the regional carriers will play a more and more important role," Trenary concluded. .

>>Contact: Philip Trenary, Pinnacle Airlines, (901) 348-4257.