Bryan Bedford
Chairman, President & CEO
Republic Airways Holdings, Inc.
Speech
to the Aero Club of
April
30, 2007
A state of change is one of the few things that has managed
to remain a constant in the airline industry. Often, change has occurred in
response to market factors such as GDP, inflation and oil prices to which
airlines fortunes are so closely tied, or to events such as 9-11 or SARS. Successfully adapting to challenging business
cycles has often required taking advantage of innovations, such as web based
distribution channels, visionary fuel hedging programs or efficient aircraft
design. Such is the case in the regional airline sector, where both the pace
and scope of changes have been dramatic during the restructuring process that
has taken place over the past five years. In fact, the effects of
network-carrier bankruptcy reorganizations and rapid LCC growth have recast the
role which regional carriers play within the industry in ways that would not
have been thought possible just a decade ago.
In response to the upheaval within the
But a new model has emerged within our industry. Far from
being “commuter” proxies of the network airlines, today’s regional carriers are
at the forefront of the industry using strong balance sheets to secure, finance
and operate new generation regional jets for a diverse group of code-sharing
partners.
Publicly owned regionals have set themselves apart from their
“commuter” peers in terms of their ability to provide turnkey solutions to
multiple network carriers. They are reliably operating larger regional jets
seating 70-86 passengers with multi-class cabin configurations across a larger
spectrum of the network carrier hub-and-spoke systems, boosting the yields of
their network partners, who are better able to match machine and mission.
As network airlines optimize their flying with their regional
partners, they eliminate equipment types, boost their fleet and labor
efficiencies, and preserve precious financial capital that otherwise would have
been invested had mainline aircraft continued to operate these thinner routes.
In turn, revenue enhancements and cash savings associated with out-sourcing
larger regional jets allow mainline carriers to increase their investment in
the most lucrative areas of their business model: new wide-body aircraft for
international routes.
These synergies, so favorable and even crucial to the success
of mainline airlines and their operating networks, underscore the increasingly
active role that leading regional airline partners have assumed in the industry
today. By entrusting to the regional carriers the flying best suited to them,
network carriers are increasing their ability to capture those opportunities
best matched to their own business models.
Just as important – and more important from a passenger
perspective – new generation regional airliners are also blurring the lines
between small jet and large jet operations in terms of customer service. Thanks
to dramatic upgrades in the size, comfort and mission capability of these “next
generation” regional jets, network carriers are confidently entrusting growing
segments of their domestic traffic to regional providers without fear of
diluting their brand.
This is essential, considering that the dramatic and
permanent changes that have impacted the U.S. airline industry after 9-11 which
required the major network carriers to develop solutions more meaningful and
lasting than past responses to cyclical downturns. But solutions to new
industry challenges that focus on operations to the exclusion of customer
service would be short-lived and possibly further damage the reputation of an
industry already running short on customer goodwill.
More than 20 airlines filed for bankruptcy since 2000. At one
point, more than half of the industry’s capacity was supplied by carriers under
bankruptcy protection. While this low point marked a tumultuous and painful
time for the industry, its employees, business partner and passengers, it also
represented unheard-of opportunities for cost shedding and efficiency
improvements. Gains in labor productivity were made that would have been
impossible absent these “edge-of-cliff” scenarios. Specifically, we began to
see the network carriers gain some meaningful scope-clause relief and to
quickly reallocate flying operated by less efficient narrow-body aircraft. In
particular, older narrow-body aircraft whose routes could be more profitably
served by smaller, more efficient jets began to shift to well-positioned
regional partners – that is, those with access to capital and delivery
positions for larger regional jets.
To highlight this trend, consider that since calendar year
2000, total domestic capacity is up only about two percent percent, with
network carrier capacity down nearly 21 percent. LCC capacity grew nearly 60
percent during this time, but regional airline capacity soared by more than 140
percent. During this same period, the network carriers’ fleets decreased by
more than 570 aircraft, while the regional sector increased by more than 460
aircraft. As of calendar year 2006, there were more then 300 regional jets
operating with 70+ seats, accounting for more than 20 percent of the total
share of regional airline seat capacity. Network carriers needed solutions to
the simultaneous effects of depressed domestic yields, skyrocketing fuel
prices, and rapid LCC growth, and it’s abundantly clear where they turned to find
it. Working with their regional partners, network carriers have taken full
advantage of improvements in the size, comfort, mission capability and
efficient economics of larger regional jets, the result being that the regional
sector today is a more integral part of the success of network carriers than
ever before.
At the risk of stating the obvious, regardless of how
competent and comprehensive a third-party solutions provider has become, the
costs it presents must remain meaningfully below those its clients could
achieve when performing the work themselves. If not, the motivation to
outsource disappears, along with the regional carrier’s reason for existence.
And with respect to the shift to larger regional jets, it’s
sometimes helpful to reflect upon the past when contemplating the future. Back
in the early 1990s, the first “regional jet” revolution began. Comair took the
lead in the industry then, rolling out a 50-seat regional jet that transformed
the industry in ways impossible to imagine at the time. Thanks to its faster, more comfortable,
jet-powered operating profile, it helped overcome many passenger perceptions
about commuter airlines and began to chip away at the rather striking boundaries
that separated mainline from regional service.
However, scope clauses artificially constrained the
regional-jet revolution at 50 seats, delaying its progression and forcing
network carriers to continue operating many domestic routes with suboptimal
aircraft, either with regional jets that were too small to accommodate demand
or with mainline aircraft that offered too much capacity. This situation,
although far from ideal, was tenable during the 1990s as the industry profited
from exuberant market conditions and continued to use the 50-seat regional jets
primarily to replace turboprop flying and open new markets.
But in the aftermath of 9-11 and rampant LCC growth, network
carriers found themselves fighting for survival. In this environment, some meaningful
scope-clause relief became possible, finally setting the stage for regional
jets to revolutionize the industry for a second time – this time going well
beyond replacing existing regional flying. The relaxation of scope clauses
allowed natural market forces to at least partially reconnect with regional jet
manufacturers, who began to satisfy pent-up demand for larger regional jets.
Forward-thinking regional airlines seized the opportunity.
With innovative financing, they secured major order positions on larger
regional jets like the Embraer 170/175 and the CRJ 700/900. Forging fixed-fee
agreements with multiple network partners, they were able to cost-effectively
leverage these fleets across a broad footprint, maximizing deployment
efficiency for both themselves and their mainline partners.
These larger regional jets have clearly expanded the role of
the regional industry. Today one out of every 5 passengers flying in the
I think it is important to note that the trend toward larger
regional jets is still in its early stages. Only half of the legacy carriers
have achieved enough scope relief to allow them to deploy regional jets of up
to 76 seats in their network. Their industry peers are surely aware of the
competitive disadvantage they face as a result. While scope relief never comes
easily, the operating realities of the industry will continue to make a
compelling case for it that sooner or later cannot be ignored. Who can say
where the airlines trailing in scope relief will move the bar in the next round
of labor negotiations?
In the meantime, significant demand for larger regional jets
remains, regardless of additional scope-clause relief. Mindful of the increased
capacity and range of these jets, network carriers that enjoy scope relief
continue to identify routes that are today marginally served by mainline
aircraft but will tomorrow be profitably served with a regional jet partner.
With LCCs poised to add hundreds of narrow-body aircraft to the domestic system
over the next decade and with the availability of Boeing and Airbus aircraft
tightly constrained. Network carriers can ill afford to ignore any
opportunities for yield and network improvements. Taking advantage of their
regional partners' jet fleets to “right-size” domestic markets continues to
represent a way for mainline carriers to reduce their exposure to destructive
pricing, without relinquishing brand presence.
Those who speak of “right-sizing” markets are making implicit
references to a misalignment of demand and capacity as measured against the
third dimension of pricing. Even with today’s record load factors, price
increases seem extremely hard to capture. Demand/capacity gaps are common in
the
Therefore, network carriers with scope relief are looking to
expand partnerships with quality regional carriers that have delivery positions
on larger regional jets and the operational expertise to deploy them in
cost-effective ways. As comprehensive solutions providers, next-generation
regional airlines are allowing network carriers to not only defend their
hub-and-spoke models, but to broaden their reach, recapturing or retaining
revenue that might otherwise be lost to the LCCs. Profitably operating marginal
routes – without sacrificing the brand – is paying truly global dividends, as
network carriers are free to divert scarce capital to invest in badly needed
improvements in their own facilities and infrastructure and to pursue expansion
in opportunistic international markets, where yields remain insulated from LCC
penetration. Such opportunities are likely to continue with the recent Open
Skies agreement with the EU.
As I indicated earlier, the regional carrier ceases to be a
solution if its cost structure is not competitive. For a regional airline, that
means being able to operate the newest regional jets while properly presenting
the network partner’s brand – and it means doing this more economically than
the network carriers could on their own. Under the fixed-fee arrangements that
prevail today, a regional airline’s costs directly affect its ability to win
business.
But in fact, the leading regional airlines are winning new
business. Innovative regional carriers have spread their costs – and risks –
across multiple network partners and invested in support facilities, including
hangars and crew bases, which not only complement their operating networks but
allow for interchangeability. This preserves and maximizes the efficiency
advantages inherent in a multi-partner approach. Although network carriers have
lowered their costs dramatically over the past several years, a gap still
exists between their costs and regional carrier costs. However, the leading Regional
carriers will have to work harder to maintain that gap, creating maximum value
for their clients and furthering justifying their own business case.
Cost cutting and operational efficiencies, however, cannot be
pursued to the exclusion of customer service – not with regional airlines
transporting nearly one in five domestic passengers. As regional airlines
assume a greater presence in the timetables of their network partners, brand
dilution becomes a natural concern. There’s no reversing the growth of regional
jets across mainline carrier networks, and network and regional carrier alike
would suffer if passengers perceive regional airline service as cheapened
versions of mainline service on second-tier aircraft.
Fortunately, the latest regional jets are blurring the
traditional lines between regional and network airline in equally important
terms: those of passenger perception. Consequently, today’s leading regional
airlines offer network carriers a product that truly represents a marriage of
operational ingenuity and passenger satisfaction. Critically, even as
passengers increasingly find themselves on a code-share flight in place of
mainline aircraft, they can nevertheless expect a brand-consistent travel
experience at all points in the network hub-and-spoke system of their preferred
airline. This is so thanks to next-generation regional jets that have
solidified the regional carrier’s ability to act as brand stewards of their
network partners.
These next generation regional jets are clearly exceeding the
scope of the “first RJ revolution” of the early 1990s in terms of size, range,
efficiency and cabin comfort. Far from comparing favorably only to their
50-seat relatives, they now compare favorably to narrow-body mainline aircraft
in several passenger-comfort features, including bag storage, seat width and
pitch and cabin height. In fact, when traveling on our Embraer 170s and 175s, I
often overhear fellow passengers remarking to each other about these amenities.
They express a pleasant surprise about the size of the seats and cabin and the
overall quality of service, especially as contrasted to their traditional
expectations related to regional service. Some passengers aren’t even aware
they’re on a regional jet. These spontaneous passenger endorsements are living
proof of the capabilities of the new regional airline business model.
Ultimately, they signal satisfied customers of the network airlines we
represent – airlines who are our customers.
In closing, one cannot help note that, once again, past is
prologue. As has been the case so often in our past, advances in aircraft
design are driving our industry forward. But a tool is at its most effective
only when in the hands of those most adept at using it. In an airline environment
that has seen the pairing of persistently high fuel costs with persistently low
yields, all set against the backdrop of aggressive LCC growth, network and
regional airline alike have recognized the importance of deploying assets to
their best advantage. By investing in and innovatively leveraging their own
fleets and crew with multiple network partners, the winners in the new regional
airline industry will establish themselves as the premier low-cost operators of
a new, farther-reaching generation of regional jets.