Consolidation Among U.S. Regional Airlines Makes Sense

Regional airlines in the U.S. play an important role in the national air transportation network. Regional airlines provide service to many communities that cannot be served profitably by larger, full-service jet aircraft. With almost 2,000 airplanes and flying for the largest U.S. airlines, as well as some providing service on their own, this group of airlines connect many people to the world and starts the careers of many people who ultimately work at the largest U.S. airlines.

This part of the industry is also facing significant challenges. Skywest Airlines announced that they would be canceling service to 29 smaller cities due to a pilot shortage, only later to be told that they must continue the services because they had received federal subsidy for some of them. United Airlines placed a big order for full-sized jet aircraft in part to replace flying currently performed on smaller jets by regional airlines. One way for this critical sector of the airline industry to survive is to encourage consolidation to make these carriers more efficient.

Pilot Recruitment

Probably the largest challenge for regional airlines today is finding enough pilots. Even when they can hire up, these pilots are quickly snapped up by bigger airlines. This is especially true from the fast-growing, low-cost carrier airlines. While consolidation among the regionals would not reduce the number of pilots needed or make more available quickly, it does mean that the industry could better plan and prepare. This is because training schools might be more efficient when hiring in bigger quantities. Also, a larger airline means more growth opportunity for pilots and faster move into the left seat. Reducing some redundant flying among carriers could also lessen the pilot hiring burden.

Fleet And Other Synergies

Like most things, airplanes get cheaper if you buy a lot of them. Having larger individual regional airlines means that fleet orders could be better optimized. It also means that spare parts, maintenance, and other operational costs become more efficient through economies of scale. Leverage with major suppliers like Embraer increases with scale, as does part sourcing and distribution. Even ongoing, line maintenance becomes easier with a broader route network and more opportunities for individual airplanes to stop at a maintenance base without extra flying.

Beyond the fleet, other synergies are also likely. This includes basic overhead like IT and accounting, training, and human resource activities. Spreading these fixed costs over a larger base of operations adds efficiency and lowers unit costs of production, making the merged companies more sustainable through rocky economic periods. None of these companies are huge, so this would not be like two big companies combining to make the business less competitive. Instead, it would be smaller carriers combining to better relate to the fast changing world of the large U.S. airlines.

Management Talent

Possibly the largest and best synergy of regional consolidation is the better use of limited management talent. Airlines in general do not have deep benches of talent, and at the regional level there isn’t much room between the senior leadership and the front line employees. Republic Airlines and Skywest Airlines tend to operate better than other regionals, and not surprisingly their management is also considered top tier.

Staffing at all companies has become more challenging. Regional airlines tend to run very thin at the management level. Using the limited talent in this industry to manage and operate a larger percentage of the ASMs is a good use of talent and a way for the regional industry to stay ahead of the game despite the constant pressures from the big airlines for whom they fly.

Essential Air Service Efficiency

The Essential Air Service (EAS) program is in its 44th year since its origination when the U.S. airlines were deregulated in 1978. The program is wasteful and not well aligned to the realities of today’s airline system. The EAS program is flown by the regional airlines in the U.S., mostly in cooperation with a major U.S. airline as feed to a domestic hub. Accepting these subsidies puts restrictions on the carriers, as Skywest learned when they tried to cancel cities as described above. Combining carriers won’t make the EAS system more efficient, but it may make it easier and less expensive to meet the service commitments. This would be from having more airplanes, and a larger network scope that may allow these services to be offered at lower overall costs. As long as taxpayers continue to spend money supporting these questionable services, the industry would be better responding with the most efficient operations as possible.

Not Like Major Airline Consolidation

The U.S. airline industry today has four huge airlines — American, Delta, Southwest, and United — that each represent about 20% of the total commercial domestic airline market. Many believe that no more consolidation should happen, even though there are many carriers in the U.S. that are not part of the “big four” club and one way to compete is to get bigger themselves.

But even those skeptical of further large U.S. airline consolidation should embrace the idea of regional consolidation. The regional industry is a mish-mash of independent and airline-owned carriers, many who fly under the banners of a big airline but some, like Cape Air and Silver, that fly under their own name. This sector of the industry has been at the wrong end of the industry’s whip, meaning that while changes have happened at the big carriers, the regionals haven’t always benefitted. They have also been leveraged and been taken advantage of in some cases. Consolidation in this sector of the industry would be welcomed and improve the state of the industry, while securing more jobs and stabilizing more of the U.S. airline network.