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| Mark Gibbs |
However, passengers flying between smaller American communities are not usually flying on major U.S. airlines, but on independent regional airlines with a far less rosy financial picture. While the ticket from a small American community may say Delta or American most travelers in small markets are likely flying on regional airlines who are branded under contract with major airlines.
The major U.S. airlines have relinquished much of the small market to regional carriers who operate those flights on their behalf. Operating smaller regionals on short haul routes (less than 250 miles) has helped feed passengers to the major U.S. airlines that connect large city pairs. This “hub and spoke” system has contributed to increasing dominance by major airlines in large urban markets and provided economies of scale for operating large aircraft between cities.
Furthermore, major airlines have cut the number and frequency of flights across all markets and have significantly paired service to smaller airports in order to ensure their planes fly full on every flight they schedule. This airline strategy focuses away from a consumer based competitive model to one that focuses on investor profitability. Through limiting the size of their airline fleets — adding and dropping routes to get the highest return from their mobile aircraft assets — major U.S. airlines have boosted their financial strength.
In this new return-on-investment focused marketplace, airlines are looking to the communities that benefit economically from their service to share in the cost of marketing, advertising, and risks of operating flights. This cost sharing includes aggressive and effective marketing to build passenger traffic, financial incentives for start-up services, and cost-sharing or control risk to achieve a specified rate of return on an airline’s service to a small community market.
Now that airlines are focused on market return, market forces dictate longer routes with larger aircraft as the most economical to operate. Small communities served through small aircraft on short routes are not where airlines are investing their future capital. Smaller communities are facing a structural change in accessing air travel through less competition, higher airline fares, fewer destinations served, and fewer scheduled flights served on larger jet aircraft. Unfortunately, some smaller communities in the Western United States are losing air service entirely including Yuma, AZ; Chico, CA; Modesto, CA; and Klamath Falls, OR to name a few losing air service in 2014.
The Airline Deregulation Act if 1978 removed Federal government control over fares, routes and market entry for airlines operating in the United States. To protect smaller airline markets from the loss or erosion of airline service that would occur after deregulation, the Airline Deregulation Act established the Essential Air Service (EAS) program to ensure small communities received access to commercial aviation. The EAS program was put into place to guarantee that small communities that were served by airlines before deregulation would maintain a minimal level of scheduled air service after deregulation took effect. This program provided Federal money to subsidize airline service to small community markets that were too small to realize profitability in the free market. Since 1978, Congress has reduced funding and tightened eligibility requirements for small communities seeking air service under EAS.
In 2012, President Obama signed the Federal Aviation Administration Modernization and Reform Act of 2012 into law. The act further capped airports participating in the EAS program to only those airports who received funding in 2011. Therefore, no new communities can enter the program should they lose their unsubsidized airline service. Secondly, the law required subsidized communities must maintain an average of 10 passenger enplanements per service day to participate in EAS.
Elko never participated in the EAS program, but now it is now barred from participating should the current airline decide to leave this market leaving air service in the hands of local constituents in Nevada.
Regional Airlines have seen their profits decline since their hey-day in the mid-1990s when profit margins were at a steady 20 percent. With major U.S. airlines consolidating through mergers and bankruptcies the contracts between major carriers and regionals were rewritten. New airline Capacity Purchase Agreements (CPA) favored the major airlines left standing after a wave of U.S. airlines disappeared from service includingTrans World Airlines, Pan American Airlines, and America West Airlines. The new airline agreements capped the regional airlines profit margin leaving them with a limited ability to control revenue. Regionals’ airline fares were set under contract by their major airline patrons without the ability of the regional airline to schedule their aircraft. This left regionals with little control over their revenue and limited ability to pass along higher costs to their customers. Profits at Republic Airlines, a regional carrier, went from $80 million in 2006-2008 to $26.7 million last year losing money in both 2010 and 2011.
When costs rise for regional airlines they cannot raise ticket prices set by the CPA contracts. These CPA contracts often last 20 years and as costs rise the regional airlines must wait until they can renegotiate their contracts with the major airlines. With competition fierce between regional carriers, the only major area that these regionals can control profits is through reducing expenses. Squeezing airline labor has been how regional airlines have secured contracts with majors in this competitive environment.
The result is that pay for regional first officers, or co-pilots starts around $22,000 a year according to the Airline Pilot Association. Regional airlines serve as the first entry job into the airline pilot market. Most applicants spend more than $100,000 for education and flying time to qualify. The Federal Aviation Administration recently increased the minimum amount of flight time necessary to fly regional aircraft from 250 hours to 1,500 hours thus increasing costs to become a commercial airline pilot by another staggering $50K. With low starting wages and increasing the number of hours a student pilot must have to obtain a job has left the regional airline industry with a worsening pilot shortage.
The regional airline industry has cited pilot shortages in cutting service this year. Republic Airlines grounded 27 planes and Great Lakes Airlines discontinued several EAS communities this year citing a lack of attracting new pilots to fly their planes.
With many factors changing the airline market, small communities can no longer rely on airlines serving their market at risk. Small communities that desire access to air service will have to share the costs in risk traditionally borne by the major airlines. As the major airlines have shifted the risk of serving small communities to regional airlines it is now regional airlines who ask the communities they serve if they will share in risk in serving that community. This is a new financial burden that many smaller communities have never had to entertain, but as the airline market matures it is a question that community leaders’ face if they want to keep connected to the global marketplace.
Mark Gibbs is director of Elko Regional Airport.
- Source: http://elkodaily.com/opinion/commentary
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