When Delta decided to sell off several subsidiary regional airlines recently, we all noticed that Comair didn’t receive any takers.  It’s costs are higher and its equipment is more dated and now Comair is slimming down to reduce costs in the hope that it might become attractive enough to find a suitor.  Just the reduction in the CRJ100/200 fleet alone will save the airline considerable money but the workforce will be reduced as well.

Comair is unattractive because of its divergence from what legacy airlines need in a regional airline partner:  It isn’t so cheap anymore.  Comair is pretty old when you consider its life and various forms.  It’s had enough time to add on a senior workforce and its found itself boxed in with its equipment (partially because of what it invested in and partially because of scope clause limitations.)  It really tends to be more “legacy” than “regional” in its airline DNA these days.

And that sounds a lot like American Eagle.  American Eagle has an aging fleet, increasing labor costs and a workforce that is aging and gaining seniority rapidly.  So far, it remains profitable on some level but only because of its contract carriage on behalf of American Airlines.

What happens if American Airlines sells this airline and pursues contracts with other regional airline partners to lower its costs?  Suddenly American Eagle doesn’t look at all attractive given the kind of aircraft it is burdened with as well as its labor obligations.  Would American Eagle find a suitor?  Maybe but I somewhat doubt it at this point.  Regional airlines are consolidating and attempting to move upstream.  American Eagle doesn’t bring very much to the table and without those revenue guarantees from various airlines, it doesn’t look all that profitable either.

What I am beginning to wonder is whether or not we’re seeing the end of the first real cycle for regional airlines in the deregulated US market?  In other words, have regional airlines that have their roots in the 19080’s become marginalized by their growth in labor costs and fleet irrelevance much as the legacies found themselves suddenly experiencing in the late 80’s / early 90’s?  If so, that would indicate that new players will find it potentially profitable to enter the market with a young crew and a more modern and relevant fleet. 

If there are new entries, their barrier to entry will end up being scope clauses governing the size of jet that can be flown by a regional.  Some airlines have pretty restrictive scope clauses and some not so much.  Some of those restrictive scope clauses got amended as a result of bankruptcies and, notably, those that didn’t go through bankruptcy in the 2000’s (AA and Continental) have some of the most restrictive clauses.  

At the end of the day, it would appear that AA and Delta are unlikely to realize very much value from their “old” regional airline companies in a sale.  Any buyer with any experience at all is liable to realize that without some sort of guarantee of a revenue stream from the seller, these airlines (American Eagle and Comair) are unlikely to be positioned to earn very much profit going forward.  And who wants to buy a lame duck?

Filed under: Airline News by ajax