Regional airlines actually operate in a more competitive environment today than legacy carriers and the differences in their labor and capital costs can be quite significant.  What’s worse, many of those airlines are stuck holding on to 1st generation 50 seat airliners that don’t make economic sense against today’s cost of fuel.

Some regional airlines that were (or are) associated with legacy carriers such as American Eagle and Comair have now taken on labor rates that are closer to today’s legacy carrier labor rates with a labor force that is significantly more senior than was ever planned for.  In addition, these airlines are most often flying the least cost effective aircraft today. 

Other regional airlines such as Republic Airways and Pinnacle have massive debt from acquisitions that can’t be serviced very well in light of what they’re able to earn from serving legacy carriers.   All of these airlines face bankruptcy or worse in the next 2 years.

The regional airline world could use some consolidation and while it’s seen some, more would help both rationalize their fleets as well as reduce competition to get those legacy airline routes. 

However, the real problem these regional airlines have is the same problem others till have.  Scope clauses.  These scope clauses that exist today are choking off flying at legacy carriers and forcing these same legacy carriers to continue unprofitable flying through regional airlines.  Regional airlines who hold on to these 50 seat jet fleets have aging equipment that can’t be replaced with more fuel efficient airliners and at the same time also have no real substantial value in the used market. 

I expect we’ll see some regionals go into bankruptcy reorganization and others to aggressively consolidate their businesses.  Regional airlines will need to capture some negotiating power with legacy airlines in order to restore some assured profitability to their business.   Frankly, I expect we’ll see some move to show a more disciplined approach to soliciting and maintaining business with legacy airlines and it will be similar to the capacity discipline that we’re currently seeing from legacy airlines.

I’ve often wondered if tomorrow’s legacy airline might look like an airline serving many masters on the same route.  In other words, imagine a regional airline servicing two (or more) legacy airlines on the same route with the same aircraft but with each “owning” a portion of the seats available on the airline.  It would end the brand consistency that legacy airlines enjoy on regional routes, yes, but I’m not sure there was much consistency in the first place.  Why wouldn’t it be better and more efficient for that regional airline to fly one Embraer 175 into a city and fill it with passengers for a number of airlines rather than just one?  In a sense, Alaska Airlines already serves this purpose in its agreements with a number of legacy airlines and it works well.

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