Regional Airlines “New Strategies” for Survival, Will it work?
In his Business Week article titled “Regional Airlines: Scrambling for New Strategies,” Justin Bachman discusses the issues facing the United States regional airlines in a down economy with high fuel prices and the squeeze they are getting from the major air carriers they serve.
The article says, “ The business model that fueled rapid growth of regional airlines over the past decade—selling seats to hub-and-spoke legacy carriers—has been severely dented by the industry’s downturn. “Regionals in the last year or so saw a 180-degree turn: They saw expenses spike with fuel and then within six months, they had a revenue problem because high-yield business travelers stayed home,” says Doug Abbey, an independent airline consultant in Washington and a former researcher for the Regional Airline Assn. “They had a cost issue that almost immediately segued into a revenue problem. It was a double whammy.”
Those pressures have forced most regional carriers to scramble for new strategies. Perhaps the boldest course has been struck by Indianapolis-based Republic Airways (RJET), which went on a furious acquisition spree this summer. In rapid-fire deals consummated in July and August, Republic bought Midwest Airlines from private equity firm TPG and acquired Denver-based Frontier out of bankruptcy court for $108 million and the forgiveness of secured claims, trumping a rival bid from Southwest (LUV).”
Have you heard this story before? Does anyone remember the story of Atlantic Coast Airlines, that highly profitable regional airline based out of Washington- Dulles, that decided to go on its own with a name change to Independent Airlines? Independence didn’t serve them too well. How long did these guys last after they broke away from United Airlines? I believe they ran though $200 million plus in capital before running it into the ground. So, the new strategy for regional carriers is to go up against the likes of Southwest Airlines. How does any airline with 50-70 seat aircraft and a highly-leveraged balance sheet compete with established and well-captialized Southwest Airlines on price? It looks like a case of business suicide to me!
It seems to me that the airline system in this country is operating on a broken business model and that is getting worse with every attempt at a new strategy – not only for the traveler but also for the airlines’ investors. These companies keep beating each other up for the same customers, with no new ideas on how to grow the market. What about enhancing the level of service, or making the experience of airline travel more efficient by cutting down on travel time? What about looking for more cost and time effective alternatives to the hub and spoke model that clogs up the air traffic system, creating delays?
If the airline industry isn’t interested in solving the problem, then maybe those of us on the general aviation side should jump in and solve it. All of this turmoil and hopeless “change of strategy” by airlines in this country creates a fantastic opportunity for the rest of us in aviation to step in and meet the need. It seems that all the customer really wants is for their time to not be wasted.
And, really, isn’t that why we fly to begin with, so we can get there faster?
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- Dec 16, 2009: Twitted by cfmcharter
The fact is that the airline business model had been broken for years before the current economic turmoil. Degregulation was supposed to make the airlines safer, cheaper and more efficent. While no one will argue that flying is safer and cheaper than it was in the 1970s. Its efficency (except in a few cases) has gotten WORSE not better. In addition the cost model defies explanation. How can a ticket from NY to LA be the same price (or lower) now that it was in 1978? How many items have DECREASED in price in the last 30 years? The endless price wars in the industry is perfect example of shooting yourself in the foot.
The hub-and-spoke system has lead to overcrowding at the largest airports (and the delays that the overcrowding causes) while 1000s of smaller airports are underserved or not served at all. The “race to the bottom” in cost savings has created an industry where even the simpliest of pleasures now costs you money. (Even charging for coffee). Many complain that the glamour of airline travel has been replaced by a “bus with wings” mentaility. Some are even talking about charging for BATHROOMS! Perhaps even STAND UP SEATING? Where does it end?
All this turmoil in the indsutry is a golden opportunity for general aviation. The time savings and efficency of boarding your own chartered airplane is invaluable in a 24/7 business world. The ability to actually RELAX in the airplane or conduct business is priceless. (Not to mention actually getting there on time) GA also can serve 1000s of airports the airlines simply ignore and compete profitably for all aircraft travelers. From “Air Taxi” service on the lower end to Charter, fractional and of course aircraft ownership on the higher end. The convienence that General Aviation provides is LIGHT YEARS ahead of the airline business model and is flexible enough to survive the changes in the industry.
It is up to the GA industry to take advantage of this opportunity NOW for its future growth.
Allen, great article on viewing the customer’s basic aviation need within the framework of a company startup. The business model broke because it didn’t satisfy completely the need for the customer to travel comfortably and quickly. People will pay for value, or at least perceived value if it is within their ability to do so.
I agree with Clint, this is a golden oportunity for GA.