How Changing Airline Demands Will Transform Regional Jet Utility

Now that Midwest Airlines and ExpressJet have made new commitments with regional jets which differ from traditional hub-small market routes, other airlines may have to be more creative with how they deploy their regional jets (or those of the regional lift providers they contract with). Airlines have been cutting regional jets from their fleets, specifically 50-seat and below jets, in an effort to cut costs. 70-seat regional jets, however, are still popular with airlines because they have better economics than 50-seaters, and it's unlikely many will be redeployed in the next couple years. Many of the 50-seat and below regional jets which remain will be used to fly traditional hub-small market routes which are still profitable, even with high fuel prices. However, some of the jets may also be used to start new point-to-point routes, similar to what ExpressJet is doing. Regional jets are well-suited for a couple of applications which will become more important to revenue-conscious airlines in the coming years.

First, regional jets offer a good way to deliver small amounts of capacity to in order to facilitate connections at focus cities. For example, Delta is building their Los Angeles operations, and has been adding an increasing number of flights to Latin America. And while Delta has a sizable operation in Los Angeles, and nonstop flights from LAX to many cities, particularly on the East Coast, Delta has stayed away from competing with the three big boys on the West Coast routes, Alaska, United, and Southwest. But Delta announced new regional jet service to begin June 7 from Seattle and Portland to Los Angeles. The new service will be operated by the former Delta subsidiary ASA (now part of SkyWest Airlines). Both flights depart early in the morning and return in the evening, timed perfectly for connections. Why did Delta add these flights on a regional jet which is far more inefficient to operate than a 737 which Alaska, United, and Southwest all operate? Primarily in order to facilitate connections at LAX for Latin America flights. Delta recognizes that in order to be successful on any route, it needs to maximize the amount of potential traffic that can utilize it. And while LAX has a lot of origin and destination traffic which will help sell tickets, O+D traffic alone won't fill planes. But LAX is a poor connection location, particularly on Delta's route network, since most of Delta's services from LAX are to the East Coast. With Delta's large Atlanta hub, passengers on the East Coast can easily connect to most of the same Latin American destinations they serve from Los Angeles nonstop from Atlanta. These passengers don't need to travel to Los Angeles. And so as a result, Delta needed to find ways to get passengers onto their LAX-Latin America flights, and connections to the Pacific Northwest made perfect sense. Delta isn't trying to compete for market share with Alaska, United, and Southwest on the Seattle/Portland-LAX route, that would be lunacy with a 50-seat regional jet. Delta is simply using some regional jets which would otherwise sit empty on the ground to expand their route network and to gain market share on routes to Latin America. The regional jet flights themselves may not be profitable, but Delta should make money because most of those passengers who travel from Seattle or Portland will continue on to Latin America, enabling Delta to charge a higher fare and make a profit overall. Finding niche applications for regional jets can be tough, but Delta's idea to use the aircraft to add capacity between large markets in order to facilitate connections should work well, provided there is sufficient demand for travel to Latin America, especially during the upcoming hurricane season.

Secondly, regional jets can also be used for starting point-to-point service, in the spirit of ExpressJet, to build up service from various markets. The excellent characteristic about regional jets is that they can be used to quickly build up service in a market to gain market share, and can be used to operate nonstop flights to many different cities, although its costly to do so, especially when competing against an airline using mainline aircraft. For example, in a city such as Omaha, regional jets could be used effectively by a lift provider contracting with a major airline to add service to a variety of cities unserved by mainline carriers. Service from Omaha to cities such as Seattle, Portland, San Jose, Austin, Raleigh-Durham, Indianapolis, and Richmond could enable an airline such as Northwest to build market share in Omaha without using precious mainline aircraft. Granted, Northwest would probably sell tickets at a premium to other airlines offering connecting service, but it would offer loyal customers more options for point-to-point service. And since those who are most likely to need nonstop service are business travelers, who already pay a premium for tickets, it could be a win-win situation, provided routes are carefully selected, and flights are timed to the needs of business travelers. This kind of service wouldn't facilitate many connections, it would simply offer nonstop service where none currently exists. Actually, Northwest has tried something similar to this in Milwaukee and Indianapolis, with mixed results. Both of those cities lacked nonstop service to many major business markets, and Northwest filled some of the gaps with mainline aircraft (mainly 100-seat DC-9 planes), and other gaps with 50-seat regional jets. Northwest has continued some of the routes, but had to cancel some as well. Unfortunately, Northwest tried to do to much in both markets. Northwest has had to pull most of its point-to-point flights out of Milwaukee because Midwest Airlines offered competing service with a better product than Northwest at a competitive price. Consequently, Midwest was able to dominate many of the point-to-point markets Northwest entered. Northwest's Indianapolis operations have been more successful, and the airline has retained many of its point-to-point flights from that city. If Northwest or any other airline wants to use regional jets to build market share, they need to do it in a location which is relatively free of competition on nonstop routes, and which offers the traffic levels to sustain point-to-point flights to multiple destinations. There are markets out there which fit this description. Omaha is only one example; Colorado Springs, Lexington, and Buffalo are all examples of markets which could benefit from the introduction of regional jet point-to-point service.

These are only two examples of how airlines can try to redeploy 50-seat and below regional jets. If airlines can find the right niches for these planes, then they will find a new life, because while their economics may be poor, there are still markets and routes where a regional jet is required and where that level of capacity isn't a competitive disadvantage (as many airlines with bloated regional jet fleets are now finding), but rather a competitive advantage. Airlines may find that because regional jets enable them to closely tailor capacity to market demands and to grow focus cities and other markets slowly, they will become assets. But, airlines must ensure that the routes they do start will be able to sustain themselves with higher fares, so airlines won't have to have sell seats at fire sale prices like Independence Air, an expedient way to failure. Airlines that fail to find ways to effectively redeploy their regional jets will find them increasingly costly and burdensome.

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Will Skybus Ever Leave the Station?

Yes it will, and sooner than many have anticipated. It appears that Skybus will essentially copy the Ryanair model in the United States from its base in Columbus, Ohio. Skybus, which will fly 150-seat A319 aircraft, predicts that their startup operations will commence May 1, although this depends on when they get final approval from the DOT and the FAA. The Columbus Dispatch wrote about Skybus' wait for government approval in a recent article. Initial flights will likely be from Columbus to leisure destinations in Florida, California, Nevada, and Arizona (since most of the customers who want bargain-basement tickets are flying for leisure), and tickets will be priced in the $10-$40 range each way. As the company has hinted at before, Skybus will copy the Ryanair model in many ways. Like Ryanair, the exterior and interior of Skybus aircraft will be covered with advertising, no free food or drink will be provided, flight attendants will sell a range of products on board, much like a retail store, and customers will need to pay to check luggage. Right now, the airlines most similar to Skybus in the United States are Allegiant Air, which makes around $15 per customer in ancillary revenues, and Spirit Airlines, which prides itself on its $.05 cost per available seat mile (excluding fuel), which is far lower than available seat mile for most legacy carriers, which can hover around .08-.10 cents per available seat mile (including fuel). Ancillary revenues are a critical component of Allegiant's revenue stream that helps subsidize Allegiant's low fares. These revenues come from the commissions generated by vacation package sales, revenues from on board food and drink sales, and commissions generated by the sale of other services, such as travel insurance. Skybus, like Ryanair and easyJet, will also try to use alternate airports whenever possible. It's likely that they will initially serve airports such as Orlando Sanford instead of the primary Orlando airport-McCoy, St. Petersburg instead of Tampa, and Fort Lauderdale or another nearby alternate airport instead of Miami. But while this airline seems to be adopting many proven cost-cutting features of the Ryanair model, they are also adopting some dangerous, unproven features which could hurt the airline's reputation. The most notable unproven feature is that the employee payscales will be comparable to a regional airline (in other words, very low). One individual writes about his experiences interviewing for a Skybus flight attendant position here (and some of the information in this post is taken from his accounts). Even Ryanair and easyJet pay salaries in most cases competitive to their legacy peers, and the airline their business model is copied from, Southwest, is one of the highest-paying carriers in the United States (which has enabled the company to retain quality employees, but it could be a liability for the carrier down the road). However, unlike Southwest, Ryanair and easyJet outsource most of their ground and maintenance staff, and their contractors may pay low wages, but the employees who actually work for Ryanair and easyJet (mostly flight attendants and pilots) get paid decently.

The other main concern about Skybus is that they will start services from a relatively small market, and given their rapid and extensive plans for growth, they will be unable to use all 65 of their planes on order from Columbus. Ryanair has been successful in part because its bases are at such large cities that suffer from high fares and poor service by legacy carriers. Not all travelers in a given market will fly Ryanair, but Ryanair has the ability to find their niche in such large markets. Columbus is America's 54th largest market in terms of passengers embarking and disembarking at the airport according to the DOT. (These figures can be somewhat misleading, however, because they include connecting traffic, and some cities like Atlanta, with large hubs but substantially lower origin and destination traffic can skew the figures, but nevertheless, Columbus is still too small a market to be starting an airline in.)Skybus' low fares may be able to stimulate the market and increase passenger numbers, but not as much as many believe. If Skybus were flying from Chicago, they may be able to find more of a niche for themselves, even though they would endure more competition. However, with a market where the largest carrier is Southwest, which already offers relatively inexpensive fares, Skybus may be up against a tough competitor with a strong base of loyal customers in the area. At least on Southwest, you will be able to pay a bit more than Skybus and receive a free beverage and snacks and a free checked baggage allowance, without the pain of being hounded by flight attendants selling cheap goods. Columbus is somewhat underserved by the carriers that currently serve the city, including Southwest, in part because the market in Columbus is so fractured. No carrier has more than 25% of the market in the city (Southwest has about 22.75%), and consequently, there is no hubbing airline to offer nonstop service to many destinations Columbus origin and destination traffic cannot support. And unless Skybus plans on a hub-and-spoke operation, and they haven't given any indication of this so far, then they will serve many destinations from Columbus unsustainably, because even with ultra-low fares stimulating traffic, Skybus cannot sustain service to too many smaller destinations that currently lack nonstop service from Columbus because ultra-low fares can only convince so many people to fly. However, if Skybus is able to deploy their aircraft at other bases, such as Cincinnati, Chicago, Minneapolis, or Dallas, all of which are hub markets that have relatively high fares, then Skybus may be able to survive.

Take one example, Cincinnati. Delta and its regional partners dominate Cincinnati, with over 90% of the passengers that come through the airport. If Skybus entered Cincinnati, they could substantially lower fares in a market with more opportunities for growth than Columbus. If Skybus provided low-cost, punctual flights, then they could potentially capture a share of Cincinnati's lucrative business market as well. There are, however, three big challenges that Skybus will face in Cincinnati, or in most hub markets they enter, for that matter that they don't face in Columbus. First, because Delta has such a large share of the market, they have tremendous pricing power, and if Skybus enters the market, Delta will fight tooth and nail to retain its market share. Skybus may be able to gain some market share, but Delta will pressure Skybus by adding flights and lowering fares in markets where the two airlines compete. This is the most important reason Skybus is staying out of hub cities. Skybus will be attractive to passengers on fare alone, and if a legacy carrier with more amenities matches their fares, passengers will most often fly with the legacy carrier. Moreover, as a startup, Skybus cannot sustain a prolonged fare war for as long as Delta. If Skybus is successful in Columbus, then they may have the awareness among many Ohio consumers, as well as the financial capital necessary to sustain a long fare war, to enter Cincinnati. But, the formation of another base won't be for at least a year after Skybus launches services in Columbus. Second, because Delta has such a large market share in the region, it has a lot of brand loyalty from travelers in the area, particularly business travelers. Skybus' business model doesn't seem conducive to the needs of many business travelers, and as a result, Skybus may struggle to get many business travelers on board. Third, the Cincinnati airport, like many hub airports, is unattractive to low-cost carriers because it gives those carriers higher costs. The Cincinnati airport has high fees for its users, and they may be too high for Skybus' ultra-low-cost business model. But on the upside, Skybus would face no low-cost competition whatsoever, since no low-cost airlines currently operate from Cincinnati. Not Southwest, not AirTran, not JetBlue. I think those carriers have missed a big opportunity; with Skybus adding 65 planes to its fleet, Cincinnati is a good location to use them, but only after Skybus has developed a market in Columbus. In hub cities like Cincinnati, Skybus would certainly face challenges, and possible difficulties implementing their ultra-low-cost business model, but they would find markets with greater growth potential, and with greater monopolies that are keeping fares high.

But if Skybus' management believes that its growth can come mostly or entirely from Columbus, then they could be another Independence Air. Remember, Independence Air thought they had lower costs and more of a market that could be stimulated by low fares in smaller cities than they actually did. Because Independence Air believed this, they offered fares that were too low, which drove their company into the ground. Without more information, I can only suspect that Skybus will head the same direction. However, Skybus could become immensely profitable like Ryanair, if they successfully stimulate a strong customer base with their ultra-low fares and are successfully able to develop their ancillary revenue streams. If they can do those things in Columbus and in other underserved, high-fare markets, then they can be successful, but if they can't, then they will burn their cash and go the way of Independence Air.

AirTran and Midwest Launch New Routes to Underserved Markets

It turns out the rumors are true, and AirTran will begin "seasonal" service to Portland, Maine starting June 7, 2007 with their 117-seat Boeing 717 aircraft. AirTran announced this service as an open-ended seasonal service, so it has an easy excuse to cancel flights if they don't do so well. In all likelihood, these flights will be successful enough for AirTran to offer year-round service; the use of the term seasonal is simply a way for AirTran to gracefully exit the market without too much backlash if it is forced to. Interestingly enough, AirTran will not serve Atlanta from Portland, not even with one daily flight, and will instead serve Baltimore with three daily flights and Orlando with one weekly flight on Saturdays. Service to Baltimore instead of Atlanta provides AirTran two advantages. First, the Washington D.C. market is bigger than the Atlanta market (even though most passengers will connect in Baltimore, there will still be a fair number of passengers that will terminate there), and fares have been high between Portland and Washington ever since Independence Air left the market over a year ago. Portland was one of Independence Air's best markets, and so it's no surprise that AirTran wants to enter it and once again lower fares substantially for passengers like Independence Air did, even though AirTran will serve Baltimore instead of Dulles. But the second reason that it's advantageous for AirTran to serve Baltimore is just as important. AirTran has intelligently recognized that most of their customers will be bound for Florida. After all, just over half of Portland's passengers are headed for Florida, and so it only makes sense that AirTran would cater to them. While Atlanta offers a wider variety of destinations to connect to, Baltimore offers nearly as many routes to Florida as Atlanta offers, but by going through Baltimore, AirTran can avoid direct competition with Delta and expand their Baltimore hub operation, which is important to strengthening AirTran's overall network. If Portland service is successful, then it will likely be made year-round (although flights on some routes from Portland may be added or reduced during different parts of the year), the Saturday flight to Orlando will likely be upgraded to daily service, and AirTran may add additional flights to Atlanta or point-to-point service to Fort Lauderdale and/or Tampa. AirTran's Portland service will put the airline in competition with JetBlue on Florida routes. And since JetBlue has 600 seats in the Portland market already, a sizable amount for a relatively small market, AirTran's addition of over 350 daily seats (351 to be exact) will make the market much more competitive, and could hurt both airlines in the short term. AirTran will certainly lower fares in Portland, in part because JetBlue has been able to charge higher fares in a market such as Portland where they are the only low-fare airline in town. But in addition to lowering fares, AirTran will lower load factors, until the market grows to accommodate the new capacity. AirTran can handle lower load factors, they are used to them on many Florida routes and have a lower break even percentage than JetBlue. But JetBlue will have a harder time if AirTran starts taking a significant part of their market share. If AirTran lowers fares enough, then their Portland service will succeed, even though they only plan on offering one weekly nonstop flight to Florida. But if AirTran cannot offer Portland customers a good value, then many customers would rather fly with an airline they're more familiar with, most likely JetBlue. However, I predict that AirTran's Portland service will be quite successful, and that before the peak winter season late this year, AirTran will add additional flights to Atlanta, Orlando, and possibly Fort Lauderdale and/or Tampa.

Midwest Airlines also announced new flights today from Milwaukee to Seattle/Tacoma beginning June 18, 2007. This new service will be in addition to Midwest's new nonstop service to Seattle/Tacoma from Kansas City that starts on May 1, and this new service is somewhat of a surprise, since in the press release that announced the new Kansas City service, Midwest showed schedules for the fastest connection between Seattle and Milwaukee via Kansas City, something most airlines don't do on a press release unless they are trying to justify not serving a city pair nonstop. Midwest's new flights will be welcomed in Seattle, which has long suffered from a dearth of service to the Midwest. But more importantly, it indicates the importance of the Pacific Northwest market, a market that until recently, both AirTran and Midwest have paid lip service to. AirTran doesn't even serve Seattle/Tacoma right now. Their seasonal service will resume in May and run through Labor Day. The Pacific Northwest is of increasing importance to the country economically, with many important companies such as Boeing, Microsoft, and Starbucks all with major operations in the Seattle area, not to mention companies like Nike and Intel with large operations in the Portland area. But sadly, the Pacific Northwest has been dominated by a few airlines for many years, and that has resulted in high fares, particularly on routes to the Midwest and East. Alaska Airlines is the predominant carrier in the Pacific Northwest, but their stronghold has been routes up and down the West Coast. They bill themselves as a "low-fare" airline, but Alaska has been able to keep fares high on its coastal routes, as well as on their few transcontinental flights. United, which still has a sizable operation in Seattle, has trimmed its schedules in the city over the past few years and is the antithesis of a low-fare carrier. Southwest is expanding in Portland (although only on Western routes) while they've halted further expansion in Seattle due to high airport costs. Southwest's presence really hasn't lowered fares and spurred demand on routes to the Midwest and East Coast. Both AirTran and Midwest are airlines that predominantly operate in the East, but in a few months, both will serve Seattle/Tacoma. The flights on both airlines should be successful at first, particularly because Seattle is a strong market in the summer with many cruise passengers flying to Seattle to embark on cruises to Alaska. But, if both airlines are truly committed to the Pacific Northwest, then both should consider adding service to Portland, Oregon in the near future. Moreover, both should expand the number of flights in Seattle, because Seattle sorely lacks low-cost service to the East Coast. Aside from JetBlue's service to New York and Boston, Seattle doesn't have a lot of low-cost airlines that offer easy access to the East Coast. While I would like to see new routes added, I don't think that Midwest and AirTran will expand much beyond this. The Pacific Northwest simply isn't an important part of either carrier's business plan, and while it's wishful thinking to believe otherwise, sadly, AirTran's seasonal service and Midwest's daily flights to Kansas City and Milwaukee are all the new routes the Pacific Northwest will receive from these two carriers in the near future. The Pacific Northwest is simply too geographically distant for both carriers to set up sizable operations in the market. It's too bad, because Seattle, like other markets poorly-served by low-cost airlines, such as Cleveland or Charlotte could accommodate the new service. If a low-cost airline were to challenge Alaska's dominance in Seattle or Portland, it would probably be Frontier, but they seem to have refocused their point-to-point expansion on Las Vegas and Memphis for the time being. As low-cost airlines become increasingly important across the country, regional strongholds such as Alaska's in the Pacific Northwest will start to disintegrate, especially given that in many of these regional strongholds, the dominant airline doesn't offer sufficient service to meet the needs of the traveling public. Unfortunately, however, AirTran doesn't seem as committed to challenging Alaska's dominance in the Pacific Northwest as it is in challenging JetBlue's dominance in Portland, Maine, and that will continue to result in customers (such as myself, a resident of the Seattle area) paying higher fares than necessary in order to travel to the Midwest and the East Coast.

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ExpressJet's Independent Carrier Announces Initial Routes

ExpressJet formally announced the new routes that their independent carrier will fly, starting in April. Overall, the routes appear to avoid competition and provide opportunities for business travelers to fly nonstop on routes that currently lack nonstop service. Nonetheless, ExpressJet will face an immense challenge to create a profitable airline, although they certainly have a better business plan than Independence Air. However, numerous details bother me about ExpressJet's route map. First of all, there seem to be too many cities on it. It concerns me that ExpressJet will be able to build up awareness and a market for flights in cities that will only have one or two daily flights. ExpressJet should instead focus on linking 10 or 12 midsize cities and building strong markets in them, rather than offering one or two daily flights from a bunch of cities. Currently, ExpressJet's route map is a mix of small and midsize cities, with no clear pattern concerning why some small cities are being served while others are avoided. For example, Bakersfield, Corpus Christi, and El Paso only have one route each, and it might be difficult for ExpressJet to build a market in these cities when they plan to offer so little service. ExpressJet also plans to operate a heavy intra-California flight schedule. Even though ExpressJet plans to operate from smaller airports including Fresno and Monterey, there is still significant competition from low-fare carriers at larger airports nearby. ExpressJet may be able to succeed with these flights, but they need to count on a dedicated base of business customers who are willing to pay for the privilege to fly nonstop to Ontario and San Diego. The prices on intra-state travel are very low right now, and ExpressJet will need to market itself to customers well in order to justify its higher prices. Flights from Fresno and Monterey could justify higher fares, but how much higher when it costs less than $50 to fly to the other end of the state on Southwest? Otherwise, intra-California service may be a liability for the airline.

ExpressJet has done a good job diversifying itself in larger and smaller markets. Larger markets such as Omaha, Ontario, Oklahoma City, and Sacramento will all be serviced by ExpressJet, but the airline is careful to avoid any direct competition with Southwest, which serves all these cities. Moreover, in these markets, ExpressJet is ensuring that the flights are long enough so that the time saved by avoiding a connection is significant, and worth paying extra for. However, I am disappointed that this carrier didn't take advantage of opportunities that I believe they missed with some of their Midwestern cities. Omaha, Oklahoma City, and Tulsa could all use more connection opportunities to the Northwest and the Southeast. Unfortunately, ExpressJet decided against providing service between the Midwest and these two regions, which I believe is a mistake, since there would likely be more business travelers flying these routes, (as flights to California are often filled with leisure customers) and there are fewer connections to these regions than to California, so the time saved at the airport would be more substantial than for California nonstops.

ExpressJet will have difficulties attracting customers, because as an independent carrier with high-cost aircraft, it will inevitably be a tough sell for customers. However, this business model could work on many of the routes ExpressJet proposes. But ExpressJet will need to be extremely vigilant and monitor the profitability of their routes. Underperforming routes shouldn't be given a chance to prove themselves, they need to be cut quickly. If ExpressJet monitors their operations closely and looks for new expansion and revenue-generating opportunities, then they can succeed. However, if management doesn't take a realistic approach to this business, by not recognizing the realities of the balance sheet and the necessity to move airplanes quickly to profitable routes, then the carrier will fail. ExpressJet also needs to recognize that they should try to portray themselves as a unified airline, not a company that has a disjointed set of routes across the United States. In its future expansion, ExpressJet will need to do more to unify the carrier by adding more routes from current cities to cities in a wide variety of geographical locations (as aircraft range will permit). By unifying the carrier, it will allow ExpressJet to expand its customer base in its focus cities and provide a variety of flights, so business travelers will remain loyal to ExpressJet instead of bolting to another carrier that offers service to more cities. It's unclear how ExpressJet's independent carrier experiment will succeed, but my guess is that some routes will fail rather quickly and need to be dropped, while others will tap into large customer bases and be successful. This new carrier can be successful, but it shouldn't be attached to its current structure, because some of these routes will likely lose money, and if this airline is to succeed, then it must mold itself to the changing realities of the airline business, and the needs of its customers and shareholders. This is what Independence Air failed to do, and if ExpressJet doesn't do it, then the carrier will fail and they will send a lot of regional jets back to Continental.

ExpressJet Announces New Service Under an Independent Banner

Yesterday, ExpressJet announced that they plan on commencing service under an independent banner to cities in the West, Midwest, and Southeast that lack sufficient point-to-point service. This is something I believed would happen for a long time now, because ExpressJet can't commit all of the 69 regional jets they released from Continental to corporate charters, the business that 15 of these jets are currently dedicated to. While ExpressJet hasn't released details of new routes, they did announce that the 50-seat ERJ-145 regional jets would be equipped with XM Satellite Radio and the new airline would offer advanced seat assignment as well as complementary snacks and meals on longer flights. Customers can start booking tickets on ExpressJet's Web site starting February 1. I predict that many of these jets will be allocated to markets that need nonstop point-to-point service to cities on either coast. For example, Omaha, Nebraska is a large enough market to be a Southwest city, but they lack nonstop service to some important markets. Omaha, like many smaller or midsize cities in the middle of the country only has service to hubs and lacks nonstop service to many large cities on the coasts which are popular destinations. For example, Omaha lacks nonstop service to Seattle/Tacoma, San Francisco (or nearby Oakland or San Jose), Los Angeles, San Diego, Miami/Ft. Lauderdale, Orlando, Tampa, and Boston. Customers who want to access those cities must connect through a hub. If ExpressJet's new airline opened service to Omaha, they would certainly face stiff fare competition from Southwest and others in the city. The regional jets that ExpressJet operates are more expensive than 737s to operate per passenger, so ExpressJet will need to charge more than other airlines in order to profit from point-to-point service. ExpressJet seems to understand that reality, and is creating a premium product on their small aircraft with entertainment, assigned seats, and free food, amenities that top what most carriers offer these days. Business travelers and others who want to save time would be willing to pay a reasonable fare premium for nonstop service to major business cities. However, ExpressJet's new airline isn't going to offer point-to-point service to every unserved market because many leisure markets can't sustain airlines that charge fare premiums. Boston or Los Angeles are more likely candidates for new service than Orlando. However, ExpressJet may also try to start point-to-point service between markets that have enough traffic to sustain a nonstop flight, but don't have much low-fare competition. Omaha may not be an ideal market for ExpressJet's new carrier to start service in because it's large enough to have significant low-fare competition which could be too more competition than a small airline can handle, however, it is attractive if ExpressJet can tap into a pool of customers who will pay more to fly nonstop. If ExpressJet can do that successfully in Omaha, they will make a lot of money there.

There is one market that ExpressJet's new airline will eventually serve that has been craving for any new service whatsoever for years and years. Wichita has tried to lure new carriers to the city, offering incentives to low-cost carriers such as AirTran to commence new service to the city. However, ExpressJet's new airline could serve major markets on both coasts nonstop from Wichita. Wichita lacks nonstop service to some major business markets, including New York, Washington DC, and Los Angeles. ExpressJet could fill this void in Wichita's service, provided that there exists a sizable contingent of travelers in Wichita and elsewhere who are willing to pay a small premium for nonstop service. Omaha and Wichita aren't the only markets that could support nonstop ExpressJet service. Other potential markets that are the right size and in the right location for ExpressJet's new service include Oklahoma City, Tulsa, Colorado Springs, Huntsville, Mobile, El Paso, Des Moines, Lexington, and others. Currently, ExpressJet is hiring station managers in some of these cities as well as others like Boise, Fresno, Bakersfield, Monterey, Jacksonville, New Orleans, Spokane, and Tuscon. Look at ExpressJet's recruitment Web site for an idea of where the company is hiring people. Many of the jobs listed on the recruitment site are in cities the company already serves with their Continental lift contract, but many of the cities are new, including some of those listed above, suggesting those are markets that ExpressJet's new airline will expand to. ExpressJet's focus may not be larger business markets, or these markets listed above may simply be focus cities like Omaha or Wichita that ExpressJet will expand from to larger cities. ExpressJet will not be able to serve cities on the West Coast from focus cities in the East, or cities on the East Coast from focus cities in the West due to range restrictions with their regional jets, but ExpressJet will still be able to fill a much needed void in service from their focus cities, even if they can't serve all the major unserved point-to-point markets from a given focus city.

ExpressJet is taking a very bold step with their new service. Like Atlantic Coast Airlines, the former parent of the now defunct Independence Air, ExpressJet has seen that there is a shakeout coming in the regional lift business. ExpressJet, with their higher-than-average lift rates charged to carriers such as Continental, was one of the first major victims of this new reality. But instead of diminishing the size of their business by returning their subleased jets to Continental, they decided to continue leasing the 69 jets that would no longer be under the Continental capacity purchase arrangement at higher rates. This is a very bold step, and must be commended by the company's shareholders. Unlike Atlantic Coast, however, ExpressJet isn't betting the farm on one new venture, most of their jets are still flying for Continental at profitable rates, and ExpressJet has also started a corporate charter business that has been successful thus far. ExpressJet is trying to diversify itself in order to survive a shakeout in the regional lift business, just like Atlantic Coast tried to. But, we can only hope that ExpressJet has learned from the mistakes of Independence Air. Independence Air tried to be a low-fare airline with high-cost aircraft, a sure way to lose money quickly. ExpressJet needs to charge higher fares because they operate aircraft more costly to operate, so they must justify to customers that they should be paying higher fares with upscale amenities and point-to-point service. ExpressJet should be able to succeed but if and only if it can charge a fare premium. ExpressJet's new carrier will not be a low-fare airline, it simply can't be if it wants to make money, which means that ExpressJet will need to choose its markets carefully. A market like Omaha may be too big with too much low-fare competition, but a market like nearby Lincoln may lack sufficient business travelers. There is a fine balance in what markets will be appropriate for the new carrier, but if it finds successful markets, then the new airline could develop customer loyalty in small markets and make plenty of money. ExpressJet has experience working with one of America's most business-friendly airlines, Continental, and has experience offering excellent service and amenities to passengers. This experience will be valuable for ExpressJet's new carrier in implementing their product successfully. ExpressJet's new carrier should be looked upon by other regional lift providers, because it's an experience that they could learn from, should they ever need to diversify their businesses and redeploy a sizable portion of their fleets.

Independence Air Seems to be Preparing for a Crash Landing

While many skeptics out there still believe that Independence Air will survive its Chapter 11 stay, you will be sadly mistaken soon. That's because, even when management is promoting high load factors on Las Vegas and San Juan routes on the employee hotline, they have sent furlough notices to many employees, including flight attendants. In fact, one employee posted his furlough notice on airliners.net. It reads in part: "The Company expects that is it is unable to secure significant external investment or a sale of all or substantially all of its operations before January 7, 2006, it will permanently cease all operations and separate all employees at all locations sometime during the period January 7-21, 2006." These were mailed Christmas Eve, talk about class from the management. Check out the hotline: 866-465-9309

Sorry to say, it looks like the end for Independence Air, but it will mean better days ahead for United, JetBlue, Southwest, and AirTran as they are able to regain some pricing power from an airline which had incompetent management. Those other four carriers won't be leaving the D.C. area market anytime soon, and they will all see better days ahead. To those at Independence, best of luck, because there are airlines expanding in the D.C. area, and they need you.

What To Expect In A Post-FlyI World

When (not if) Independence Air disappears from the skies, a new mix of fares and routes will appear. Any routes flown by United or Delta currently that were announced to purely compete with Independence Air will likely be dropped. (At one point, Delta was operating Knoxville to Orlando which was also operated by Independence Air). The big difference though is that fares from small markets, such as Charleston, SC or Portland, ME will increase dramatically. Fares were artificially low from those markets, and because of Independence Air's entry, traffic was up dramatically at small airports, because low fares were spurring demand. Airlines such as United, have had to lower fares to those markets due to Independence's entry, and when Independence leaves, fares will increase significantly, but traffic at those airports will decrease. Fares in the Washington D.C. market will increase slightly, but not too much because of Southwest's Baltimore operation. Fares in the D.C. market will stay low for the foreseeable future.

But there is another outcome of the future failure of Independence Air, and that's the vulnerability of companies which provide regional aircraft to major airlines. Independence Air used to be a vendor, to Delta and United, but it saw the shakeout coming, and decided to be proactive and seek a new business model. It's going to fail, but it was very smart to think ahead, because that shakeout is coming, and only the best may survive. A vendor such as Mesa has been able to cut costs dramatically, at the expense of on-time performance and employee morale, and attract new airlines to sell lift to, such as Delta which started using Mesa in October 2005. Skywest is another long-term player in this market and won't be going anywhere, as it has long-established contracts with the solid carriers United and Delta and has been providing superior service and reliability than Mesa at marginally higher costs. Skywest also has terrific management, and will adapt to the future if need be. Air Wisconsin helped U.S. Airways in it's financing to exit bankruptcy. It is a key part of the new post-merger U.S. Airways. Every other vendor out there, from Colgan to Republic is vulnerable, and since high fuel prices are forcing major airlines to reevaluate the situation with it's routes which require regional aircraft. These aircraft are getting older and high fuel prices are quickly making them very uneconomical. That's what Independence Air learned. Not only that, but they are already being taken to the aircraft graveyard in the desert. Northwest Airlines is already forcing its vendors to retire some inefficient regional jets as Northwest just can't afford to fly them. However, the vendors that may be most vulnerable are companies such as CommutAir or Gulfstream International Airlines. Both these airlines solely operate turboprops, and consequently, their relationship with the "mother carrier" is different. Instead of the large airline keeping the fares, paying the vendor, and the vendor paying its costs, airlines which fly turboprops pay major carriers to fly under that airline's regional name, such as United Express. Then the vendors keep the fares and pay the costs of doing business. CommutAir provides service in 19-seat turboprops for ContinentalConnection in the Northeast. These aircraft require two pilots and usually only fill 10 or 12 seats per flight. They are expensive to operate, and they rely on Continental's minor Boston operation to keep them up and running. It's a very risky business, and because the aircraft are so small, and the fares on the routes it flies so low, it's a very difficult place to make money. Gulfstream also operates those 19-seaters, but it also operates Embraer 120 turboprops on intra-Florida and Florida-Bahamas routes. It contracts with Continental (and it's Latin American partner Copa), as well as Northwest and United. Again, it's very risky, especially on routes with very low fares. Both CommutAir and Gulfstream can continue to make money, but it will be a very rough road ahead for them and for other regional aircraft vendors. It's hard to say how many regional aircraft will be headed to the desert. Avro 85s, CRJ-200s, and Saab 340s all from Northwest's vendors have gone or will be going soon. After this series of retirements (some subject to court approval) Northwest will draw from a fairly large CRJ-200 fleet (even after retirements), and a small fleet of Saab 340s.

Independence Air Files For Bankruptcy, Finally

Independence Air today filed for Chapter 11 bankruptcy. This should come as no surprise to anybody watching the industry even remotely. Hopefully, Chapter 11 reorganization will lead to the company's demise. This airline has been around for too long with a business model that is fundamentally flawed. Furthermore, Independence Air is in a lousy market. They not only have high costs but are competing in a market with very low fares, due to the Southwest competition in Baltimore. Independence Air is just wasting fuel with its inefficient regional jets, and it's artificially lowering fares unnecessarily in markets, especially D.C. where fares are already low. Fares need to increase, and the presence of Independence Air is preventing airlines from making profits from D.C. and in other East Coast markets. Even though passengers might see an increase in fares, due to the Southwest presence the increases won't be too dramatic. Independence Air is unlikely to restructure into a profitable carrier, and hopefully, for the sake of the industry, Independence Air will fold and the rest of the industry, the sane faction of the industry will thrive in the new world.

Independence Air's Cutting Flights...

Independence Air is trying to save itself by launching more flights with its profitable A319 aircraft, and trying to dump some of the more unprofitable CRJ flights. The airline is launching new A319 service to New York La Guardia, while cutting CRJ flights to JFK, as well as Stewart up north. Furthermore, the airline is also cutting some of the more unprofitable CRJ flights, to Louisville, Cleveland, and Indianapolis. The airline also plans on launching San Juan this winter. However, this might be too little too late, as the airline is still burning cash, and the A319 flights don't exactly fill the financial crevasse the airline has dug itself. However, the facts are that if the airline wants to last for a long time, they have to cut much, much more (if not all) of its CRJ flights, and focus on short-haul East Coast routes from D.C. This means that they must file Chapter 11, and soon, or else they may be stuck and quite liable to their creditors. If they file Chapter 11 before the new bankruptcy law comes into effect, then they can terminate the leases on the CRJs and keep the A319s. If they are smart enough to take this route, then they may survive, but otherwise, they will continue bleeding cash and head for Chapter 7.

Will a Merger Solve Anything?

As the media discusses how two of America's largest airlines had to file Chapter 11, a question arises, what about mergers? U.S. Airways and America West will start the transition tomorrow toward a new U.S. Airways, and that deal seems to be working, so why can't it work with Delta and Northwest? Anybody who says that a merger between those airlines would be a success is in a different universe than those who know the airline business. The facts are that Northwest is primarily an Airbus operator; Delta, a Boeing operator. The millions of dollars required in fleet refurbishment, consolidation, new staff training, spare parts, etc. would be wasted on such a joint operation. Northwest has a profitable route system, taking passengers from smaller markets to larger markets, that's the growth in the industry you will be seeing, not more flights from NYC-Florida. Delta also has a profitable route network, however, they do have some work to do in expanding to Asia (where the real growth is), and reducing their dependency on regional jets for mid-size and large markets. A merger would help reduce some inefficiencies in each system, but the costs strongly outweigh the benefits.

However, that doesn't mean that mergers aren't possible in the industry. America West and U.S. Airways had complementary route structures, America West had a strong presence in the West, U.S. Airways, a legendary presence on the Eastern Seaboard. This can happen again with airlines that are weak (both America West and U.S. Airways were being hit hard by low-fare competition), but also with airlines that are relatively strong that can expand their horizons. A few pairings come to mind.

The first pair would be Alaska and AirTran. While Alaska has many variants of the 737, and AirTran only has the -700 they have very complementary route systems, each airline having well over 80% of its flights on its side of the Mississippi river (Alaska on the West, AirTran on the East). The airlines would be able to expand together into the center of the country while retaining their dominant positions in the Pacific Northwest, California, and the Southeast (especially Florida). While some fleet restructuring would be needed, this carrier would create a nationwide low-fare powerhouse in key leisure markets. But there's another piece of this. Alaska owns Horizon, a regional subsidiary. Horizon's services would be perfect in the Southeast, if the new airline ordered Bombardier Q400s. Here's why: Delta, the other dominant player in the region has hundreds of regional jets working for it in small communities around the South. The Q400 turboprop, which holds 74 people in Horizon's configuration costs the same amount to operate as a 50-seat regional jet. Delta has those jets working routes that the Q400 can do just as efficiently. In comes AirTran with a flood of new turboprops, they are able to lower fares in small markets that have been high partly because of the high cost of operating CRJ-200s, and dump capacity on those markets as well. With a new nationwide network, the airline would be able to attract passengers once attracted to Delta because of the array of destinations from the Atlanta hub (over 200). It would significantly weaken Delta's position as a regional provider in those markets and would hurt the already struggling airline. It would be the absolute best thing AirTran could do.

Another merger idea is AirTran and Midwest, this based on the idea that Midwest is a struggling airline with the same type of plane (717s) that AirTran uses (in addition to AirTran's 737-700s) and a route network that would allow AirTran to expand into the Midwest, which they have been trying to do from Atlanta, but there's only so much traffic that wants to go to Orlando or Charlotte. AirTran would be able to make the operation more efficient and maybe even keep the fresh-baked cookies on board. It would also be a smoother transition than with a much larger airline like Alaska.

A final merger idea is between Frontier and Spirit. They are both Airbus operators and have somewhat complementary route systems, Frontier in the West, Spirit in the East. In addition, Spirit is doing a great deal of expansion in Mexico and the Caribbean, two markets that Frontier is interested in getting into. Frontier has set up a mini-hub in Cancun already and has over half a dozen Mexico destinations. A merger would allow the new carrier to become a leisure-oriented airline, ferrying passengers from the lower 48 to destinations like Florida, California, Mexico, and the Caribbean. It would be a great operation, as long as the airline managed to keep things running smoothly during the off-season.