Mesaba Files For Bankruptcy... Just As Comair Announces Cuts

One of Northwest's small jet providers, Mesaba Airlines, has filed for bankruptcy protection. This move was precipitated by Northwest's trimming of Mesaba's fleet, eliminating one aircraft type, the Avro RJ85, while reducing the numbers of the other two aircraft in the fleet, the CRJ-200 and the Saab 340 turboprop. Like any other small jet provider, Mesaba has been having trouble adapting during this challanging time - they must downsize quickly to stem their high losses. Northwest seems to be committed to Mesaba for CRJ-200 and Saab 340 operations, even though their flights will be reduced. Mesaba has not been paid $30 million for some recent flights by Northwest, which has caused Mesaba to sue Northwest. With a planned fleet reduction of 28%, things will be tough at Mesaba, but they are really tough everywhere.

Comair, Delta's regional jet subsidiary based out of Cincinnati announced cuts today that will trim its workforce by 1000 people (including 350 previously announced job cuts). The small jet provider also said that it will trim up to 30 50-seat aircraft from its fleet, with 11 gone by December. The airline has the highest costs of any Delta small jet provider and Delta is giving them an opportunity to cut costs more. If Comair can't negotiate further decreases in labor costs as well as lower supply chain costs, the airline could either be liquidated or just sold - possibly to Mesa or Skywest, which are the long-term players in the small jet provider business. Comair has got stormy skies ahead, but it can manage if it gets costs down and if Delta has a truly loyal base at Cincinnati. Ever since Delta's SimpliFares program was started, more passengers have been drawn back to Cincinnati from other airports such as Louisville (which has Southwest service). However, if Comair fails to cut costs, there is a realistic possibility a Delta Cincinnati hub could be downsized further or shut down.

Northwest Wastes No Time On Cost-Cutting...

Northwest Airlines announced late today that it will terminate the leases on its 35 Avro Regional Jets, currently operated by one of its regional subsidiaries, Mesaba Airlines. These are older aircraft that are expensive to operate, partly because of the lack of capacity on the plane, and also because there are few other airlines that operate the plane - for a good reason. The plane, notable for four engines on such a small airframe, is quite spacious for a regional jet, holds 69 passengers, yet has operating costs that are simply too high (probably because of its excess of engines). Mesaba operates a fleet of 35 of these aircraft, not too many, and they need to be gotten rid of. Mesaba owns 10 of the planes outright, while they lease the other 25. Nine of the planes will be removed from service as of October 31, while the other 26 will be gone by December 31. It's Mesaba who gets hurt by this move, as they have no replacements for these aircraft.

While it sounds like a done deal, some people close to the situation say that Northwest may just be maneuvering to get a better lease rate from Mesaba. Mesaba may be caught in quite a bind here, but since these planes are very uneconomical, New Year's Day will mean one less aircraft type for NWA.

Mesa Plans Hawaiian Inter-Island Operation

Mesa Airlines, the poorly run small jet operation, has announced that it will start an inter-island operation in Hawaii with its CRJ-200 regional jets. The idea is to codeshare with the upcoming America West flights that are going to be arriving in Hawaii starting in December. According to Mesa, they plan to form a new company which will commence operations in the first quarter of 2006. By March, America West will have four flights per day to the islands. As Mesa already codeshares with America West and U.S. Airways, this is a natural move for them. However, the bozos at Mesa could not have picked a worse place for a new operation.

First, regional jets have very high operating costs per take-off and landing. Aircraft use gobs of fuel on takeoff, and since these jets are already very inefficient, they just become that much more inefficient on short flights. Second, the competition on the routes is ridiculous. Hawaiian Airlines operates 717 aircraft on inter-island routes, Aloha operates 737s (both the smaller -200 and the larger -700). Island Air operates Dash-8 turboprops with 37 seats, and offers flights to some destinations that other airlines cannot access due to the length of the runways. Another start-up, FlyHawaii, plans to fly between the islands with ATR-72 aircraft. That's a great deal of competition to go up against.

To add to that, almost every other plane up there is more efficient at carrying passengers than the CRJ-200. With fuel prices at record highs, it's just silly to think that you can operate an airline with that much competition with aircraft sorely lacking in fuel efficiency. Because of that competition (in other words: low fares), yields are terrible, and Mesa's entry will only exacerbate that situation. Furthermore, the real money is made by carrying mail and other cargo between the islands, that's the strength of the 717s and the 737s, and it's what makes this operation so difficult.

Other questions are also raised, because America West's flights are going to be arriving at roughly the same time. How will the scheduling work? How many planes do you need stationed in Hawaii to create viable connections? Also, it sounds like Mesa's goal is to establish an independent airline in the islands. So will they be flying different routes, maybe non-stop routes that islanders normally must connect on? That's an advantage of a small jet, maybe they can charge a premium for that if they decide to jump. If only 40-50 people need to go from Liuhe to Kona per day, a daily by Mesa could work there.

It's a tough sell, but it maybe able to work. Then again, knowing the management at Mesa, they'll somehow screw it up.

Suicide In The Airline Industry

For the most part, Northwest Airlines operations have been running fairly smoothly since the mechanics and cleaners strike started Saturday, August 20. The airline has reported an increase in cancellations since the strike began, however, not a significant amount to do lasting damage to the airline. At the same time, the airline and the union have broken off talks and don't seem to be getting to that stage anytime soon. Northwest keeps the latest updates on the labor situation here. The union is on the expressway to extinction especially since union leaders, including Dennis Sutton, president of AMFA Local 5 in Romulus, MI make comments like the following: "Enjoy this. This is the chance of a lifetime to screw Northwest." Why should the public support the union with comments such as these? Keep in mind, most of the union members are asking for semi-reasonable concessions, ones that can be negotiated with the airline, but the union is completely opposed to the cutting of 1,100 jobs (about 53% of the union) of heavy maintenance which Northwest is hoping to source to save money. The only way this union can win is if Northwest joins the August air crash club which is unfortunately growing after the recent incident in Peru. If a Northwest jet were to crash, the airline would be forced to re-hire the union mechanics to save its reputation. The PR would be horrible to say the least, but it's better than keeping the replacements on-line.

But Northwest isn't the only airline with suicidal employees. The management of Spirit Airlines, the East Coast/Caribbean carrier that manages to stay out of the media very nicely clearly want to be fired after Spirit's latest announcement to start daily service to Atlanta, Georgia from Fort Lauderdale starting February 16, 2006. There are many things wrong with this decision, the first being that with only 1 daily flight to a new city to start, the airline is unlikely to gain any real following quickly, and because Atlanta is a hub city for two very large airlines, which both have a very strong following among Atlanta-area consumers, AirTran and Delta, Spirit is unlikely to gain any attention particularly with only 1 daily flight. Second, the Atlanta flight departs in the morning, allowing for timely connections to the Caribbean, yet Delta serves all those destinations daily, and in many cases with multiple daily flights. AirTran serves FLL from Atlanta and will start Cancun service before Spirit's Atlanta launch. Third and finally, Spirit has many, many other markets that it can serve that probably have more rewards. Atlanta already has a great deal of competition and JetBlue was forced out a few years ago due to strong competition and Spirit doesn't have the attention or the presence to even come close. A bad, bad move. At least they have awhile to get the word across.

Finally on the suicidal list is Delta/Independence Air. Both will be filing bankruptcy before the new laws come into effect mid-October, and the only thing unclear is if Independence Air will try to restructure under chapter 11, or if they will give up and liquidate under chapter 7. Independence Air uses for the most part 50-seat Canadair Regional Jets (CRJs), and the economics of CRJs is pretty lousy, but when fuel is at $67 a barrel, the economics just simply won't allow you to break even. Delta is very exposed to regional jets, as its former subsidiary Atlantic Southeast Airlines owned dozens of them. Delta pays other small jet providers such as Skywest (which did flying for Delta before the ASA purchase) the cost of operating the airplane, plus a small profit. Because airlines like Delta still suffer due to pricing pressure, they don't have the revenues to generate profits from the airplane. Airline stocks have never been popular, and now is no exception. However, I wouldn't mind being in desert real estate or aluminum smelting stocks. Because that's the future. Delta can restructure, but it will be a future with far, far fewer 50-seat regional jets. More 70-seat CRJs will be flown, and maybe, maybe more turboprops will be flown. The Q400 70-seat turboprop costs the same amount to operate as a 50-seat CRJ. Which would you fly with $67 oil. Even the turboprops will find difficulty making money, then again these flights are needed to differentiate Delta from Southwest and to diversify the revenue streams of the airline. They need a new plan, and hopefully, that's what chapter 11 is for.

Mesa Gets United Contract

Mesa Airlines has received a five-year contract from United Airlines to operate 30 regional jets on some of Air Wisconsin's former routes. Mesa's sloppy operation will save United money, and along with Skywest, which runs a significantly better operation the two carriers will have replaced three-quarters or 60 out of 80 aircraft currently being operated by AirWis.

The Changing Face Of The Small Jet Provider Industry

Small Jet Providers (SJP), known to many in the uninformed public as "regional carriers, or regional airlines" are going to be shifting their role in the industry as the fad of regional jets starts to dwindle, and their role will become diminished.

Fewer Players:  There are going to be fewer players in the industry, period. Only the small jet providers who are diversified in several carriers, and who can change with the times will survive in the next few years. Expect Skywest, Mesa, and Republic to be the heavyweights, Trans States is probably going to be around, considering that they are getting a new United Express contract. Air Wisconsin, though well run, might be in trouble due to the financial troubles of US Airways, and United's objections to AirWis becoming a US Airways Express carrier. Also, Colgan, who up until recently was exclusively a US Airways Express carrier and will start flying under the Continental banner soon. Colgan will be lucky to survive, especially if US Airways goes under. ExpressJet, Pinnacle, Mesaba should be safe, barring any unforeseen events, however, these three will not expand beyond their current brands of Continental for ExpressJet, and Northwest for Pinnacle and Mesaba.

Declining Role of 50> Jets, Possible Role for SJP's In Larger Jets: The introduction of the Embraer 170/190 series aircraft will allow airlines to serve mid-sized markets more efficiently, as these aircraft add capacity, and have considerably lower available seat mile (ASM) costs. These jets fill a capacity gap of 70-110 seats that isn't being filled by regional jets, and isn't covered by 737 or A320 aircraft. Many are calling these aircraft "regional jets" but these are not regional jets. The two reasons for this are first, the Embraer 190/195s can fit over 100 people, there are "mainline" aircraft such as the DC-9 and 717 that fit these many people. Even some smaller versions of the 737, such as the -500 and -600 fit these many people. The second reason is that these aircraft are much more efficient than regional jets, and can fit many more markets. Aircraft such as the 170 and 190 can be put into markets where instead of a daily 737 flight, airlines can provide more convenient service into a market by providing two 170 or 190 flights. The 170/190 can do this very efficiently, unlike regional jets. At the same time, these jets can fly between Seattle/Tacoma and Chicago, New York and Miami. Now, these jets are going to transform both the SJPs and the major carriers, which is why I go into detail about them. Because these jets are so versatile and efficient, they will become popular. The debate here is whether SJPs should be operating jets this large, especially the 190. Republic Airlines is already operating the 170 for United Express, and this fall JetBlue will get the first ever 190, followed by at least 99 others. In fact, Republic is so excited about these jets, they have purchased for $1 million the struggling Shuttle America, which is currently flying turboprops for United Airlines. "Republic's decision to purchase Shuttle America is in anticipation of increased demand for the Embraer 170 and to provide Republic with the opportunity to operate aircraft larger than 70 seats such as the Embraer 190 while complying with certain scope restrictions that some of its major airline partners currently have in place." As the role of 50> seat jets decline due to poor economics and low yields, the 170/190 series will be quite popular. Many markets which are served by the 50> seat jets, may not be served again, at least with jets, because of poor economics. Many regional carriers are shifting to adapt to new markets, bigger markets, and are going to need the bigger aircraft. The 70 seat CRJ700 won't work well, because it's an extension of the 50 seat technology, and it's not efficient enough. However, JetBlue is treating the 190s as mainline aircraft, and it's expected that most majors will if they purchase them. That's something that regional carriers don't like, and carriers such as Republic who might be interested in 190s, will put up a fight to be able to use these planes. However, they might run into trouble with union contracts, and other red tape.

A Resurgence of Turboprops? Turboprops, certainly not the public's favorite plane, may be making a comeback as they are more efficient than ever, and with high fuel prices, they might be adopted by SJPs. In particular, the Q400 turboprop is ideal for markets with current 50 or 70 seat regional jet service that are within 400 miles of the destination. The Q400 is used in this country by Horizon Air, Alaska's regional subsidiary, and they are very happy with the performance of the plane. One of the main selling points of the plane is that it flies like a jet, and can be within 5 minutes of a regional jet when flying routes less than 400 miles, and it also has the same trip cost as a 50 seat jet, but the Q400 holds 70-75 people. If small jet providers are able to convince major carriers that these planes would be better than regional jets, then they will be utilized. However, this plane doesn't have the potential that the 170/190 series does, but it can and should be utilized more on short routes currently operated by regional jets. Other turboprops might come back, such as the smaller, less efficient versions of the Q400, the Q200 and Q300, but those planes are much less attractive to airlines.

Keep in mind, small jet providers are contractors, and contractors can be replaced at any time, and if small and mid-sized markets don't provide the revenue they should, then the contractors will not be needed.