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Over 70% of US airports with commercial air service are served exclusively by regional airlines. And almost all of those airports reside in or next to small or midsize communities. Unfortunately, both the communities and regional airlines face head winds in the coming years. New regulations coupled with the potential for additional taxes and reductions in subsidies will hamper the regionals’ ability to grow and operate with sustained profitability. This will have a direct effect on the small communities that regional airlines serve.

Most people have never heard of Pinnacle Airlines, ExpressJet Airlines, or Republic Airlines but have flown on them many times. An average regional airline flies turboprop aircraft or jet aircraft with less than 100 seats on a contract basis for mainline carriers such as United or Delta. Although separate companies, the regionals usually fly under the mainline’s brand such as Delta Connection or United Express. In most cases, Delta and United take care of scheduling, promoting, and selling tickets for the flights while the regional takes care of providing the primary product. Now, let’s hop into some of the issues.

One of the bigger impacts to the industry will be felt when new rules regulating pilot duty time kick in. (Cranky did a good job of breaking down this issue in a previous post.) These new rules were introduced to address ongoing concerns about pilot fatigue. Pilots will now work a little less and get more rest. This makes sense. Who doesn’t want a well-rested pilot at the controls?

But there is a flip side. The new rules governing duty and rest periods will force carriers to hire more pilots if they want to run the same schedules they have today. The savvy regionals will work diligently with their mainline partners to reoptimize schedules. But they will not be able to totally avoid higher pilot costs. Regionals will have to pass on the additional costs to their mainline customers to remain at current profitability levels.

Another new upcoming regulation will increase the minimum number of hours of experience a pilot needs to fly for an airline. Currently, a pilot only needs 250 hours along with a Commercial License to get hired with a regional airline. In a couple of years, this will increase to 1,500 hours and require an Airline Transport Pilot (ATP) certificate.

On the surface, this seems like a no brainer. More hours = more experience = safer flying. But there isn’t research proving that pilots with 1,500 hours consistently fly safer than someone with less experience. When this steep increase is implemented, it will create an artificial pilot shortage. Some pilots pay out of pocket or through loans to get to 250 hours. Getting to 1,500 hours on one’s own dime will push a bunch of would-be pilots out of the market. The shortage will push up wages to account for the lower supply and result in additional expenses.

In the fall of 2011, the Obama administration proposed creating a new $100 departure tax for all air carrier departures and general aviation jet departures. The proposal also increased security taxes on airline tickets and was given to the super committee for consideration. An impressive coalition of 30 organizations including airline trade groups, general aviation groups, unions, and manufacturers quickly got together to fight the proposal. The rally cry is that airlines and passengers already pay higher taxes than alcohol, tobacco and guns which are intentionally set high to discourage their use.

It appears that the White House quietly backed off the proposal because of the backlash it received during an election cycle. If the proposal was revisited and passed, it would have a disproportionate effect on regional airlines that carry fewer passengers each flight than their mainline counterparts. It’s much cheaper to spread $100 over 200 passengers than over 50.

Another debate in Congress has been the over subsidizing air service to small communities through the Essential Air Service (EAS) program. This program is designed to help provide small communities with air service that cannot, due to such low demand, support itself. I expect a haircut or possibly elimination of this program. Accordingly, many routes would cease to exist.

In isolation, each of these challenges would have a much smaller impact on the industry. Together, these policies would have significant negative economic effects and force airlines to cut flights on underperforming routes. And each flight lost in a small community has larger implications due to the community’s relative size.

These changes will burden an industry already struggling with consolidation and high fuel prices. Pinnacle is flirting with bankruptcy. SkyWest and Republic’s financials have been limping along since their acquisitions of ExpressJet and Frontier respectively. American Eagle’s anticipated spinoff from American Airlines will increase competition in an already saturated market. We’re seeing a steep decline in small jets which don’t work with today’s fuel prices. Turning a good profit in the regional industry is proving difficult even while their mainline counterparts are starting to enjoy being in the black.

Some municipalities and the airlines will come up with creative solutions to mitigate the effects. They will also need to continue lobbying the government to implement policies that have positive economic effects. Regardless, it appears that the end result will be fewer options in small communities.

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Matt Tregre is an airline enthusiast and has held positions in finance, revenue management, pricing, customer service, and baggage tossing with stints at Southwest, ExpressJet, & Pinnacle. During school, he developed marketing plans for small airports. He now works in revenue strategies for a corporate aviation company and greatly misses having flight benefits.

[Original photo via Wikimedia Commons user Paranomia/CC 3.0]

For example, the airline’s vision statement begins with “We believe that every employee, regardless of personal beliefs or world-view, has been created in the image and likeness of God.” It’s become even more of a topic with the integration of the Frontier and Midwest teams that didn’t choose to work for a religious company.

So, let’s get on it with. (Click for Part 1, Part 2)

ON PARTNERING AND COMPETING WITH THE LEGACY AIRLINES

Cranky: With some of the bigger airlines, you’re flying for them and you’re competing against them. I mean, you could potentially have a codesharing agreement, then you’re flying for them on a contract and competing against them. It’s a tangled web. Does that cause any tension?
Bryan: I have to break it into the two geographies. Nobody cared about Midwest. The fact that Northwest had an equity stake in Midwest and we codeshared with them. Nobody cared about that. Obviously you know, with Frontier, United was obviously concerned about it. You know, people prefer less competition and not more, but there really wasn’t in our minds, there wasn’t going to be a strategy where Frontier was going to liquidate.

They were making money. Companies that make money in bankruptcy don’t go away. . . . Frontier wasn’t going away. I think that’s the message, whether they wanted to believe it or not. It was going to be around anyway, so hopefully better to have somebody around that’s rational at the controls than somebody who’s irrational.

Cranky: Although, they could have gone away if Southwest bought them. Then there would have been two airlines in Denver.
Bryan: Southwest was free to make an offer and compete, but at the end of the day, they didn’t lose because of insufficient consideration, they had labor issues. I guess in fairness they didn’t lose, they withdrew.

ON RELIGION AND BUSINESS

Cranky: I know you’re busy so just one last question. From a culture perspective, you said morale is high right now, people are pretty excited, you have a single brand. How has the integration been from the perspective of a Frontier employee or Midwest employee? I know you have a very strong culture here in Indianapolis and I know that you’re very religious. Have you seen any tension between Frontier people coming into this and saying “well what’s going on here. What are we getting involved in?”
Bryan: If there is tension out there, it’s pretty low and people are being civil. The Republic vision statement clearly addresses our feelings that we’re all created in the image of god. It calls us to a higher standard of treating people with respect and dignity. In my mind, it calls us to treat people fairly according to the work that they do. It wasn’t to convert people or proselytize. . . . There’s something more here than just a job. We have people of different faiths, different backgrounds, different ethnic cultures. Most airlines are melting posts. It’s just a recognition of who we are and as long as we work together, we’re going to be successful . . . .

Now, we’re not hiding our faith either. We take positions on issues. Abortion was an issue that we took a position on several years ago. It was very controversial, both internally and externally. But again, it’s down to, whether we believe in the sanctity of life or not. It’s not that we were saying that if you get an abortion, you’re fired. That wasn’t the issue. This is a big meaty issue in our culture and our society and people should understand what we think. And oh by the way, if you are in the position of having an unwanted pregnancy, let us know and we can help. And we had employees that did and we did, we arranged a couple of adoptions.

From a Republic perspective, it’s been such a large part of our culture. People who are looking at joining a company and see this either are turned off and don’t apply or they’re turned on and they come here. It’s our culture. Now you’re being bought as Midwest or Frontier and you’re being brought into this culture and clearly there were some folks that were very offended by that. A very, very small number of folks. Look, it’s America. Most of us have a Judeo-Christian world view, so I think we’re more likely to be aligned on this. That was certainly the case with Frontier and Midwest. Now the media talked about is it right or is it wrong? Should CEOs do this, should CEOs do that? It was very controversial according to the press, but that was good too. You know. I mean, at the end of the day, getting people talking about it is healthy.

Cranky: Well, there’s no reason you can’t do it. It’s a company that you can set it up however you want to set up. This isn’t the government.
Bryan: It is true, there’s no law against it. We certainly don’t have a box that you check on your application: “I believe, I don’t believe.” The only qualification to work here is “do good work.” You can believe in the tooth fairy.

Cranky: Wait, that’s not real?
Bryan: It is to my kids

Cranky: I think it’s perfectly fine. People can choose who to fly, who to work for, what they want to do. I just think about it from the perspective of someone who comes in from a high culture company like Frontier, has a really strong good positive culture, not to say that this isn’t positive, and coming into something else that’s a potentially different feel for someone. And removed as well since you’re in Indiana and they’re in Denver. Was there really a tough transition for people?
Bryan: I thought you were just talking from a religious aspect of the culture. Looking at culture in a much more broad sense of the word, prior to the brand announcement being made, there was tension between all cultures. I mean, for the Republic side, “how is owning Midwest and Frontier going to help me in my daily work?” Midwest people I think understood that the company would be gone had we not purchased it, but still trying to figure out, “who are we and what do we do?”

Same for Frontier. “We survived bankruptcy and we survived being taken over by Southwest. What does it mean now?” And so there’s a lot of post-transaction reflection that all three employment groups were doing and it has been a tough transition.

Making the brand announcement has been like a tonic. People can finally say that we know who we’re trying to be. You can make a decision on whether you like it or you don’t like it. If you say, “well, I don’t like the brand proposition with no first class seating.” Ok, well, act accordingly. We hope you stay, but if you don’t, god bless you. And the majority will stay because they love the industry, they love working for Frontier.

ON LABOR INTEGRATION

Bryan: We also have labor integration issues. It’s interesting that non-represented classes of employees, we were able to hire mediators arbitrators to sit down with both sides and within 90 days we’re integrated and everything is cool. People are now able to transfer around within the larger network and it’s working out pretty well. In cases where we have represented workers in different unions, it’s just a lot more conflict. It’s the classic US Airways east-west stuff.

Cranky: Hopefully it’s not to that extent.
Bryan: Well, it’s not. Look, our world view is if you don’t want to integrate the seniority lists, don’t integrate the seniority lists. We’re ok with that. We’re not merging the companies in the classic sense. We’re not merging Frontier into Republic. Yeah, we own it, but it’s the Airbus operator. It’s always going to be the Airbus operator and a CS300 operator, but it’s going to be a separate certificate. So we don’t care.

If merging the senoirity list is creating tension, then don’t do it. So there are answers. We’ll treat everybody the same. I think the whole seniority integration is just a red herring. It’s more union vs. union as opposed to employee vs. employee. We’re all going to sink or swim together. A lot of our Republic capacity is now in the brand operation, so the brand operation better work.

Cranky: I think I’ve probably kept you longer than you had anyway, so thank you.
Bryan: It was good meeting you.

ON INFLIGHT ENTERTAINMENT

Bryan: The LiveTV take rate on sub 2 hour flights is low single digits. People really like it. We tried to get in on the [Embraer] 190s but when we looked at the mission of the 190s, which was thinner, shorter haul markets, we just couldn’t cost justify it. So the next thing was wifi and we’re rolling that out this summer.

Cranky: One of my concerns along those lines is you mix the fleets on routes. I know, out of Long Beach for example, there’s an A318 and an Embraer 190. That’s pretty common. So are you concerned about having the different product?
Bryan: A lot of it comes down to the message. There will be people on the Airbus who want wifi but we’re not planning on that this year. We’re going to see how it does on the E-Jets. So the brand promise is some form of inflight entertainment. Not necessarily LiveTV or wifi but some form will be available on the fleet.

Cranky: 70 seats and up
Bryan: Yeah. There is a connectivity option for wifi for small jets. The small jet brand will be differentiated whether it’s Lynx or Connect. There will be some marketing differentiation so people understand. It’ll be very clear when you’re on an E-Jet flight, this is what you’ll get. The only difference will be LiveTV on the Airbus and wifi on the E-jet. There’s a lot of value in the Ejet, but what it really does is that in a place like Milwaukee, 100 seaters are just too many seats for some of these long, thin markets and 137 seats is WAY too much. [laughs]

ON HUB COMPETITION

Cranky: Looking at the route network as it stands today, you have your two main hubs in the two most competitive cities in the country right now.
Bryan: Yeah, well, we didn’t start that fight.

Cranky: I think others expected you not to be around at this point, so that’s why this fight is going on. What are you seeing right now? Are you at a place where things are going well? Do you see a place where all these airlines can exist at their current levels?
Bryan: Well, first I would say that we were disappointed by our Q1 revenue results. How much of that would be brand confusion, our poor execution on managing technology systems, codeshare process . . . . We learned a lot of hard questions in Q1, took a lot of chances in Q1. We learned another hard lesson that it’s a competitive marketplace and if we aren’t prepared to compete on price, we aren’t going to get the business. We’ve absorbed all those lessons and we’ve hit the cover off the ball in March. We’ve hit the cover off the ball in April. Advance booking numbers into the summer are off the charts. So, it feels really good right now, actually.

We’re less interested today in what the competition is doing. We’re really just into what we’re doing. We’re running a really good airline – 99.9% completion factor, 87% on time rates so we’re putting out a great product in the second quarter and in the first quarter as well but we all suffered from weather events. I think you stay the course right now.

We still have a lot of integration work to do. The brand decision was hard for us to make and it was hard for Midwest, but it was also liberating because now it allows the commercial people to really focus on this is the brand. This is the brand promise. We don’t have to worry about messaging in different ways. That’s good for the employees. We now know that we are one and we are delivering this product. We’ve just gotta execute and the competition will take care of itself.

I do not see the competition exiting Milwaukee. We’re taking traffic from northern Illinois, and we’re paying a pretty price for it. Unfortunately, the discounted pricepoint is something like $60 off to get people to go up to Milwaukee. When they get there, they have a great experience. It’s just a smaller, better ease of use airport that’s more reliable.

It’s taken a lot of discounting to get people to come up there to try us but we hope once they try us, they’ll come back.

Cranky: This sort of goes back to what you were talking about before about people buying on price. What can you do to get people to buy on product or on service?
Bryan: If that’s what I said, I wasn’t clear. I think price is clearly #1, #2 is product.

Maybe it’s the win or tie strategy. As long as we’re price competitive, we believe that we can beat the other guys. We don’t believe our brand is strong enough today, I hate to say it, but the facts are the facts, to get a price premium.

ON WEB BOOKING AND DISTRIBUTION

Cranky: Is there anything in the way people buy that can change to help that?
Bryan: Certainly the other LCCs do a much better job of driving customres to their website.

There’s a huge gap in terms of distribution on our own, whether its via the call center or the IBE [internet booking engine], but that’s an opportunity for us to start selling products in ways where you’re going to find the best deals on frontier.com, we’re going to bundle some things that you can buy online.

Cranky: And that’s already there to some extent. I know for our flight home, we bought the Classic product. It shows it to you, but if someone books through a travel agent or online agent, they’re not even going to see if it’s an option.
Bryan: That’s true. We have a workaround on that but we’ve debated whether we want to roll it out or do we want to make Classic fares available on the GDS. It’s a debate that happens internally, but there is one side of the market that would drive us to make it available.

For example, all of our corporate accounts work through a corporate travel agent. [Classic Plus] is a product that they want. They want refundability, flexibility. They want one way pricing. They want seat assignments. They want free bags. That Classic [Plus] product is what they want, and the only way they can buy is through the GDS. We do have to make that product available to that segment of the market.

Cranky: It’s not today?
Bryan: No, not today. It should be by the summer. . . . Then do we take it out even further? Do we roll it out to all the GDS? But put distribution aside for a second.

ON FEES

Bryan: What we’re really trying to do is give customers choice. A lot of people talk about, “don’t charge me bag fees.” We’ll give you that option. We’ll give you the option to buy a la carte or to buy a bundle. You’re in control. If you really are offended by those fees, then by all means, we want you to buy the bundled product. We obviously want people to buy that.

It’s interesting. On our website we’re getting less than 40% of our sales there. But of that 40% that’s buying, almost 40% of those are buying the bundled product. So the take rate’s pretty high.

Cranky: It’s a huge revenue opportunity.
Bryan: Yeah, I think so. And certainly rolling that out to the Midwest network will help as well. There are lots of opportunities to gain share.

ON CODESHARING

Cranky: Is this something, ya know, you see people interested in codesharing like JetBlue going to SABRE to open up that opportunity. Is that something you’re interested in?
Bryan: Well, we’re SABRE-hosted.

Cranky: But are you looking to pursue codeshares?
Bryan: Well, of course we’re interested. You were in Phoenix so you heard the whole collaboration speech that was given. Just looking at companies that cover huge regions of geography that we don’t touch and the reverse is true. Looking at how we could expand the network. There were discussions pre-bankruptcy with Frontier but of course it takes a lot of time and energy.

I’ll have the final chapter in the next couple of days.

Our hour-long conversation was just downright fascinating covering topics from religion, to integration with Frontier and Midwest, along with bundling vs a la carte pricing and more. When we first sat down, Bryan immediately asked about me. We spent nearly ten minutes on my background before getting into the airline talk, which is where we begin today. I’ve broken this across the aisle interview down into three parts. Today, we start with the airline’s recent expansion and go into the strategy and now-discontinued multiple brand strategy. (Part 2 on competition and fees, Part 3 on religion)

ON THE RESULTS OF FRONTIER’S RECENT EXPANSION

Bryan: Where are you living now?
Cranky: Long Beach, actually, and I’m flying you back on Monday.
Bryan: Thank you.
Cranky: Gotta make sure we keep you there.
Bryan: Of all the new markets that we’ve opened that’s the one that’s really struggling. We’re trying some targeted advertising in Denver, because a lot of folks in Denver don’t know where Long Beach is. We’re trying to figure out how to get people to understand that it’s the Southern California alternative.

We’re opening 15 new markets and that is the only one that’s not hitting its revenue forecast. Some are just barely making it, like Santa Barbara is just, but some, like Branson, what a shocker.

Cranky: I was gonna say, you’ve already added capacity there.
Bryan: It’s blowing the doors off. The only reason we went there was because we had a really high revenue guarantee.
Cranky: I guess you won’t need the revenue guarantee right now.
Bryan: No, it’s going to be very profitable.

ON THE INITIAL REASON FOR BUYING FRONTIER AND MIDWEST

Cranky: So the strategy seems to be now more find the right markets for the Embraers.
Bryan: Step back a bit and look at a higher level. We’ve had great growth, great expansion through 2008. Then the fuel shock happened and we learned a couple of things. One, airlines are very jaundiced about adding capacity, and two, consolidation is on everybody’s mind and a lot of people’s lips. . . . Quite frankly it’s happened slower than I would have thought. I think the first go around with Continental and United should have been done . . . when United’s market cap was $600 million instead of $3.6 billion.

As the operator, consolidation is good since it makes your partners stronger . . . but the fact is that when they combine, if 70% of their passengers are flow, they can flow them through anywhere they want. So they can operate larger capacity planes by funneling more flow over a specific hub. Dehubbing becomes a very serious option.

Cranky: Shrinking pie for regionals
Bryan: Shrinking pie for regionals and certainly shrinking pie for smaller regional jets. We have to acknowledge there’s just not a lot of growth opportunities. There’s the opportunity for market share to move around, but having alternatives is healthy. We never wanted to be so big with one airline so that the loss of that partner would be an extinction model for us. But now, the fact that our core business is at risk for virtually no growth if not contraction, if there’s one area that can benefit from the capacity reduction and consolidation, it’s the LCC side.

ON REGIONAL CONSOLIDATION

Cranky: Do you expect consolidation on the regional side?
Bryan: There’s a lot more discussion about it. The Wall Street analysts love transactions, you know? It’s hard to consolidate because most of the contracts that we all have have change in control provisions that in some cases allow partners to cancel deals or at least renegotiate deals.

Cranky: Could be something like a Mesa in bankruptcy?
Bryan: I won’t say that it’s impossible. Nothing is impossible. I won’t even say it’s implausible, because when there’s a will there’s a way. . . . We’re all looking for the same thing. Where can you take out non value-add expenses to become more cost effective. I just think it’s hard because the seller is not necessarily controlling the revenue stream.

ON THE NOW DISCONTINUED MULTIPLE BRAND STRATEGY

Cranky: So now you’re in the [low cost carrier] LCC space. You started bringing Midwest and Frontier together. The question I asked you in Phoenix is “are you regretting it yet?”
Bryan: [Laughs]
Cranky: It’s been an interesting road. I’m particularly curious. It seems like at the beginning you had this plan to operate multiple brands, get the operational efficiency of running them behind the scenes. Clearly there’s been a change to go toward the Frontier brand after a few months of this. So what have you seen? Is the multiple brand thing something that just doesn’t work for a single airline?
Bryan: When we started looking at the possibilities of these acquisitions, we went outside the airline industry. Avis and Budget was a good example of the model where, here’s a company that’s in the rental car business where they have the premium Avis brand and the discount is Budget. And they seem to coexist well. And that was really sort of the example of a model where we were going to go after.

Cranky: Where Midwest would be the premium brand and Frontier . . .
Bryan: . . . the discount brand, yeah. We learned quickly. The education that we got was in 2009 we bought these brands at the trough of the recession and there was no demand for premium anything. So the Midwest response, even before we bought them was to make less premium available . . . so there was a lot of experimentation out of desperation to try and figure out a model that would allow that airline to work. Everything was working against them.

Cranky: Especially in Milwaukee
Bryan: Yeah, so we did start the customer research process not necessarily to pick one brand or not but just to measure brand health and try to figure out what resonated with customers. What we discovered was the Milwaukee community wanted the same thing as everyone else. They wanted affordable fares, nonstop service. In their own ways, each one of these airlines are trying to provide that.

A lot of what we learned is the Midwest brand had this perception of what it was back then. Customers would revisit the airline and there would always be disappointment. “That’s not what I remember Midwest to be.” And they were right, it wasn’t.

Cranky: They were lobster and fine china back in the ’90s.
Bryan: The Milwaukee community loved it but as soon as the economy soured, budgets went from buy first to buy coach. But sorry, you can’t buy that on Midwest. After all the struggles they went through, they still enjoy lots of hometown customer support. That underdog role that they took on with AirTran, people wanted them to succeed. But they really weren’t fulfilling the need of the customer at the end of the day. Shrinking service from the west coast, abandoning the west coast. Huge, huge mistake. Then again, the MD80s burned so much gas and the 717s couldn’t make it to the west coast. They had few choices and they were all bad.

Cranky: And now you have Frontier. Have you seen the acceptance levels, is there anything different now that Midwest is gone from Milwaukee?
Bryan: Interestingly enough, one, Frontier actually has great customer service. The inflight experience is actually very complementary. Having TV on the airplane is a new amenity for folks in Milwaukee and they really like it. We thought there was a need to try to bridge between what was Frontier and what was Midwest and the answer to that is Stretch [extra legroom seating].

I’ll post the rest of the interview over the next week or so.

On the Introduction of New Aircraft
Republic CEO Bryan Bedford: We spent a lot of time looking at the narrowbody product offering and we fly a lot of Airbus products. Our employees love them. It’s a great aircraft. Then you start looking at operating capability and cost. You’re looking for that step function change to overcome the induction differences with training, different costs. Before I’m going to induct a new fleet type, I have to get a new double digit saving opportunity.

So with the [Bombardier] C Series, we saw an airplane that at least, as advertised and engineered, will deliver the goods. We compare a 138 seat aircraft to 138 seat aircraft, we’re looking at between 17 and 19% aircraft-related cost savings.

Qatar CEO Akbar al Baker: We look at the operating costs, amenities and the product improvements that these new airplanes bring. We also believe in keeping types of airplanes we operate to a minimum. We like to keep our fleet up to date. The average age is just 3.2 years.

British Airways CEO Willie Walsh: It’s great to see good competition between Boeing and Airbus and developing competition like the C Series. We have had a look at that and it looks like an excellent aircraft. We’ve ordered A380s and 787s. We see them as being very different from the A380. An aircraft like an A380 can be very effective at some destinations we serve. Hong Kong is a good example where typically we’d operate 3 747s a day and they leave within an hour of each other. So frequency is not important, volume is. If you can replace 3 747s with 2 A380s you get much better economics and it frees up a slot at Heathrow. The A380 works really well but we never saw it as an ideal replacement for the 747.

The 787 has the opportunity to be a game changer more than anything else. It’s a very efficient aircraft, it should be, and I think that will open up new destinations that are just not economic with the aircraft we have today.

US Airways CEO Doug Parker: I see nothing revolutionary coming out of the manufacturers. It’s not meant to be disparaging, the jet age is over and physics are what they are. Clearly there are some things evolutionary that would be of interest. What matters to airlines right now is, consumers don’t care, you can find no difference between aircraft types. No premium for a better airplane including even regional jets. Now it clearly matters how many seats you have. So what matters is for the number of seats you have in the market, how do you generate seats at the lowest cost. If there’s a next generation narrowbody that’s coming that works, that’s great, but I don’t think it’s a revolution.

JetBlue CEO Dave Barger: We’re kind of boring compared to Willie. I’m just looking for a winglet or a sharklet so we can go Boston to Oakland 100% of the time. We’ve been testing with Aviation Partners a winglet. We’re through the testing now and we’ll see if Airbus can work the engineering accordingly. Not just better range but the fuel efficiency that everyone talks about. That’s a big number for an airline like JetBlue. As Doug mentioned, whenever it’s decided to be built, there are some improvements that are out there technologically that can help.

Willie: I think there are issues. Doug is right to a point, but sometimes you’ve heard customers say it. “I hope I’m not traveling on that thing.” Propellers somehow still discourage people. I think there is an issue, the open rotor from an efficiency point of view sounds fantastic, but I’m not sure if it’s the right way forward. You’ve got this balance between noise, which is a very sensitive issue, and fuel efficiency. I think people need to think long and hard before leaping to these solutions.

Doug: If that’s the only problem, that’s a marketing problem. Get Sully to fly around in one and say it’s safe and you’re fine. There is more to it than that but the simple optics issue is something that we can deal with.

Bryan: Clearly today, Willie mentioned it, there is this aversion to getting on a prop plane whether it’s less safe, noisy, bumpy, lower altitude, who knows but it’s there. It’ll be one of these issues about how low a cost for someone to take the revenue.

Dave: Put TV in the back of the seat and nobody will ever notice.

On Regulation
Dave: I think, Doug I’ve heard you say, we brought [the three hour rule] on ourselves. We were there 3 years ago. It’s unfortunate that we spend so much time because we brought it on ourselves, because if we could spend more time talking about investment and technology, as we start talking about RNP and RNAV, the procedures at these airports, what a better use of time as long as we’re not stranding customers on the tarmac. That type of thing, things such as financial regulation and oil speculation and the bills that are making their way through Washington.

There are parts of the same building talking about oil going to $200 a barrel and other parts talking about shorting the airline stocks. What’s wrong with that picture? Investment in technology, focused oversights, position limits, whatever it might be so that we’re not caught in the middle is very important and then climate change. I think we’re playing catch up to other countries. Just do no harm. We’ve done an awful lot to really drive fuel efficiency. It’s a big deal.

Bryan: I agree with everything Dave said. I’d like to envision a partnership between government and industry between regulators and those who are regulated so we don’t feel like we’re constantly fighting each other. The things that bind us together are much greater than the things we don’t see eye to eye on, but the climate in Washington seems to be more of a “gotcha.”

I’m not sure what it is but it feels like there’s less cooperation. It may not be happening in the trenches, but when we see our public officials come out and castigate a guy for wanting to implement a carry on baggage fee – why is that a political thing? Customers should be able to decide not to fly that guy. I think the problems are real and significant and there’s opportunities to fix them. You’ve got very willing industry participants. We want efficiencies because burning less gas makes that pie bigger for our employees to share in. We all want the same thing; we just have a hard time getting there.

Doug: Our message is simple: do no harm, which means two things to us. Please no new taxes or fees. We’re already the most burdened industry, higher than cigarettes, alcohol. We’re taxed like we’re a vice. For now, just don’t give us any more please.

The second part of that is that you’ve got to let us go do self help so we can fix ourselves. Don’t get in the way of us trying to do things to get this industry profitable. This slot swap that we announced in August still isn’t approved. Just please execute the slot swap. It’s symptomatic about what’s going on. This is pro-consumer. Delta is going to take those slots and fly big airplanes, we’re going to do the same in Washington. This is good. . . . All we want is just let us compete; let us do the things that other businesses are allowed to do – trading assets – let us compete within the antitrust laws. There are laws if we start to violate those, but these are not even close. I can’t imagine there’s any problem with United/Continental but there are going to be people in the administration that are going to try to make problems. Our government doesn’t seem to want to let our industry get itself profitable. Just leave us alone and let us compete.

Willie: I enjoyed that. Governments and regulators have two very important roles: safety standards and security standards. It’s important to acknowledge there’s a standard of safety that we must match and aim to exceed. Regulators telling us what to charge, where we can fly, those days are long over. I think they need to stand back. We’re dealing with a situation in Europe. European airspace closed down for the best part of 6 days. As an airline we’re deemed responsible for providing food drinks, phone calls, etc. This had nothing to do with the airlines and yet with thousands and potentially hundreds of thousands of customers stranded away from home, we’re forced to pick up the bill. We then have to give priority to the people with bookings instead of trying to get people repatriated because it forces us to pay high levels of compensation to anyone who we would bump from the flight. Politicians were criticizing the industry yet at the same time telling us to comply with this legislation which prevented us from doing that. Common sense says the regulators should have suspended the legislation and allowed the industry to sort out the problem. We do well in the face of challenges like this. If we had been allowed the scope to do what’s right for customers, we would have handled that situation in a much better way. And when we talk about closing down airspace in the first place – scandal – it never should have happened. We’re forced to stop flying and yet we have to pick up the bill. Consumers do not benefit from that. We need regulators to stand back and look at the big picture and really challenge us to sort these issues out. This is a brutally competitive industry. We will fight for every customer. If one airline wants to charge you to carry on a bag and everyone else says they won’t do that, why should a regulator intervene?

Doug: I enjoyed his comments.

Akbar: I entirely agree with Willie that they should leave the airlines alone. The more they interfere with us, the more they will put us against the wall. The general public will suffer.

On Competing with Low Cost Carriers in Europe
British Airways CEO Willie Walsh: I think what we’ve seen in Europe in 2009 has been more the impact of the truly global economic downturn [than low cost carriers (LCCs)]. People in the EU talk about BA losing to Ryanair, easyJet. There’s no evidence to support that. BA is holding market share relative to these guys because we’ve been competing with them for 20 years. I think we’ve been able to adapt to their sort of competition that they present us. It’s really a case now that the consumer has choice and can really understand what’s available. So a lot of the consumer media in the UK has recognized that there’s very little difference in terms of overall price between established carriers, network carriers and low cost carriers.

What we witnessed was a truly awful economic environment. Ryanair and easyJet suffered as well. They scaled back their growth, saw significant falling profitability and they struggle just as much as everybody else. The main issue for BA was the impact on premium travel. IATA estimates that 7 to 8% travel in premium and generate 25% of revenue. For BA, 13% travel in premium classes and generate 45% of revenue. We’ve seen some evidence of premium customers on short haul within Europe and moving away from the premium cabin. That doesn’t mean they’re moving from network carriers to low cost carriers. It means they’re moving from the front of the aircraft to the back, and I think that’s a structural change. Long haul premium travel is cyclical and there’s clear evidence that it’s now recovering. I’m convinced from everything I’ve seen that the competition between LCCs and national carriers will continue.

Qatar CEO Akbar al Baker: The same is true for LCCs in our region. Now, it’s a fashion in our region. The geography does not permit low cost carriers flourishing because we do not have deregulated skies. We do not have secondary airports, we have the same cost base. We are hardly losing our market share. Everyone asks when Qatar launches an LCC. We will do it when an LCC entrance into our market will impact share and it’s not happening because people in our region still want to travel on a full service carriers. They realize there is so much of a hidden cost in my region from low cost carriers. The fare will become nearly the same.

On the Convergence of Business Models Between LCCs and Legacy Carriers
JetBlue CEO Dave Barger: I don’t think the LCC concept will be gone even though there’s a migration that’s going on . . . . I don’t think the true LCC model goes away.

Republic CEO Bryan Bedford: I think the models are converging. What we’ve seen through forced financial restructuring are legacy carriers that have to rethink their business model. The product is moved more toward what the LCCs have been doing and LCCs have been moving more toward the legacy model – business class cabins, TVs, wi-fi. We’ve seen more amenities on the LCCs; less amenities on the legacies. So there’s a product convergence but the networks are so powerful.

Moving away from domestic to more balanced between international and domestic. As these alliances crystalize, some of the LCCs are going to wonder where do we go? How can we move people from small town America to the world? We see Southwest trying to create their own marginal expansion internationally. At the end of the day it’s a network business, and we’re trying to figure out ways to differentiate the product because the customer has decided to show a great amount of loyalty.

US Airways CEO Doug Parker: I think you’re right, there’s definitely a convergence. I think of it more that we end up having lower cost structure but more it’s hub and spoke airlines vs point-to-point carriers. JetBlue and Southwest connect a lot of people but they don’t have a hub and spoke which gives them a cost advantage. It used to be in the 90′s and 2000s that used to be largely generated by labor costs. You could have a model that worked; ran a hub and spoke out of Phoenix but had much lower costs than the other hub and spoke carriers because we had much lower labor costs. That you can’t do anymore because of what’s gone on with the legacies.

You have to get the cost advantage by avoiding hub and spoke. I don’t think you can start an airline doing the same thing in a different city and use a cost advantage. Southwest contracts have higher labor costs but they have much lower costs because of their model. The consumer won’t be able to differentiate but the LCCs won’t be flying to places like Asheville, North Carolina.

The Phoenix Aviation Symposium is a great event that gives really excellent access. I mean, I (and a few others) had a beer with British Airways CEO Willie Walsh while he talked about the volcanic ash situation. I also had a drink with JetBlue CEO Dave Barger later on. That sort of thing doesn’t happen very often in one place. Why are all these CEOs milling around? For the executive panel. This year, it was made up of US Airways CEO Doug Parker, JetBlue CEO Dave Barger, British Airways CEO Willie Walsh, Qatar Airways CEO Akbar al Baker, and Republic CEO Bryan Bedford.

Though recording wasn’t allowed, I typed as quickly as I could and got a pretty good transcript down. There wasn’t any huge news here, but I think the candid back and forth between the panelists makes for some really interesting reading. I’ve trimmed it down a bit to focus on the most interesting pieces. Let’s get on with it.

On Recent Industry Crises and Priorities
Qatar CEO Akbar al Baker: Unfortunately, this industry has been very unlucky – faced with either natural or national calamities. As far as Qatar is concerned, we have been a bit fortunate. Besides the premium yield taking a beating, we are not dropping our trousers to get passengers on the airplane. We are fortunate because we operate a very lean structured airline; productivity of staff is very cleverly measured. We have no unions so people are accountable to management and a CEO who is very ruthless.

We have one of the lowest aircraft/employee ratio of any scheduled carrier and a very clever fuel hedging structure in place. I know that people think I have an oil well behind my office and that we get very cheap fuel, that we get a lot of government subsidies. I am a businessman. I would be ashamed for someone to give me handouts to run my airline. We are very cash fluid generated by the ancillary business we have. The airline has the alcohol distribution in a country that people think is dry.

JetBlue CEO Dave Barger: I’m sure Willie will talk about dealing with volcanic ash . . . Talking about oil speculation. When oil runs to $147 a barrel, then it’s down to $37 or $38 a barrel, it’s very diffcut to run the business. And also worldwide climate change. The impact it has on the industry as well. This is an industry that’s incentivized to really be carbon friendly. It’s our number one cost.

The second issue as well – it was intriguing – the labor panel; it’s no secret we’re 12,000 crewmembers at JetBlue and we have no unions. It’s not pro or anti-union but the issue of labor relations at our company. It’s a different lens. It’s a second thought that we spend a lot of time on.

The third area is how that then leads into consolidation. Whatever happens with the industry landscape, the crewmembers are looking at consolidation. “Am I protected? What’s next? What does this mean with our interline agreement with American Airlines?” We’re really spending a great deal of our time on these.

Republic CEO Bryan Bedford: What did strike me about the panels is who wasn’t here. We had government, the regulators, labor. We have lawyers, we have airline CEOs, finance guys, manufacturers, but we didn’t have the customer here. It really struck me we didn’t have the customer here. It’s amazing how we do as a business moving people around at the highest degree of safety and yet people hate us. I wonder why is that? Maybe it’s all the bickering between management, between labor, between the airlines. For so many smart people, we could do better, maybe better telling our story.

The fact that we have to have legislation on the passenger bill of rights says it all. If I have a 15 minute line wait to check out of my local grocer, I don’t expect Congress to solve that problem. I take my business elsewhere. Where’s the incentive for airlines to outperform if the customer is going to buy based on price?

US Airways CEO Doug Parker: I think we’re in a really interesting time. This looks the same to the outside world, but I would argue that what we’ve gone through in the last couple years is phenomenal and unprecedented. We’re talking about $80 oil now. I vividly remember when we did the America West/US Airways merger. Part of what we’re telling people was we’re building an airline that would be profitable at $50 a barrel oil. So that’s where we were just 5 years ago. Nobody thought it was even possible to be profitable at $80 a barrel.

We also just went through a recession unlike anything our business has ever seen. Certainly more prolonged than 9/11 impact. We’ve never seen in one year industry revenues fall 20%, which they did and we weathered. If we had 2008 RASM [unit revenue] or $60 barrel oil, everybody would be talking about the record profits this industry is making now. So at any rate, I think the industry has made some major fundamental changes that still have us losing a lot of money. Unfortunately, to suggest that both would happen would not be something we’d think could happen. I just hope that we keep that discipline. I worry somewhat that things get better and we start to do the things we did in the past.

Finally, consolidation is happening and it’s huge into what it’ll do to our ability to make this industry long term profitable. All the issues in this industry are the things that make long term problems. Things like labor relations and government regulation become less of an issue because you have a business that can run like a business. The problem is we’ve never had an industry ever that has been long term sustainably profitable.

British Airways CEO Willie Walsh: My predecssor at BA used to say that he had a lot of luck in his role as CEO and all of it was bad. He left 5 years ago; he lied. You just cannot, if you read this script, people would say you’re making it up . . . We’ve seen a unique combination of cyclical impact and structural impact at the same time in a period that was incredibly tough to deal with. Oil is now structurally higher. The days of $20 oil is gone. It’s likely to be closer to $100. We have a big issue now in terms of financing – it’s much more expensive. Just when we think we’re getting our head above water, something comes along – volcanic ash.

I’ve read in the newspaper about the skies being covered in volcanic ash. We dealt with a computer model that said there was volcanic ash. That’s a scandal, but our industry has to deal with those issues and we look forward to the next crisis. The good thing is that we’re still here. To think we came through 2009 with all the challenges shows you how determined and resilient this industry is but things have got to change.

On Consolidation
Doug: The industry is destined to consolidate. There’s value in having a larger network with customers and shareholders by doing things more efficiently. I think it makes sense. I believe we’re headed to an industry, simply hub and spoke airlines, legacy carriers. We didn’t need 7 of them in 2005, we don’t need 4 of them now, we need 3 and that’s where we’ve always been headed. You have all sorts of guys, JetBlue, Frontier, etc flying around doing what they do well, making sure if you get your costs too high, they’ll steal your market share. I think it’s a good model. Generally these leaks have been accurate, so we’ll have another merger done on Monday.

[Doug later emphasized that he "wasn't trying to suggest that anything is going to go on with US Airways anytime soon. To the contrary, things are going great as a standalone and we can do that for as long as we want. It's years off."]

Bryan: We’re certainly acting as the networks are realigning. The synergy opportunities are just so significant. I think the industry is looking for ways to find stability. Labor wants it, customers want it, and financing teams want it. The struggle if you’re a regional is one of the ways networks drive synergy is they segment the market differently. If 70% of your market is willing to connect, it doesn’t matter where they connect, so those hubs become marginal. Pittsburgh, St Louis, Raleigh/Durham. And if you’re a feeder in those markets, you lose that flying. The best case was that it wasn’t growing and the worst case is that it was shrinking. We want to grow the pie. How do we get a bigger slice of it? We need to figure out ways to incent customers to pay more for the product.

Willie: Part of the problem [in Europe] is we still have to have a structure that complies with air service agreements on a global basis. . . . A lot of the complexity we’re dealing with there is that BA can continue to fly to Japan and China, and Iberia can continue to fly to Latin America. There’s still a lot of complexity holding us back. Who knows, 10 years from now we might be looking at genuine global consolidation.

Akbar: I know you’re pulling me into politics here, but I need to leave the United States this evening. Some airlines of course would like to block other airlines growing. I do understand maybe from their nationalistic point of view, but at the end of the day the world is deregulating. The commerce is becoming more, there are no borders, in this way we are taking advantage in our region by growing. If there was a real wish of consolidation or a political directive of consolidation especially since we are government owned, it would have happened between Etihad and Emirates. Emirates is a well established airline would have been ideal to be named as a national carrier. The same with Qatar, they have an economic requirement, want to make it an dominant hub in the region. We were part of Gulf Air, but Gulf Air was not serving the national aspirations so this is how Qatar Airways was born, but we also, I agree with Willie, maybe in 10, 15 years time, that consolidation wind will also blow toward us. But as of today I don’t think it will happen.

We are blessed with one thing; we are located in such an advantageous geographical region, at the crossroads of east and west. We have huge O&D potential: Africa, Russia, China, and this is exactly what we’re tapping. This is what’s making the airline prosper. We are one of the few carriers that span to all the continents. You note just 10 years ago, nobody had even heard of Qatar Airways, and I’m sure 99% of the people don’t even know how to pronounce my country. This consolidation in my region today I think will not happen for the foreseabble future, so we have to work independently very similar to US Airways.

Dave: I think a term we use internally is one of open architecture. I’m biased on Kennedy and it’s geography. The ability to associate what we started prior to our conversion to Sabre with Aer Lingus in that traffic over JFK and Boston; Lufthansa owns 17% of JetBlue. We’re not part of Star but the world seems to be changing. Not just the open architecture but contrarian relationship. The interline deal with American is pretty basic, but I do think we can put together networks to break the model. That doesn’t mean we won’t go into an alliance but this open architecture to connect to Doha or over to Heathrow or wherever, it’s pretty exciting.

From a labor crewmember perspective, it’s really hard because people don’t quite trust what this is all about. I do think for us, consolidation, hey we suppport it but we don’t plan to be part of it. We’re going to let the industry around us consolidate. Our model is different at this point in time.

For Republic, this was probably a pretty easy decision to make. The order for 40 planes with 138 seats each is worth $3.1 billion at list prices, but that means they probably paid $29.95. Like Airbus when it first tried to break into the US market, Bombardier must have been willing to give a sweetheart deal to anyone who would take a chance.

The C-Series is the first non-Boeing/Airbus airplane in the 100-150 seat category to get an order in the US since Douglas back in the day. So maybe it’s fitting that the interior of the cabin looks remarkably like the MD-80. Try to ignore the hilarious rainbow of colors strategically placed by Bombardier in this shot (Asian, black, white, Indian, young, old, bald, gray hair, blah, blah, blah) and you’ll see that it actually looks like a vast improvement over the MD-80:

The seating is 2×3 across, just as in the MD airplanes, but you can see that the windows are nice and big, and, most importantly, so are the overhead bins. They show roller bags being placed wheels-in, so these should be just like what you’ll find on a new 737 or A320, just with only one middle seat per row instead of two.

The other thing that isn’t like the MD-80 is that the engines are slung under the wings, so you won’t be stuck in row 32 staring at an engine casing. The engines are really what have the chance to make this thing succeed. After heading toward the junk heap of formerly important aviation-related companies, Pratt & Whitney has decided to make a comeback with its Geared Turbofan. This is a complex engine that has never been able to be produced reliably for commercial operations before. (They can do it for military.) Pratt thinks it will make it work, and that means a 20% reduction in fuel burn. If it works, that’s huge, and this airplane will fly long before Boeing or Airbus even get close with their next generation airplane. If not, well, this plane may not fly at all.

So what will Republic do with this? Well, the plan is to put them into service in the branded operation – that means Frontier and Midwest. They don’t have much of a choice here. If any airline decided to outsource its 138-seat flying requirements, then there would be an absolute revolt from the front lines. Most airlines don’t have the ability to do it now anyway.

In the branded world, they won’t say if it’s going to be a Frontier or a Midwest product, but let’s be honest. By the time these things show up in 2015, I’ll put money down there’s really only one brand left (if any, I suppose). But there are some clues in the press release about where they’re taking their product.

The airplane will be configured with 138 seats. The first five rows will be in STRETCH configuration with a few inches more legroom and nothing else. That tells me that Midwest’s Signature Service days are numbered. They’ll end up standardizing with STRETCH as the premium option.

Will these airplanes end up replacing the Airbus fleet? It wouldn’t surprise me if that happens one day, but the C-Series can’t really offer the A320-size capacity that Frontier might want to continue to have at the upper end. For what it’s worth, Republic says that no retirements are planned because of this. Well yeah, it’s still 5 years away.

To sum it up, the planes must have been really cheap, and they won’t be delivered for 5 years. Might as well get in on the action now with the hope that this thing works as advertised. If it doesn’t, then I’m sure they can just walk away. If not, then they’ll be in a good place.

Airline Capacity Cuts Slow in December, Some Carriers See Growth – BNET
December traffic numbers show some interesting trends.

United Pushes International Presence with Muddled Marketing Message in Denver Fight – BNET
United is heading back to its Independence Air playbook in its fight in Denver.

Boeing’s Loss of 787-3 Orders is Good News – BNET
When is a canceled order a good thing? When it allows Boeing to walk away from the 787-3.

Sean Menke Leaves Frontier Airlines, This Can’t Be Good – BNET
Sean Menke is leaving Frontier and Republic, and that doesn’t bode well for the airline.

September 2009 Traffic Numbers – BNET
September traffic numbers are out and the results are pretty good for JetBlue and Southwest.

Episode 68 – Cranky Yet Again – Airplane Geeks Podcast
For some reason, they let me back in the door once again for another fun-filled talk about airplanes. Giddyup.

Frontier President Sean Menke Heads to Republic – BNET
Frontier’s chief is heading to Republic to oversee all their brands. Consolidation seems to be happening faster than I thought.

Mokulele and go! Join Forces to Cut Capacity in Hawai’i – BNET
Mokulele and go! are done competing. They’re going to effectively combine to once again make Hawai’i and two carrier market.

Republic Adds 10 More Embraers to its Growing Fleet – BNET
This week, Republic continued to build its arsenal of airplanes here on the mainland. They acquired 10 more Embraers 190s from US Airways.

Why Being Geeky is Cool – JetWhine
Rob has a really nice mention of my Airplane Geeks appearance and he talks about Cranky Concierge.

JetBlue’s All-You-Can-Jet Pass Considered a Success – BNET
Friend-of-Cranky and Aviation Queen Benet Wilson talks to JetBlue SVP Marty St George about the success of the All-You-Can-Jet program.