My ongoing, unorganized series looking at the demise of small city service in the US has been pretty depressing. Sure there are some ideas on how to help mitigate the destruction, but that’s often more theory than anything. Today, however, is different. Little Southern Airways Express is reinventing small city service in Pennsylvania, and the airline is actually making money doing it. Sure that requires Essential Air Service funding for the model to work, but not everyone can make a go of it even with that. I spoke with Chairman and CEO Stan Little as well as Chief Commercial Officer Mark Cestari about just how this was all coming together.
I suppose I should start with the obvious question… who the f*&@ is Southern Airways Express? It’s actually the cobbling together of two airlines, each only a few years old. Southern Airways Express had it routes down south where it flies primarily from non-sterile private terminals to small cities in the Essential Air Service (EAS) government-funded program. While that network does well for the airline, it’s the newest addition to its network that’s really proving to be different. Southern bought Sun Air Express in March 2016 and has been building out its Mid-Atlantic network ever since. Take a look at this route map.
As you can see, Southern absolutely smothers Pennsylvania from one end to the other with regular, scheduled service touching Pittsburgh and Baltimore (using sterile gates unlike down south). And yes, some of those cities are very close together with service that has not been successful in the past. (Remember Altoona?) So how has this worked? Scale seems to be the absolute key to this.
Scale to Spread Fixed Costs
Southern is the second largest airline in Pittsburgh (by departures, obviously not passengers) with a surprising 34 daily flights. In Baltimore, it has built up to 18 a day so far. Most of the routes flown are EAS-supported, and that means EAS funds pay for the ticket counters and gate space. With that base, Southern only has to consider its variable costs when adding another flight. That not only allows Southern to come in as a low bidder on new EAS routes, but it also helps justify the addition of non-subsidized routes.
For example, non-EAS service from Pittsburgh to Harrisburg, the first nonstop to the state capital in years, is only viable because the fixed costs are already taken care of in Pittsburgh. With this base, Southern expects to grow a lot more, mostly through new, unsubsidized routes.
Scale to Improve Reliability
Reliability has long been a problem for small city operators. This becomes even more pronounced when airlines go to far flung destinations where there’s only a single route. Stan called this his Thief River Falls rule. “We’re never going to bid on Thief River Falls to Minneapolis and have one plane that is 1,000 miles from the rest of the fleet.” Having a strong focus within Pennsylvania means it can properly build-out its operation with spare aircraft, parts, and alternate transportation options to ensure much better reliability. It sounds like last year was rough operationally as the company built out its footprint, but things are now running well.
Scale to Get Big Partners
Mark likes to use a retail analogy when talking about airlines. The legacy carriers are the department stores, and he wants to work with them. So what is it that the consumers of department stores want? They want a seamless experience. That means Southern needs to get an interline agreement that will allow people to check bags through and have a single ticket. Getting an interline agreement is no small feat, but when you have the scale to offer 34 daily flights in Pittsburgh, other airlines begin to take notice. Apparently the announcement of a big interline partner is imminent.
Scale to Provide a Better Schedule
Having these two hubs on the west and east means many of these cities can be connected in both directions. That leads to increased demand (fewer people driving to the hubs), and it means Southern can provide a better schedule to people who aren’t just going to Baltimore or Pittsburgh but are connecting beyond. Southern has seen great growth in passenger numbers where it has put this strategy into place.
The Airplane That Enables Scale
Southern operates 19 Cessna Grand Caravans with 9 seats each. It’s a small airplane, but it’s the only one that actually enables Southern to create the scale it needs to make this work.
Compared to other 9-seaters, the Caravan is the most cost-efficient airplane around, and Stan believes it is the reason that the whole operation works. These airplanes have only 1 engine and aren’t pressurized, so cities actually have to waive that requirement thanks to EAS rules. Stan says that’s never been a problem, and while it’s unlikely to work everywhere (the high altitude of Denver comes to his mind), it’s perfect for a lot of routes.
Compared to larger 19 or 34 seat airplanes, it’s a no-brainer. The small number of seats enables more frequencies, something the locals strongly prefer. And it also allows the airline to fly under Part 135 instead of more restricted Part 121 operations. That makes it easier to find pilots and cheaper to run the operation all-around. But it’s the pilot thing that really matters the most considering the looming shortage in the industry.
Scale and Southern’s Unique Pilot Proposition
Having scale with a fair number of flights in small cities, Southern was able to do something really strange with its crews. Instead of basing its pilots in the big hubs, it opened pilot bases in its tiny outstations. Operationally, this did wonders. Southern would have had trouble attracting pilots to fly in Pittsburgh, but in a place like Bradford, Pennsylvania, it’s a different story. It doesn’t need a ton of pilots in each city, so it recruits locally.
Stan gave me the example of a 40-year-old lawyer in Bradford who retired and started flying for Southern. He lives in Bradford, is home every night, and isn’t likely to fly for anyone else with that kind of life. Southern needed to find 100 people like this, and it did.
It has also gone to the other end of the spectrum for pilots. In Part 121 operations, a pilot is forced out at the age of 65. Southern, however, can pick those pilots up and have them act as experienced pilots for a few years to help train the young ones who are starting up. Everyone wins.
Pilot Strategy is Key to the Schedule
Having pilots based in small cities brought with it a hugely important benefit beyond making it easier to recruit pilots. It allowed Southern to run a far better schedule. Now with pilots starting out in the small city, Southern can run early morning flights to the hubs with late returns. Since the pilots live in those small cities, they’re in their beds every night. With pilots based in the hubs, the only way to do an early morning flight out of the small city with a late return was to put pilots up in a local hotel. But paying to have 2 pilots stay in a hotel just to fly no more than 9 people out the next morning simply doesn’t work financially.
It’s a whole different ballgame with pilots living in those small cities. The ability to fly out in the early morning and back in the late evening (along with other options during the day as well) means that there is better connectivity in the hubs, and not just to legacy carriers.
Southern Sees Value in Low Cost Carrier Connections
An interline with a big legacy airline is important, but it’s not everything. Back to Mark’s retail analogy, the low cost carriers are like the Big Box Stores, and they do a ton of volume at low prices. That’s especially true in mid-size cities with former hubs like Pittsburgh and Baltimore. And Southern wants to work with them too.
So far, Southern sees 30 percent of its connecting passengers actually connect on to a low
cost carrier. Low cost carriers don’t do interline agreements in a traditional sense, so how can Southern work with them? First, the airline keeps fares low. You might be able to charge someone $200 if she’s a business traveler flying in the local market. But if someone is flying from Altoona to Pittsburgh and then on a $99 Spirit ticket to Florida, the Altoona-Pittsburgh flight just can’t cost that much.
Second, Southern has low change fees and no bag fees. It has tried to align itself with Southwest’s model, especially in a place like Baltimore. If someone misses a flight or has an issue, then there isn’t a ton of friction preventing people from getting where they need to go on an alternate flight. Passengers don’t like having separate, unrelated tickets in case things go wrong on one, but Southern makes it clear that it’s willing to work with passengers so they aren’t left out in the cold. With the frequency it has, Southern can make travelers feel even more comfortable.
It All Adds Up
Looking at all these pieces together, you find a successful airline that, according to Stan, is making money now. Sure, that does mean taking a lot of government money to post a profit, but others have tried and failed to even make that work. If we’re going to keep EAS around, then this looks like a promising model that can work in at least some places. These small cities in Pennsylvania now have some of the best service options they’ve had in years, and the passenger numbers should support that. My plan is to find someone in one of these airports who is willing to talk about how things look on that side of the equation.