University of Montana ScholarWorks at University of Montana Graduate Student Theses, Dissertations, & Professional Papers Graduate School 1985 The regional airline industry Stephen L. Smestad The University of Montana Follow this and additional works at: https://scholarworks.umt.edu/etd Let us know how access to this document benefits ou.y Recommended Citation Smestad, Stephen L., "The regional airline industry" (1985). Graduate Student Theses, Dissertations, & Professional Papers. 7986. https://scholarworks.umt.edu/etd/7986 This Thesis is brought to you for free and open access by the Graduate School at ScholarWorks at University of Montana. It has been accepted for inclusion in Graduate Student Theses, Dissertations, & Professional Papers by an authorized administrator of ScholarWorks at University of Montana. For more information, please contact [email protected]. COPYRIGHT ACT OF 1976 Th is is an unpublished manuscript in which copyright sub ­ s is t s , Any further r e p r in t in g of it s contents must be approved BY THE author , Ma n sfield Library Un iv e r s it y of Hout Date ; _______ 1 ^ Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. THE REGIONAL AIRLINE INDUSTRY BY STEPHEN L. SMESTAD B.S., PACIFIC LUTHERAN UNIVERSITY, 1975 PRESENTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTERS OF BUSINESS ADMINISTRATION UNIVERSITY OF MONTANA 1985 APPROVE fi,iBqarjybf Examiners Deân, Graduate Scïïôol , 1 Date; Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. UM! Number: EP38787 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. U M I* Oiasertation Publishing UMI EP38787 Published by ProQuest LLC (2013). Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code uesf ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 4 810 6 -1 3 4 6 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. TABLE OF CONTENTS I. OVERVIEW OF THE INDUSTRY PAGE A. INTRODUCTION 1 B. HISTORY OF AIRLINE DEVELOPMENT 2 The Local Service Experiment 3 C. MARKETS SERVED 4 D. GROWTH OF THE REGIONAL AIRLINES 6 E. DEREGULATION ACT OF 1978 9 Free Market Entry and Exit 10 Pricing and Fare Freedom 10 Joint Fares 11 Increased Aircraft Size 12 Essential Air Service 13 Subsidy for Essential Air Service 15 The 406 Subsidy 16 The 419 Subsidy 16 I I . AIRCRAFT SERVING THE INDUSTRY 18 A. AIRCRAFT CURRENTLY SERVING THE INDUSTRY 18 Historical Perspective 19 A Product of Technology or Regulation 19 Aircraft Development Stunted byRegulation 20 Today's Commuter Fleet 21 Aircraft Utilization 23 Turbine Powered Aircraft 24 Seating Capacity 24 B. NEW GENERATION AIRCRAFT 26 C. OPERATING/ACQUISTION ECONOMICS OF COMMUTER AIRCRAFT 28 Operation Costs 29 Direct Operational Costs 29 Direct Operating Costs by Aircraft Size 32 Fuel Price Sensitivity 33 Indirect Operating Costs 33 I I I . PROBLEMS FACING THE INDUSTRY 35 A. FINANCING 36 Federal Finance Programs 38 ii Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. TABLE OF CONTENTS Debt Financing 41 Leasing 43 In itial cash outlay 45 Credit lines 45 Investment Tax Credit and ACRS 46 Miscellaneous considerations 47 Leveraged Lease 49 Public Financing 52 Manufacture Support 53 B. COMPETITION 56 Automobile 56 Other Air Carriers 58 History of Protection 58 Deregulation Act 59 C. RELATIONSHIPS WITH THE MAJOR CARRIERS 61 The Birth of the Interline Relationship 62 The Logic of Interlining 63 Regional Airlines Recognized 64 D. MISCELLANEOUS PROBLEMS 65 Two-Letter Designator 66 Double listings 66 Passenger response 67 Issues 68 Computer Reservation System 69 IV. STRATEGIES OF REGIONAL AIRLINES 71 A. STRATEGIES UNDER REGULATIONS 71 B. STRATEGIES UNDER DEREGULATION 74 The Linear and Hub/Spoke Route Strategies 74 Small Package Express Service 77 Strategy of Interlining with aMajor Carrier 78 C. STRATEGIES OF TWO REGIONAL AIRLINES 78 CHAUTAUQUA AIRLINES 79 Route Development 79 Management 80 HORIZON AIRLINES 82 Management 83 Route Development 83 Route Strategies 85 Frequent Service Strategy 86 i ii Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. TABLE OF CONTENTS Aircraft to Match the FrequencyStrategy 86 Small Package Express Service 87 Chautauqua/Horizon Summary 87 V. SUMMARY AND CONCLUSIONS - IMPLICATIONS FOR THEFUTURE 89 A. PASSENGER GROWTH PROJECTIONS 89 Stage Length 92 Fuel Prices 93 B. AIRCRAFT 94 C. REGIONAL AIRLINE CARRIERS 96 D. POTENTIAL PROBLEMS 98 Interline Arrangenments with Major Carriers 98 Financial Arrangements 100 Two-Letter Designator 101 Computer Reservation System 102 E. SUMMARY 103 EXHIBIT A 106 EXHIBIT B 108 EXHIBIT C 109 EXHIBIT D 110 EXHIBIT E 111 FOOTNOTES BIBIOGRAPHY H® 1 V Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. LIST OF CHARTS AND GRAPHS I. OVERVIEW OF THE INDUSTRY PAGE COMMUTER PASSENGER TRAFFIC 1970 TO 1984 6 TRAFFIC STATISTICS 1978 TO 1984 7 FLEET FLYING HOURS 8 AVERAGE HOURLY UTILIZATION/AIRCRAFT 8 NUMBER OF POINTS SERVED 15 I I . AIRCRAFT SERVING THE INDUSTRY TOTAL AIRCRAFT OPERATED 1970 - 1984 18 TOP 11 AIRCRAFT SERVING THE INDUSTRY 22 AVERAGE AIRCRAFT UTILIZATION (HOURS) 23 SEATING CAPACITY 23 TURBINE VERSUS PISTON POWERED AIRCRAFT 24 PASSENGER SEATING CAPACITY 26 I I I . PROBLEMS FACING THE INDUSTRY STRAIGHT-LINE VERSUS ACRS DEPRECIATION 47 IV. STRATEGIES OF REGIONAL AIRLINES N/A V. FUTURE OF THE REGIONAL AIRLINE INSUSTRY U.S. DOMESTIC SCHEDULED AIRLINE TRAFFIC 1970-1994 90 U.S. REGIONAL AIRLINE TRAFFIC 1970-1994 90 GROWTH COMPARISON OF REGIONAL TO TOTAL DOMESTIC TRAFFIC 91 NUMBER OF SEGMENTS BY RANGE CATEGORY 93 EXHIBIT A - TOP 50 REGIONAL AIRLINES IN 1984 106 EXHIBIT B - NUMBER OF AIRCRAFT BY SEATING CAPACITY 108 EXHIBIT C - REGIONAL AIRLINE COST - 150 MILE STAGE LENGTH 109 EXHIBIT D - REGIONAL AIRLINE COST - FULE COST COMPARISON 110 EXHIBIT E - RESALE VALUES OF REGIONAL AIRCRAFT 111 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. I . OVERVIEW OF THE INDUSTRY A. INTRODUCTION The regional airline industry has experienced substantial growth during the 15 years it has been recognized as representing a distinct class of air carriers. It was in 1969 that the Civil Aeronautics Board recognized the need to establish a class of small, noncertificated scheduled airlines. Thus, the regional/commuter airline industry was born. During 1984, regional airlines transported 26.1 million passengers and its revenue passenger miles totaled 4.17 billion.^ Regional airlines are readily becoming a major force in the passenger transportation industry and the indications are that this upward trend will continue into the 1990's. The typical regional airline operates scheduled, high-frequency flights from outlying communities to the larger airports where their passengers and cargo may continue on other scheduled flights. The aircraft used for these flights are generally piston or turboprop, multi-engine aircraft which can be flown at lower altitudes than the je t aircraft operated by the long-haul carriers. The average trip length of the regional carrier is usually between 100 to 300 miles. The efficiencies of operating smaller aircraft has allowed the regional airlines to serve not only the smaller communities effectively but also larger cities which have long, narrow markets, i.e . many passengers evenly spread throughout the day. Because of these operating efficiencies, regional airlines are able to profit in such markets whereas major carriers operating je t aircraft cannot. Simply stated, regional airlines are those carriers which provide regularly scheduled passenger and/or cargo service with aircraft seating Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 2 fewer than 60 passengers and a cargo payload of 18,000 pounds or less. These airlines operate according to schedules published in the widely used airline schedule guides. Regional airlines are often referred to as commuter airlines or simply commuters, and these terms will be used interchangeably throughout. In 1981, the Commuter Airline Association was renamed the Regional Airline Association. B. HISTORY OF AIRLINE DEVELOPMENT The modern system of air transportation in the United States is not very old. The Civil Aeronautics Act of 1938 created the Civil Aeronautics Board (CAB) and established guidelines for the Board to regulate rates and routes of airlines through a system of certification. Carriers granted certificates at that time were termed "trunk carriers" and are today referred to as "major" carriers. Originally, there were two general classes of air transportation common carriers - trunk carriers and non-scheduled carriers. The trunk carriers provided scheduled service on fixed routes whereas the non­ scheduled carriers furnished service on request without schedules. These small, non-scheduled