# Presentation: 149112

## Small Community Service ProspectsFaye Malarkey Regional Airline AssociationFederal Aviation Administration30th Annual Aviation Forecast ConferenceMarch 18, 2005

## Regional Airline Facts

- Estimated 129 million passengers transported in 2004
- More than 15,000 flights a day
- 1 in 4 domestic passengers travel on regional airlines
- Regional airlines operate approximately 2,700 aircraft, approximately 1/3 of the U.S. commercial airline fleet

**Notes:**
The Regional Airline industry continues to grow

## Regional Airline Service

- Serve 735 airports in
-      North America
*	**	**(95% of total)*
- Serve 655 airports in
-      United States *(98% of total)*
- Regional airlines provide the
-    only air service at 72 percent
-    of these airports

**Notes:**
This is what that service looks like.  At nearly three-quarters of U.S. Airports, regional airlines are providing the ONLY source of scheduled air service.  At many small communities, it’s us or the bus.  

## Regional Airline Passengers11 million in 1978 129 million in 2004 

**Regional Airline Passengers**11 million in 1978 129 million in 2004

**Notes:**
Regional airlines are growing – here’s a look at our passenger load back in 1978, when it was only 11 million, compared to almost 130 million last year.

## Code Sharingthe lifeblood of the regional industry

- 54 code-sharing agreements
- 10 owned by majors/nationals
- 2 partially owned by majors
- 42 marketing agreements
- 							(as of January 2005)

**Code-sharing airlines transport 99% of passengers**

**Notes:**
Most regional airlines operate under code-sharing agreements with major airlines.  In some cases, regional airlines are owned by their major airline partner and in some cases the regional airline has a marketing agreement with a major airline.  Nearly all regional airline passengers travel on code-sharing airlines.

## Code-Sharing

- Under “fee for departure” agreements, major airlines determine where regional airlines fly
- Major pays regional flat rate per flight
- Service must fit within the network
- Service must match revenue objectives of major, including opportunity cost of flying to one market vs. another
- Under “pro-rate” contracts, regional and major airlines partner on routes and service
- Regional paid portion of revenue from fare, assumes portion of financial risk
- New fare environment making this service harder to provide.  Communities may need to provide revenue guarantees for new regional service

**Notes:**
Code sharing agreements take two basic forms.  The first, more prevalent among larger carriers, occurs when a major airline and regional airline enter into a fee for departure agreement, where the major pays the regional airline a flat rate for flying

A second arrangement, common to smaller, turboprop operators, occurs when major airlines pay regional airlines a portion of fares.  Carriers with pro-rate agreements are frequently more vulnerable to cost increases – fuel for instance.  

## Regional Airline Fleet

**Turboprop routes have dropped 54 percent over the last decade (from 1429 routes to 651).**

**Notes:**
Here is a look at the regional airline fleet with the orange line representing turboprop aircraft.  As you all know – with regulatory costs increasing for turboprop aircraft, these aircraft have been on the decline.  This chart illustrates that change, with turboprop routes dropping by 54 percent in the last decade.  

## Turboprop Routes 1Q1995

**Notes:**
Here’s another look at that figure:  This chart depicts turboprop routes in existence back in 1995...

## Turboprop Routes 1Q2005

**Notes:**
...Compared to the turboprop routes in existence today.
As turboprop service goes away, small communities that cannot support jet service continue to lose service.

## Short-haul markets have lost substantial service since 2001

-    The shortest bands drop at the highest rate due to availability of substitute products (car, bus, train, access to LCC by driving to alternative airport)

- Source: BACK / OAG Schedules Database

**Notes:**
As turboprops are retired, the shortest haul markets suffer as the “fly versus drive” equation continues to change.  As you can see from this illustration – the shortest bands are dropping at the highest rate – and that’s because of proximity to an alternative – car, bus, train, near-by airport with Low Cost Carrier service)

## Regional Airline Servicemakes the hub and spoke system work

- Regional airlines are structured to work with network carriers to absorb risks from network reconfigurations
- 21% of domestic passengers travel in markets that produce less than 50 passengers per day*
- Network carriers depend on these markets for 27 percent of their passengers*
- Low fare airlines provide limited service to small communities – only 7%  of their passengers and 10% of their revenue come from smaller markets.*
**The service provided by regional airlines is critical for the operational and financial success of the major airlines**

****Source:  “A Significant Co-Dependence” by Aaron Taylor, Eclat***

**Notes:**
You heard from John Heimlich about some of the challenges facing major airlines – so I’d like to take a moment to discuss regional airlines’ role within the system.  
Regional airlines are designed to be the partner that absorbs risks – we are nimble and can be used to develop service, or to salvage service when the major airline needs to pull down capacity. 
The feed offered by regionals remains absolutely essential to the entire network.  

## Scope Clauses Create Inefficiencies

- Scope clause restrictions, which some airlines have been able to revise but not eliminate, should be reevaluated in the current economic climate
- Major and regional airlines must be able right-size aircraft to markets
- Scope clauses fail to serve the long-term economic interests of the regional airlines, major airlines, or the pilots of both
- It is simplistic to view scope only as a labor dispute when it continues to deprive communities of competitive alternatives and increased nonstop routes
- In a deregulated environment, limitations on air service should not be acceptable to Congress or federal policymakers

**Notes:**
- Air service is the lubricant that keeps the economy running smoothly - this is especially important for small cities, where the runway has replaced Main Street as a key driver for economic growth.  Scope clause constraints deny passengers travel options and have no place in a deregulated environment.  
- The new reality also dictates that major and regional airlines must be able to match the appropriate size aircraft to the market 
- 18 carriers in negotiations or mediation with labor issues

## Regional Airline Growth and Success

- Regional airlines affected by major carriers finances
- Regional airlines must maintain or reduce costs or will be priced out of the market
- Majors have many choices for partners
- Lower ticket prices and yields have caused majors to reduce “fee per departure” contracts
- Regional carriers with “pro-rate fee” agreements seeing less income due to lower ticket prices

**Notes:**
So – regional airlines are important system-wide, and likewise, the fate of regional airlines is inextricably linked to our major airline partners.  We feel the ills of the major as lower yields and fares force mainline carriers to put the squeeze on their regional partners – with the result being lower fee for departure rates or lower fares translating to less revenue to share with pro-rate regional carriers.  

## Regional Airlines Have Reduced Costs in Response to Reduced RevenueCost and Revenue Per ASM (cents)

- Source:  DOT OIG

**Notes:**
In short, in order to remain profitable, regional airlines, like our major airline partners must keep costs low.  As you can see – regionals have endeavored to reduce costs as revenues continue to drop.  Unfortunately, as we adjust revenues to costs, there are a couple of factors outside of our control

## Taxes/Fees on a $200 Ticket* Have More Than Tripled

_**2004**_**Taxes = 26% ($52)***

_**1972**_**Taxes = 7% ($15)***

_**1992**_**Taxes = 15% ($29)***

- 	*Sample itinerary assumes one-stop domestic round-trip with maximum passenger facility charge (PFC) per airport; $200 total price includes taxes and fees.

- Source:  ATA

**Notes:**
Like taxes.  You’ve all heard the argument that airlines are taxed up there alongside the so-called “sin” industries of tobacco, alcohol and firearms.  And it’s true.  As airlines take steps to reduce costs on all fronts – Uncle Sam is taking an increasingly large bite out of airfare.  In fact, since 1972, taxes and fees on your $200 ticket have MORE THAN TRIPLED!  

## Taxes and Fees Impact Service

- Airlines face pressure on fares and cannot pass increased fees to passengers
- Average leisure fares down 10 percent in 2004 compared with 2003; business fares down 8 percent
- All airlines must absorb increased costs or could lose passengers to other airlines
- Passengers are even more price sensitive in short-haul markets
- Regional airlines lose passengers to the road as the “fly-drive equation” changes and passengers drive to airports with lower fares

**Notes:**
First of all, as John will tell you – airlines lack pricing control.  Both business and leisure fares are down significantly this year.  Airlines who don’t absorb cost increases will lose passengers to other airlines.  

In short hall markets, regional airlines have the added jeopardy of not just losing passengers to other airlines, but of losing passengers to the car!

## Taxes and Fees Impact Service

- The aviation security fee in the President’s FY06 Budget Request would increase by 120 percent to $5.50, capped at $8 one-way and $16 round-trip
- The new tax would bring the total federal security tax on airlines to $4.7 billion per year
- Passengers traveling on regional airlines would be disproportionately impacted because multiple flight segments mean more tax occurrences
- This fee increase would raise fares for travel to rural communities, will divert resources away from carriers serving rural markets, and makes this service even more expensive for carriers, putting **air service to smaller communities at risk**.

**Notes:**
I think by now most of you know the details of the President’s proposed security fee increase so I won’t dwell on it further than to say the fee increase, if implemented, will hit regional travels even harder.  It’s very simple.  The nature of regional air travel involves multiple flight segments.  That means if you have to connect to get to your smaller community, you’re going to pay the fare twice.  

Americans might support paying a higher security fee if it meant more security, but the Administration proposes to invest only one-fifth of it for aviation security – the rest will be used primarily to cover higher spending in other programs and reduce the overall federal budget deficit. 

## Budget Cuts Impact Service

- AIP targeted for one of the largest reductions ($600 million) in the entire fiscal year 2006 budget request, despite a proven track record that enhances airport safety, capacity, and security
- Administration suggests airports should respond to cuts by imposing maximum PFCs as potential revenue source of **$350 – 400 million per year**
- As airport rates and fees increase, service becomes more expensive

**Notes:**
- While tax and fee increases tend to hit carriers hard – proposed budget cuts would also have a direct, negative impact.  For instance – this year’s Presidential budget request recommends sweeping cuts for the AIP program.  In order to make up those funds – the administration suggests airports impose the maximum PFC.  
- Again – the PFC is a segment charge – the kind of charge that hits regional air travelers the hardest because of the connecting nature of regional airline flights 

## Essential Air Service

- EAS currently ensures commercial air service to 146 communities (36 of which are in Alaska)
- Because of increasing costs and the continuing financial turndown in the aviation industry, about 37 communities have been forced into the EAS program since 9/11/2001

## Essential Air Service

**The FY06 Budget Request would severely cut and potentially dismantle the EAS program **
- Funding for EAS would be cut by $52 million (1/3 of communities would be forced out)
- Cost-sharing criteria imposed on EAS communities based on hub airport distance
- Communities within 100 miles to large hub airports, 75 miles to small-hub airports, or 50 miles to airports with jet service would lose commercial air service and receive only 50 percent of previous funding for surface transportation use only
- Communities less than 210 miles to a large or medium hub would receive a 25 percent cut funding cut (subject to fund availability)
- Communities more than 210 miles would experience a 10 percent funding cut (subject to fund availability)

**Notes:**
The President's budget hits rural communities again with cuts to the Essential Air Service program.  It would require some communities to pay a local contribution. Further, even if they opted to pay and stay in the program, a third of the EAS communities would be forced out by the proposed funding cuts. The budget also eliminates funding for the Small Community Air Service Development Program.

## Demand Management

- The FAA forecasts that traffic will exceed pre-2001 levels during the current fiscal year and will exceed 1 billion enplanements by 2014.
- Peak-hour pricing systems are inconsistent with national goals to enhance air service competition throughout the United States
- Regional passengers pay the same aviation taxes and fees as other travelers and should not face higher ticket prices or limited travel options because we failed to modernize and expand the airport and airway system
- Congestion pricing limits service and fare choices of passengers in small or medium sized cities and is not an appropriate solution
- RAA favors federally-mediated voluntary negotiations to address capacity concerns, similar to those that were used effectively by the federal government for Chicago O’Hare.

**Notes:**
As Administrator Blakey announced yesterday, with traffic returning to pre 2001 levels THIS FISCAL year, and with traffic expected to exceed a billion in 2014, I’ll leave you with this final thought - we need to work diligently, together, now, to prepare for this traffic and to protect the budget for airport expansion and ATC modernization that will allow capacity enhancement.  However, the answer to increasing traffic is NOT congestion pricing schemes, which price passengers to smaller communities out of the market.  
RJs blamed for delays, but this simplistic argument ignores the price and service benefits RJs have brought to small and large communities.  It also disregards the RJs have become a critical element in the survival plans on many legacy airlines.
Both Congress and the Department of Transportation have agreed on the need to protect air service to small- and medium communities, but congestion pricing would price smaller communities out of the market and should therefore be rejected.
 (Network carriers only accounting for 25 percent of growth at large hub airports, losing 6 percentage points to LCC carriers)

## www.raa.org

**Notes:**
I thank you so very much for your attention this morning.  I look forward to answering any questions at the end of the session.