any news on ACA with UAL's deal?

[hotwing]

Just kind of curious if anyone has heard anything out there regarding ACA. It looks like ACA may be given a chance to grow with this stuff... ? Anyone out there have any news or ideas?


Swimming in the pool

 

[CRJ puppy]

WAY too early to tell. This could go many different ways. For the time being, it will be status quo, unless the bankruptcy judge decided to liquidate UAL, which ain't gonna happen. So count on status quo for now. The big question 1 or 2 yrs. down the road is the plain (plane?) fact that UAL will emerge a better, but leaner, smaller, more efficient airline. The problem is....if they are smaller, then what planes are the people going to get onto when we bring the passengers to the airport? Delta's? American's?

Remember, ACA gets paid once the a/c goes WOW regardless of how many people are on board. While there is no doubt that ACA and others will take over some less profitable routes for larger craft...some of our less profitable routes (for UAL, not for us) will get cut. It could end up being a draw. SO as I said: status quo for now...look into your crystal ball or ouiji board for the future. No one REALLY knows for sure (not even the board of directors at United).

Don't you just love the world of aviation?!

------------------------

"you're cleared into position and wait..."

(the Canadians had it right all along..!)

 

[B1900DFO]

"Remember Aca gets paid once the A/C goes regardless of whether anybody is on board."

I wouldn't be surprised if UAL tries to back out of that arrangement in BK court. My guess is that they will force the regionals to start taking on some of the financial burdens of a down cycle....

 

[generaltso]

I hear people talk about how "UAL will emerge a better, but leaner, smaller, more efficient airline"

Did people think this about Pan Am?

 

[throttlejockey]

I agree with B1900FO:

The Regional Feeders at UAL will probably have to renegotiate their contracts, and UAL/BK Judge will ask them to take more risk.

The current "fee for departure" agreements may be history, and "pro-rata" risk sharing may become the new "norm".

As a result, I would expect increased flying by the RJ operators, because "pro-rata" flying is extremely cheap for mainline (mainline takes much less risk), and SCOPE may be diluted by the BK Judge. This increase in flying is only good for RJ Operators in the short term.

In the long term, it will be detrimental to the RJ Operators. The increase in financial risk will create increasing financial pressure on the RJ operators and profits may evaporate. The higher cost RJ operators will be pressured by the lower cost ones (Mesa, etc.) and those that can't hack it may disappear.

The next few years is going to be difficult for all involved. But do not let uncertainty change your plans for the future.

 

[dogg]

A little off of the subject:
With the exception of Horizon Air which flies under its own colors, has its own res centers and does not operate under any sort of agreement are there any other regional carriers still doing there own flying.

It has been my understanding that in a "fee for departure" program, the cost of an RJ is made up by putting that passenger on a mainline flight. I understand that many passengers on RJ flights never get on a mainline flight and I wonder if those flights generate any real profit on there own or if they are being used just to keep people flying on United or Delta etc..
I would certainly hope that management at the "fee for departure" carriers are looking at those scenarios and determining if a non-affiliated all RJ carrier can make it on its own.

In other words, can Atlantic Coast Airlines go back to being a stand alone, painted in their own colors, with their own res centers type of airline where their only affiliation is the old fashion code-share agreement.

It would be interesting to see the true direct and indirect operating costs as well as outright purchase/lease costs of a 50 or 70 seat RJ.

 

[Marko Ramius]

Good posts

Dogg, throttlejockey, B1900DFO make many good points and raise good questions. The fee per departure agreements will likely disappear or get dramatically changed along with everyone's contracts in this Ch11 IMO. This has been a sore point at UA for some time now. UAX operations currently show as a loss on UA's balance sheet. Now the loss generated by UAX is likely significantly LESS than it would be if mainline service were used instead because most routes are money losers in the current environment. That is the current benefit of RJ's in the UA system-they allow UA to maintain market presence while stemming the cash flow loss from operations. Long term, this can't work for either party because UA can't lose money forever and UAX can't collect checks from a defunct partner. At UA's last quarterly conference call, a couple of the analysts were giving Rono Dutta a hard time about how UA could sustain it's RJ operations in this manner long term. Rono admitted that the UA makes no money unless a passenger gets on a mainline flight, and that some of the UAX carriers(read ACA primarily, and to some degree Skywest) have pretty much extorted UA on their fee per departure deals. It was suggested that UA would have been better off to convert some A320's to all coach and fly them on the routes instead-something he agreed with oddly enough.

So going forward, where does that leave them? Still too early to know for sure, but I think it's likely that things will change somewhat. Even if UA doesn't want it, I doubt the creditors will be interested in UAX carriers pulling 14% profit margins when UA is losing money and competitor carriers have 3-4% margins. UA is looking at another Shuttle product, and will likely include that as part of their reorganization plans. Unlike other similar products, UA will have the opportunity to negotiate changes to all contracts at one time not just the pilots. The cost advantages they obtain may or may not have an effect on the express carriers. I suspect that some markets may become a hybrid of express and mainline. A renegotiation of the fee per departure agreements may force changes to express carrier labor contracts, and won't that be lovely! Especially considering that ACA and Skywest fly for both UA and DL so this could spread to affect ASA, Comair, and Chautaqua. I suspect that it will be worse, if they go to pro rata agreements instead of fee per departure. This type of deal would probably put more pressure on the Express carriers to deal with the higher CASM's of the RJ. If the scope clause is eliminated or modified to allow 70 and 90 seaters, maybe that's the route the carriers will go to offset the increased risk and cost with lower CASM 70 and 90 seat aircraft. Alledgedly these are some of the reasons that Horizon chose 70 seat Canadair's instead of 50 seaters. Whatever happens I think the pain of this bancruptcy will be felt by more people than realize it thus far.

 

[throttlejockey]

Dogg:

You raise a very good point - are these carriers prepared to make it on there own? I certainly hope so or else there will be a lot of out of work RJ pilots in the future.

When an RJ is compared to a 737 or A320 on a segment cost basis the RJ is far less costly. But the RJ can only generate 40% to 50% of the revenue. You cannot compete against low fare carriers with RJ's nor can you compete with higher capacity mainline aircraft unless you choose the right routes.

Midway Airlines tried to compete using RJ's and found them to be uncompetative. You cannot fill enough seats at the right yield to make sense.

I do not know of any Regionals that currently operate RJ's on a "pro-rata" basis. Almost all of them are operating on a "fee for departure" basis. However, there are many Turbo-prop operators that operate on a "pro-rata" basis:

Trans-States (J41/ATR) for U and AMR
Colgan (SF34/B1900) U
Shuttle America (SF34) U
Great Lakes (B1900) UAL and FRNT
Gulfstream (B1900) CAL
Mesa (DH8/B1900) AWA and U
Horizion (DH8) Alaska
Corporate Airlines (J32) AMR

Those are a few.

 

[Beantown]

Trans-States (J41/ATR) for U and AMR
Colgan (SF34/B1900) U
Shuttle America (SF34) U
Great Lakes (B1900) UAL and FRNT
Gulfstream (B1900) CAL
Mesa (DH8/B1900) AWA and U
Horizion (DH8) Alaska
Corporate Airlines (J32) AMR
---------------------------------------

Actually, Mesa's Dash 8's at AWA are one of the only "Fee for departure" turbo prop operations out there. -Bean

 

[filejw]

Dogg, I would check that Horizon info.They are owned by Alaska and have had an agreement with NWA from the begining [18 plus yrs].The pilot contract at NWA had at one time language concerning Horizon.I think it is still in effect but not sure.

 

[dogg]

Actually, Horizon is owned by the Alaska Air group which happens to also own Alaska Airlines inc. However Alaska Airlines and Horizon Airlines are on equal footing with each other when it comes to which airline is being paid for or losing money etc... as far as the deal with NWA that is a simple code share.


I guess my question is how many of the regionals ie skywest, comair, aca etc can you call a res line and buy a ticket that says skywest, comair, aca etc. on it and when you get to the airplane it has a paint job that is unique and says SKYWEST down the side of it etc...

I think if you look at the economics of a regional, Horizon is what the model might look like. They had no where near the explosive growth of the other regionals who were really being subsidized by UA, DAL, USAIR, NWA, AMR etc. While the other big regionals have been showing profits and dumping turbo props etc Horizon has hung on to their turbo props and they seem to only cautiously get RJ's. And only as a replacement for the retiring F-28's.

I am not saying that Horizon is doing it right only that they may be a more realistic view of what is to come for the other regionals when the "fee for departure" dream hits the ground as it surely will in UA case... just food for thought

 

[Marko Ramius]

Frontier Jet Express?

Dogg,

I may be mistaken, but I believe that the Frontier Jet Express flights that Mesa operates for Frontier are not fee per departure. They must live or die on their own two legs. I don't know how successful they have been, but I do know that they pulled out of at least one route DEN-STL due to lack of profitibility.

 

[dogg]

I remember reading that they were not on a fee for departure out of DEN. And that they were free to come and go as profits come and go.

How about Air Wisconsin and Airtran does anyone no how Airwis is being paid. These non fee for departure deals will be the test of wether an RJ can stand on its own. And should point to the future success or failure of the RJ concept. I know the public does not like props but I doubt that they will pay a premium to ride on a jet if it comes down to that.

 

[sideshow]

One point. The fee for departure arrangement that so many regionals now have, and ACA specifically, came about fairly recently. In the last 2 to 2 1/2 years. Prior to that, United paid for a certain number of seats and ACA did their own marketing and had much more flexibility over how they ran the operation. One of the big things United got for chaning the contract to fee-for-departure is much greater operational control over their regional partners without having to go buy them as some of their competitors have done. Now, they may re-evaluate that arrangement but I'm not sure how ACA extorted money from UAL when UAL wanted the arrangement in the first place.

 

[Marko Ramius]

I should have been clearer, sideshow

I know that it was UA who wanted the current fee-per-departure agreements. The reasons were about control as you said, primarily because Comair gave Delta a bit of scare IMO. UA has largely resisted the idea of owning its regionals outside of the Air Wisconsin debacle, so these 10 year deals were negotiated instead. Better deal for UA anyway, because by the time UA would have been interested in buying its regionals, their asking price would have been too high to make it worthwhile. The extortion I was referring to was the yearly renegotiation of the subsidy rates for each UAX carrier. There is alot of information to suggest that ACA management played serious hardball with UA and won hefty increases from UA when the carrier was in trouble. Skywest wasn't as aggressive, but still won increases from what I understand, an Air Wis stayed at last years rates. Perhaps ACA didn't think it would come to this, and felt that playing hardball on the rates would pay off as UA outsourced more in it's restructuring-who knows? What is known is that something has to change with these current deals. There are projections out there that have UAX flying 41% of UA domestic flying, up from the mid twenties right now. UAX's connectivity would increase dramatically, which under the current deals means revenue would decrease almost as dramatically. Remember that UA only makes money if a UAX passenger gets on UA metal-UAX, Star(excluding LH), and UsAirways don't count. Outside of that they are largely throwing money out the window in an effort to maintain market presence. It's great for ACA, Skywest, and Air Wis that they are recieving this money and making profits, but how can this be expected to continue in this fashion long term? UsAirways' CEO Dave Siegel is learning this as well, the RJ's aren't working as well profit wise when they aren't in house like CoEx was. I think the operational control issues aren't as big as UA management thought they were. Where are ACA, Air Wis, and Skywest going to take the majority of their aircraft if they don't like the deal given to them by UA? Nowhere because there aren't enough big time dance partners left, and certainly not ones offering the same profit potential as their current partners. Look at Mesa and Chautaqua. Both have faced challenges with their major partners over the last four years or so, and have looked to expand their portfolios. The results haven't a ton, Mesa was able to add Frontier and Chautaqua was able to add some DL feed. However there main breadwinners pretty much remain unchanged. Why else is JO so hot to get back in bed with a company he once sued(UA) and so pissed at Air Wis for getting the AirTran JetConnect deal. There's only so many crumbs to go around. The solution for UA coming out of BK has to be finding a way to make money on many of these routes with their own metal combined with a more rationalized approach to UAX that keeps those companies stable but forces them to are in the risk of flying airplanes for profit.