What Does the Future Hold for Regional Aviation?

1. What Does the Future Hold for Regional Aviation? FAA Aviation Forecast Conference March 10, 2010 George W. Hamlin Hamlin Transportation Consulting Fairfax, Virginia www.georgehamlin.com

2. Taxonomy Definition: The science or technique of classification Source: www.dictionary.com

3. Definition According to the Regional Airline Association Regional airlines, operating 9- to 78-seat turboprops and 30- to 108-seat regional jets, provide short and medium-haul scheduled airline service connecting 636 US communities with larger cities and hub airports

4. Agenda • Background • Current Situation • Challenges • The Future

5. Regional Airline Short History • As of regulation in 1938, single class of airlines (‘trunks’) established • Post World War II, ‘local-service’ carriers established • During the 1960s, trunks shed many smaller cities to local-service carriers • Also during the 1960s, locals acquired jets, and competed more directly with the trunks

6. Regional Airline Short History--2 • “Third-level” carriers entered the market • Allegheny pioneered use of third-levels in replacement/code-sharing • During the 1980s, majors expanded into smaller markets via code-sharing with regional partners

7. Regional Airline Short History--3 • Regional jet ‘revolution’ • Increasing concern about scope clauses • Prior to ‘capacity purchase’ economics, robust financials • Many locations now regional-only

8. Selected Regional Carrier Operating Margins Carrier 1993 1994 1995 1996 1997 1998 ASA 26.9% 27.0% 23.1% 22.7% 20.7% 23.4% Atlantic Coast 1.7% -5.8% 7.9% 10.9% 14.1% 18.2% Comair 13.0% 15.9% 13.0% 20.5% 20.6% 24.8% Skywest 7.8% 13.1% 9.0% 2.3% 5.5% 11.4% Source: Merrill Lynch Global Airline Industry Airline Almanac

9. Agenda • Background • Current Situation • Challenges • The Future

10. Regional Traffic, indexed to 1999 Source: RAA; USDOT data

11. Regional Capacity, indexed to 1999 Source: RAA; USDOT data

12. Regional Traffic & Capacity, indexed to 1999 Source: RAA; USDOT data

13. A Trend that’s Likely to Continue

14. Region? North America

15. Top 20 Airports: Regional Departures Source: RAA; July 2009 data

16. Top 20 Airports: Total Departures Source: RAA; July 2009 data

17. Top 20 Airports: Regional % of Total(Highest to Lowest) Source: RAA; July 2009 data

18. Top 20 Airports: Regional % of Total(Lowest to Highest) Source: RAA; July 2009 data

19. Top 20 Airports: Regional % of Total(Lowest to Highest) Source: RAA; July 2009 data

20. Relationships: Exclusivity Major Regional Major Regional Major Regional

21. Relationships: Distribute the Eggs Major Regional Major Regional Major Regional

22. Why all the Liaisons? • Regional carrier perspective: don’t put all your eggs in one basket • Major carrier perspective: obtain lowest costs by playing off partners against each other

23. Agenda • Background • Current Situation • Challenges • The Future

24. Challenges • Changing economics • Economy • Aircraft • Industry downsizing; consolidation? • Environmental concerns • Fuel • Availability • Price • Scope

25. Not Just in North America Europe's regional airlines are concerned the traffic recovery may not be strong enough to carry many financially weak carriers through the coming year. "We will see a bloodbath this winter," believes JesperRungholm, founder and CEO of Danish Air Transport. "There are some very unsound businesses around. It's actually a good thing if they fail," he says, because it would eliminate some unwanted capacity. Source: Aviation Week, October 19, 2009, page 48

26. Yesterday’s Hero?

27. Changing Times Lufthansa will expedite the retirement of 45 Bombardier 50- and 70-seat regional jets operated by its Cityline and Eurowings subsidiaries in an attempt to lower unit costs at the two operators. … Lufthansa will place larger aircraft on some of the routes affected by the reduced RJ fleet. Source: Aviation Daily, September 21, 2009, page 1

28. Industry Consolidation • Likely to be fewer major carriers • Merger • Failure • Still a need for current number of regionals?

29. The Doughnut Hole • “Hub-raiding” has extended catchment areas • Below 200 miles, spokes may not be effective except in densest markets • Close-in spokes may no longer warrant service

30. How Much Longer Will This Make Sense? CMH DAY IND 105 miles 43 miles 101 miles CVG 96 miles 77 miles LEX SDF

31. Agenda • Background • Current Situation • Challenges • The Future

32. Possible Operating Models • Stay the course; continue Major carrier feed • Do something different • Independent • Hybrid

33. Brave New World in Denver…and Milwaukee The company believes its dependence on the financial health and strategic decisions of its airline partners makes future growth prospects as a regional provider limited at best. With limited or no growth prospects, “you can either be proactive or wait until things get better”, a Republic spokesman says. Source: “Republic’s New Frontier”, Aviation Week, June 29, 2009, page 39

34. Airline Economics 101 Nonstop Service Frequency Share of High-Yield Traffic Greater Profitability Higher Return on Investment

35. Some Thoughts (Heresies?) About Airline Economics • Volume may not be the answer • Lowest cost may not produce the highest profit • Market stratification and product differentiation can permit • higher return on investment • lower investment level

36. Key Questions • Scope • Aircraft size • Compete or cooperate • Continuing need for what the Regionals provide on a network basis – but who will provide it?

37. Taxonomy Redux It’s all about • Size • Scope • (It’s about size…not geography)

38. Future Definition of a “Regional” Airline? Airlines operating turboprops[?]and jets that are generally smaller than those produced by Airbus and Boeing in scheduled airline service, typically in conjunction with “Major” airlines

39. Further Evidence: US Airways also will reassign the 124-seat Airbus A319s now serving the Boston-LaGuardia leg of its Shuttle operation to its mainline fleet, and replace them with some of the 15 Embraer E-190s left in its fleet. Source: Aviation Daily, October 29. 2009, page 1

40. Smaller jets gain bigger role at O’Hare-1 United and American Airlines, the airport's two major tenants, schedule about two regional jet flights for every one flown on far-larger Airbus or Boeing jets at O'Hare, according to data compiled by OAG for the Tribune. Source: Chicago Tribune, February 11, 2010

41. Smaller jets gain bigger role at O’Hare-2 Ten years ago, the numbers were reversed: American operated two traditional jet flights for every flight by its American Eagle regional jet subsidiary. United flew three flights for every flight subcontracted to its United Express carriers. …experts say there is likely no going backward: In the future, domestic flights of two or three hours will likely be flown by smaller planes. Source: Chicago Tribune, February 11, 2010

42. The Title Says It All Regionals Dominate New Services in United’s 2010 Summer Schedule United has unveiled 16 new city-pairs for the carrier’s summer schedule, starting June 9. … In line with United’s capacity control initiative, 11 of these new routes will be served by the carrier’s regional partners, with SkyWest providing most of this capacity. Source: Aviation Daily, February 22, 2010

47. Some Implications for Regional Aircraft Demand • Length of haul increasing, short segments disappearing • Diminished role for turboprops; down but not out • 70/90 seaters will have growing role … but scope clause issues; larger?? • Further blurring of major/regional distinction • Will there be a new “third tier”?

48. Conclusions • There’s an obvious need for what Regionals provide, -but- • Who will provide it? -and- • How? • The bottom line? Stay tuned!

49. What Does the Future Hold for Regional Aviation? FAA Aviation Forecast Conference March 10, 2010 George W. Hamlin Hamlin Transportation Consulting Fairfax, www. www.georgehamlin.com