REGIONAL AIRLINES ARE DOING TERRIBLY. THEY NEED A RECESSION. / THE WALL STREET JOURNAL

Regional Airlines Are Doing Terribly. They Need a Recession.

Despite some recent green shoots, trends still point to a gloomy future for many regional contractors

By Jon Sindreu

Mesa Airlines is one regional contractor that has struggled since the pandemic. Photo: Reginald Mathalone/NurPhoto/ZUMA Press

Most industries breathed a sigh of relief this year as the global economy managed to avoid a recession. 

Not regional airlines.

In its latest annual report, published a few days ago, the Regional Airline Association said that passengers and revenues by U.S. regional airlines in 2023 were the lowest in two decades and down by 27% and 33%, respectively, in five years.

When the pandemic hit, many regional carriers thought they would recover faster than the rest of the industry. 

Instead, the mainline airlines, whose logos often adorn regional carriers’ planes, became direct competitors. 

Their need to put idle fleets to work led them to fly narrow-body planes on routes traditionally operated by regional jets. 

They were also happy to slash traffic to small airports to focus on more profitable routes.

Nearly two-thirds of U.S. airports will have less air service in October than in 2019, the RAA added, with 12% losing more than half of their flights.

In 2021 and early 2022, flights between small “spoke” airports started to increase, an analysis of schedule data provided by airline analytics platform Cirium Diio Mi shows. 

Stocks in the two listed players in this segment, SkyWest Airlines and Mesa Airlines, outperformed those of other airlines.

But the respite was brief: As travel started coming back in full, scheduled flights between small airports trended down again at the expense of low-cost carriers and legacy airlines adding routes that linked “spokes” to their focus cities and bases. 

They had to scramble to find enough pilots and cabin crew, having laid off too many employees during the pandemic and their first port of call was the usual: Poaching from regional airlines. 

Comparing this September with the same month of 2019, scheduled seat capacity in regional jets and turboprop aircraft is down 17% and 70% in the U.S. and 41% and 19% in Europe, both respectively.  

Regional airlines are an overlooked but crucial part of the industry. 

This is particularly the case in the U.S., where they service a third of the country, yet passengers aren’t usually aware that they are flying with them: Most of these carriers—barring exceptions such as Cape Air and Silver Airways—exclusively operate by selling their seat capacity to the big network airlines. 

The latter take care of the fuel bill and sell the tickets to the customers. 

Often, they own their regional contractors: American Airlines, for example, is the parent company of Envoy Air, PSA Airlines and Piedmont Airlines. 

But it also sources from independent firms, such as SkyWest, Mesa and Republic Airways.

Optimistic investors may well think that there is nowhere to go from here but up, with recent data pointing to a rebound in regional schedules. 

Mainline airlines have resized their staff in terms of personnel and wages and jet-production shortages have already led them to pause their hiring sprees. 

Small cities are also angry about having lost connectivity and are pushing to regain it. 

But the economics of the business suggest that the crisis isn’t over. 

Full-service carriers were cutting back on their contracts with regional players long before Covid-19: In 2019, Delta Air Lines got rid of two of its five remaining regional partners, with one of them, Compass Airlines, going under shortly after. 

Across the Atlantic, Flybe, Flybmi and Stobart Air were recent casualties. 

Mainline airlines’ practice of doing more domestic flying in-house and using larger aircraft to do so is a long-running trend. 

In an era of secular growth for air travel, as the last couple of decades have been, those larger planes allow for lower costs per seat and economize on staff. 

U.S. regional contractors can’t offer to do the same because “scope clauses” set up by unions limit the size of planes they can fly. 

A side effect has been that manufacturers no longer make the types of regional aircraft that best serve thin routes. 

Also, pilot academies aren’t churning out enough graduates to meet long-run demand. 

To make matters worse, upstarts such as JetBlue-founder David Neeleman’s Breeze Airways, are now profiting from the gaps that regional operators have left.

It is unlikely that this will change unless a recession makes it harder to fill planes, creating a temporary pilot glut and an incentive to use smaller aircraft again.

Investors could still benefit from a winner-takes-all dynamic: The top player, SkyWest, has gone from flying 26% of all U.S. regional passengers in 2019 to 32% in 2023. 

Its operating margins are recovering and the prospect of greater economies of scale has pushed its shares up 43% since the onset of the pandemic—even as shares of its rival Mesa, which has been struggling to fly enough block hours to cover expenses, are down 85%. 

Everybody else, however, may need some bad times for the good old days to return.