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Regional airlines' tough times may mean fare hikes

Baggage handlers unload an American Eagle jet on

Baggage handlers unload an American Eagle jet on March 12, 2013 in Springfield, Ill. Regional airlines are facing a stormy future with declining revenue and rising costs, even as the major carriers grow. Credit: AP / Seth Perlman

DALLAS -- For passengers traveling between smaller cities and large hub airports, the ticket may say Delta, American or United, but they're likely flying on a regional airline whose planes are painted in the major carrier's colors.

This arrangement helps the big airlines pack their planes more cheaply and contributes to recent record profits.

It isn't as wonderful for the regional airlines, however. Their profits are shrinking, costs are rising, and they're having trouble finding enough pilots to work for the salaries they pay.

Consumers should be concerned. Fares could rise as regional airlines are forced to raise pilots' pay. Aviation experts predict that some regional airlines may fail, which could lead to reduced service at smaller airports.

Last week, an airline industry group said that 86 communities have lost at least 10 percent of their flights since last year. Regional airlines say the trend will get worse because of a pilot shortage.

About half of all passenger flights in the United States are operated by regional airlines. A decade ago many of the regionals were earning steady profits. That began to change when several of the big airlines went through bankruptcy and rewrote their contracts with regional airlines to cap the small guys' profit margins.

Regionals that boasted 20 percent profit margins in the late 1990s suddenly had their margins capped at around 12 percent, a level some don't even reach, says Robert Mann, an airline-industry consultant.

The most successful regional airlines are still making money, but far less. Republic earned about $80 million a year from 2006 through 2008, but earned just $26.7 million last year. It lost money in 2010 and 2011.

Many regional pilots look to move up to the bigger airlines -- and better pay -- after a few years. But with recession, the 9-11 attacks, retrenchment at the big airlines, and an increase in the pilot retirement age to 65, it turned into "a lost decade" of career stagnation, says William Sprague, a pilot for American's Envoy Air subsidiary. He expected to spend five years at a regional; it has turned into 17.

Now American is shrinking Envoy's fleet in a cost-cutting squeeze. "The future of our carrier looks bleak. I've never seen morale lower," says Sprague, who is also a union leader. He says many pilots are bolting for low-cost carriers like Spirit, Allegiant and Frontier, or even to fly corporate planes.

The regional airline industry may soon experience the kind of consolidation that thinned the ranks of the largest airlines between 2008 and the end of 2013.

Helane Becker, an analyst for Cowen and Co., says the regionals face a basic problem: Their fares are set by their contracts with big-airline patrons. That leaves them little control over revenue and limited ability to pass along higher costs.

"When fuel prices go up, the major airlines can raise ticket prices," but the regionals must wait several years until they can renegotiate their contracts with the major airlines, Becker says.

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