State of Regional Airline Industry

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State of Regional Airline Industry

• Tom Bacon
• Vice President, Planning
• Mesa Air Group

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State of Regional Airline Industry

• Tom Bacon
• VP, Planning, Mesa Air Group - NEW
• VP, Marketing, Bombardier Flexjet
• VP, Planning, American Eagle
• VP, Finance, American Airlines
• Dir., Finance, SABRE

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Key TopicsWhat You Came For

• Cost of travel
• Will fares go up or down?
• Level of service
• Will service go up or down?
• New ideas in travel

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State of Regional Airline Industry

• Background
• Current Situation/Trends
• Mesas Position
• In context of fares, service, innovation

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Definition of Regional

• Not
• Powered by propellers
• Limited to short flights
• Focused on a single part of the country
• Owned/controlled by airline mavericks
• Specified by size of company in revenues
• Definition Aircraft size
• Number of seats

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Regional Industry

• Small airplanes but big business
• Over one in five passengers is regional
• More than 2700 airplanes
• Fastest growing airline segment in past ten years

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Key TopicsWhat You Came For

• Cost of travel
• FARES HAVE FALLEN PARTLY DUE TO REGIONALS
• Regionals intense focus on costs
• Level of service
• Will service go up or down?
• New ideas in travel

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Cost of Travel How Fares are set
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Cost of Travel

• What drives cost of travel?
• Mysterious fare trends?
• Fares are great cocktail party banter
• Cost of providing air travel
• Should impact fares eventually!

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Airline Scope Clauses

• Pilots at each of the larger hub oriented
  airlines are unionized (mostly Air Line Pilots
  Association or ALPA)
• Scope clauses specify what flying is covered by
  their collective bargaining agreements
• Most contracts allow limited flying with smaller
  aircraft outside their contracts
• Both the and size of a/c are specified
• Thus, regional pilots are subject to different
  payscales and work rules

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Key TopicsWhat You Came For

• Cost of travel
• Will fares go up or down?
• Level of service
• SEAMLESS SERVICE IS CRITICAL
• New ideas in travel

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Branding

• Brands you know
• United Airlines
• Delta Air Lines
• American Airlines
• USAirways
• Continental
• Northwest

• Brands you may not know
• Mesa Airlines
• Freedom Airlines
• Skywest Airlines
• Republic Airlines
• Chatauqua Airlines
• Go-Jet Airlines
• Pinnacle Airlines

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Low Cost versus Seamless BrandShould Regionals
be Independent?

• Primarily independents
• UA Air Wis, ACA
• HP Mesa

• Primarily wholly owned
• AA American Eagle
• CO Continental Express (formerly)
• Acquired its regional suppliers
• DL Comair, ASA

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Independent Regional Business Model

• Large Major Airline is Brand Airline
• Brand airline markets service
• Tells Regional where to fly
• Brand airline collects all passenger revenue
• Brand airline pays Regional a fixed fee for
  flying
• Brand airline pays all fuel cost

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Independent Regional Business Model

• What services/risks can Regionals bear most
  efficiently?
• MarketingNO
• Fuel..NO (pass through)
• Airport handling..Mixed
• Aircraft ownership..REGIONAL
• Pilots/flight attendants...REGIONAL
• MaintenanceREGIONAL

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Wall Street Regionals in 2000Better than
Sliced Bread

• An airline stock with
• Guaranteed margins
• No fuel risk
• No risk of fare wars or overcapacity
• Growing business (filling a need for lower cost
  jet travel by large, brand airlines)
• Mesa was a pioneer in this model

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Regional Diversification

• Brand airlines learned the hard way that too much
  dependence on one regional is risky
• Comair pilot strike shut down DLs Cincinnati hub
• Independence Air break from United left a large
  gap at Dulles Airport
• Concerns over risk (along with strong regional
  stock prices) benefited independent regionals
• Drove brand airlines to sell owned regionals
  (XJET, ASA)
• Mesa today operates for 3 brand airlines at 8 hubs

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Regional DiversificationMesas Revenue
Distribution
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Regional Independence

• Continental
• Delta

• Sold Continental Express as ExpressJet
• Terminated contract for certain RJET a/c
• Sold ASA to Skywest
• Bid out some Comair flying

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Independent and Seamless

• Highly integrated schedules
• Need for tremendous flexibility
• Monthly schedule changes including new airports
• Highly integrated operations
• Often handled by brand carrier at airports
• Performance based compensation
• Reliability and customer surveys

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Key TopicsWhat You Came For

• Cost of travel
• Will fares go up or down?
• Level of service
• Will service go up or down?
• New ideas in travel
• REGIONALS HAVE BEEN THE INNOVATIVE PART OF
  INDUSTRY

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Regional Innovation

• Regional jet itself
• Upgraded service from turboprops
• Expanded service for Major brands
• More competition in large markets to expand
  brand (AA in NY shuttle)
• New niche markets Wall Street to Walmart
  service
• New airline model independent regionals fly for
  fixed fees
• Airline mavericks grow exciting businesses

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Current Trends Airline Costs

• Cost trends
• Brand airlines re-bid contracts in bankruptcy
• Stiffer competition for regional bids
• Large, strong, proven regionals
• Tighter scheduling (to lower cost
  post-bankruptcy)
• Independence provides greater cost savings

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Current Trends Seamlessness

• Service/seamlessness
• Greater schedule flexibility/integration
• Deltas experiment with props at JFK
• Deltas purchase of the aircraft recognizes
  long-term need in their network
• Strict performance measurement

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Current Trends Innovation

• Larger aircraft
• Business model changes
• Growth

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Larger Aircraft

• Pushing the definition of regionals
• 70-seat, 90-seat aircraft
• The growth airplane for Delta, USAirways
• JetBlues Embraer aircraft
• Bombardiers new aircraft
• Pushing the scope limits
• Bankruptcys effect on scope
• Embraer bet against scope

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Business Model Changes

• What services/risks can Regionals bear most
  efficiently?
• Marketing.UNDER REVIEW
• Fuel...UNDER REVIEW
• Airport handling...Mixed
• Aircraft ownershipUNDER REVIEW
• Pilots/flight attendants.REGIONAL
• Maintenance.REGIONAL

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Regional Growth

• Brand airlines arent sourcing regional airplanes
  as quickly as they once did
• Caution in adding capacity
• Scope issues
• Regionals still seek growth.
• International opportunities China
• Growth as a new brand airline!

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New Regional Brands

• New brands (operated by regionals)
• Mesas go! airline in Hawaii
• Opportunity versus higher cost incumbents
• Incumbents high fares attracted new entrant
• Internet distribution (not national brand,
  corporate sales force)
• Mesas 1 sale got everyone talking
• ExpressJet in point to point services
• Niche opportunity

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Mesas go! Airline

• High frequency Honolulu service to/from
• Kona - Hilo
• Maui - Lihue
• Challenges Hawaiian Airlines/Aloha Airlines
  long-standing competitive positions

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New Regional Brands

• The new brands are different from Independence
  Airs failed attempt to construct a brand at
  Dulles
• Cherry picking
• Not dependent on scale for marketing penetration
• Internet/personal marketing
• Word of mouth
• Smaller percentage of overall regional operation

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Mesas China Plan

• Mesa signed agreement for a regional jet
  operation joint venture with Shenzhen Airlines in
  China
• Mesa controls 25 of the JV with larger economic
  interest
• Airline will initially operate 20 50 seat
  aircraft
• Potential to grow to up to 100 aircraft
• Operations are expected to begin in the next 9
  months
• In time for the Beijing Olympic games
• The focus cities of the operation are
• Shenzhen, Beijing, Chongqing, Xiamen, Nanjing,
  Kunming, Dalian, Shenyang, Xian, Zhengzhou
  Nanning
• Shenzhen Airlines operates 45 aircraft (737
  A320s) on 100 routes in China Southeast Asia

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The China Plan
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Mesa Air Group

• Low costs
• Proven seamlessness/service/flexibility
• Positioned for diversification
• Innovative/growth oriented

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Conclusions

• Regionals are important part of industry today
  continued importance to large airlines and to
  airline passengers
• Independents are an exciting business with a
  unique business model
• Regionals innovation has impacted whole
  transportation industry

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Key TopicsWhat You Came For

• Cost of travel
• REGIONALS WILL CONTINUE TO HOLD COSTS DOWN
• Level of service
• BRAND AIRLINES REGIONALS WILL MAKE SERVICE MORE
  SEAMLESS
• New ideas in travel
• REGIONALS ARE HOTBEDS FOR INNOVATION