The regional airline sector, at least as investors

used

to know it, is fast fading from view.

However, when I spoke with a select group of industry leaders at the

Regional Airline Association's

annual conference in San Antonio this week, I came away with the impression that many are unaware of the degree of change taking over their part of the world.

Nowhere is this change more apparent than in the stocks of the airlines themselves.

Over the last 10 years, those who invested in

Atlantic Coast

(ACAI)

,

Comair

,

Atlantic Southeast

and

SkyWest

(SKYW) - Get Report

reaped some very healthy returns. Until last year, the regional sector posted some of the highest returns for the industry as a whole, thanks to the smaller airlines' terrific growth rates.

But suddenly the outlook, the performance and the composition of the sector have changed dramatically.

First, the number of investment choices is dwindling.

Three of the more popular regional airlines were bought out by larger airlines last year.

Reno Air

was bought by

AMR

(AMR)

, holding company of

American Airlines

, while both Comair and Atlantic Southeast are now subsidiaries of

Delta Air Lines

(DAL) - Get Report

.

Atlantic Coast and SkyWest are still independent only because

United Air Lines

(UAL) - Get Report

, the major airline partner to both, has apparently made a conscious decision

not

to purchase either of them.

So of the traditional regional airlines, we have Atlantic Coast, SkyWest,

Mesa Airlines

(MESA) - Get Report

and

Great Lakes Aviation

left. That's it. And I think it is safe to wonder how long they will be independent.

(

Midwest Express

(MEH)

and

Midway Airlines

(MDWY)

are two smaller carriers not directly affiliated with larger airlines, that we do not, for investment purposes, classify as regionals. Both also just reported disappointing first-quarter results.)

The second big change for regional airlines is that they can no longer run bare-bones operations to artificially suppress expense growth and ratchet up earnings.

As a result, we see less of the volatile upswings that many of these hot companies once produced on a regular basis.

At Atlantic Southeast, for example, the formula for shareholder success was to spend as little money as possible on employees or operations.

The airline more or less followed the

ValuJet

approach to making Wall Street happy. We all know the drill. Growth is accelerated, major year-over-year increases in revenue are posted, expenses are kept artificially low, and the stock appreciates like a kite.

This formula worked for shareholders for years, until its major airline affiliate, Delta, was forced to take it over -- in self-defense. Atlantic Southeast's abysmal operational performance had become such a liability to the Delta system that the only way to improve the situation was to buy it and oust most of the management.

Delta's move highlights another important part of the changing investment landscape for the regional sector. The majors want their smaller affiliated airlines to provide a uniformly consistent level of service to their flow-through passengers. As a result, contracts between the major airlines and the smaller carriers now routinely carry "performance" bonuses tied to on-time flights, completion factors and other measures. Such inducements were unheard of just a few years ago.

The new performance incentives mean smaller affiliated carriers can no longer afford to scrimp on service and suffer high numbers of delayed flights or cancellations. They must spend more on operational and service areas.

The other damper on the regional airlines' sky-high returns is the "fly-for-hire" contracts many have with the big airlines. The pacts call for the smaller airlines to provide the lift for larger carriers at an agreed-upon rate or formula. The smaller airline carries x number of passengers, they get y number of bucks.

That's good for small carriers because it provides a stable and predictable income base. For shareholders however, consistent income streams mean no more sharp jumps in stock price.

As a result, growth rates should continue to be good for the regional airlines such as SkyWest, Mesa and Atlantic Coast. But they will not have the big revenue hops that we see at such "growth airlines" as

WestJet

(WJA: Toronto), which just reported earnings 98% ahead of the same quarter last year.

Meanwhile, SkyWest and Atlantic Coast, both longtime Wing Tips favorites, have had an excellent year-to-date performance this year. Mesa has also had a very nice year so far, and this stock should continue to do well. Through last Friday, SkyWest had picked up a 50% return for investors year-to-date, Mesa shares were up 37%, while Atlantic Coast gained 26%.

Holly Hegeman, based in Barrington, Rhode Island, pilots the Wing Tips column for TheStreet.com. At time of publication, Hegeman held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. You can usually find Hegeman, publisher of PlaneBusiness Banter, buzzing around her airline industry Web site at

www.planebusiness.com. While she cannot provide investment advice or recommendations, she welcomes your feedback at

hhegeman@planebusiness.com.