Regional Airlines Face Vexing Problems -- Does Delta Connection Have Answers?

The Regional Airline Association opens its annual convention Monday with the industry facing an economic crisis reflected in a pilot shortage, but also entering a period of rejuvenation enabled by new airplanes and, perhaps, better operating performance.

The convention takes place in Charlotte, the second biggest hub for American (AAL) - Get Report , and also a hub that symbolizes the industry's dependence on regional partners.

American, the world's largest airline, has 10 regional partners, including three that it owns and that are known in airline-speak as "wholly owneds." At Charlotte Douglas International Airport, 370, or 56% of American's 650 daily departures, are operated by regionals.

Like most trade conventions, this will be one where vendors hawk products -- among them are the new ATR 72-600 turboprop aircraft, which will fly demonstration flights during the convention -- and where leaders discuss key industry issues. A panel discussion titled "Growing Tomorrow's Pilot Workforce" is scheduled for Wednesday.

Eric Snell, vice president of Delta (DAL) - Get Report Connection, which contracts with six regional airlines including wholly-owned Endeavor, told reporters recently that "pilot hiring" is the biggest problem regionals face, although he noted that a "a couple of carriers are hiring and now [offer] better contracts."

Snell also detailed Delta's efforts to upgrade its regional partners' operational performance. Operational performance has historically been a problem area for the regionals, although it has been improving -- in 2015, Skywest finished sixth among the 13 carriers ranked by the U.S. Transportation Department for on-time performance. ExpressJet was ninth and Envoy was 11th. Delta ranked third.

Snell said Delta's plan is "to take the Delta blueprint and embed it in each regional partner," while Delta CEO Ed Bastian spoke of "brand perfect" days, when not only Delta mainline but also Delta Connection complete every scheduled flight.

As of Thursday, Delta had completed 70 days with no mainline cancellations, 22 days with no Delta Connection cancellations and 18 "brand perfect" days. Meanwhile, Endeavor was on a 63-day streak of operating without a single cancellation.

Also, last month Delta became the first mainline carrier to agree to provide financing for regional carrier Republic Airways, which filed for bankruptcy protection in February, after Delta filed suit contending that Republic did not operate scheduled Delta Connection flights.

"They're a good partner for us, one of the more reliable partners," Snell said. "There's a need for good operators like them."  Delta agreed to settle the suit.

Aviation consultant Bob Mann said the pilot shortage may be the most obvious issue confronting the regional industry, but an underlying issue is that the industry has only three buyers for its services. 

"What happens to the now numerous regional carriers when they only have three buyers?" Mann asked. "Does that force consolidation?"

Delta Connection "does the best job of any of them, holding [regional partners] to task and to cost, but Delta still doesn't control it," he said. "So that may not be the best model.

 "Once everybody says you need an on-time, high-completion model with service like the mainline," it could begin to seem to the three global carriers that the wholly owned model is the most efficient, he said. "If Delta is serious about brand, the nearly half of domestic departures that are Delta Connection have to be indistinguishable from mainline in performance."

At the same time, Mann said, "When you are one of three buyers, it's nice to have 10 sellers. You can whipsaw them. That drives the lowest cost solution, which is also the lowest quality solution."

Labor leaders have decried the regionals' rush to the bottom.

Last month, Danny Persuit, then president of Transport Workers Union Local 549, which represents about 800 dispatchers including 400 at regional carriers, talked with TheStreet about the difficult negotiations with Air Wisconsin.

"I feel for Air Wisconsin," Persuit said. "Like all the regionals, they are caught in the middle in a race to the bottom. They are under pressure because they want to continue to fly. To do that, they have to be even with or cheaper than the wholly owneds."

In March, Tim Canoll, president of the Air Line Pilots Association, told TheStreet: "The regional airlines are caught in the middle. Their customers are mainline airlines who buy seats, and the mainlines will only pay so much."

But Canoll said that American wholly owned Envoy Air has addressed the pilot shortage problem by providing "the goal standard, the envy of many of our other fee-for-departure carriers" because the pilot contract provides a path to flying mainline flights at American.

One other problem RAA faces is that after it scheduled a Charlotte convention, North Carolina legislators passed House Bill 2, which restricts the rights of LGBT people. The legislature reacted to Charlotte's extension of its anti-discrimination ordinance to include bathroom access.

In response to the legislature's action, at least 20 conventions and events and dropped plans for gatherings in North Carolina. But RAA remained and RAA President Faye Malarkey Black took Charlotte's side in the dispute.

"The RAA believes no individual should be discriminated against because of gender identity or sexual orientation," Black said in a prepared statement. "We have been closely engaged with the Charlotte Regional Visitors Authority (CRVA) and the city of Charlotte, who have been good partners throughout the planning process of our convention, to learn about steps they have taken to ensure the city's visitors face no discrimination while participating in trade shows and conventions like ours."

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.