American's PSA Airlines Figures Out How to Grow in a Brutal Business
PSA President Dion Flannery

In just 20 months, PSA Airlines has grown to 107 aircraft from 49, making it the country's fastest growing regional airline, which is perhaps a mixed blessing.

The regional industry, which gathered in Charlotte this week for the annual meeting of the Regional Airline Association, is troubled by a pilot shortage, which could get worse, and by the structural problems associated with an industry of about two dozen companies that compete for the privilege of selling nearly all of their capacity to three disciplined, demanding, cost-sensitive buyers -- American (AAL) , Delta and United.

Of course, PSA benefits from being a wholly owned division of American Airlines Group. That means the Dayton, Ohio-based carrier can promise its pilots the opportunity to flow through to American, and it means that PSA has a measure of financial support from its parent.

But it doesn't mean that American just hands over the flying. "We compete for flying," said PSA President Dion Flannery, in an interview at the Regional Airlines Association convention in Charlotte. "American can buy {regional capacity} in the free market when the competition can provide it for less. So we have to compete.

"This is a carrier that did what it needed to do for a decade" to get to where it is, said Flannery, who was named PSA president in August 2014 after serving as president of US Airways Express.

In particular, about a year after the December 2013 merger between American and US Airways, PSA signed a pilot contract that included a flow-through provision that enables about 60 pilots to move to American each year. That number can increase to 100 if PSA continues to increase its pilot workforce, which now stands at about 1,200. Top pay for veteran pilots is about $108,000 annually.

A contract, signed in September 2013, was tied to an order for 30 new 76-seat Bombardier CRJ-900s. On top of those, American transferred 47 CRJ-700s that had been committed to Envoy. Today, PSA has 35 CRJ-200s, 26 CRJ-700s, and 46 CRJ-900s. Having a single, familiar manufacturer for its fleet helps PSA get flying from American. "We're the trusted provider in the family," Flannery said.

Finding pilots remains a challenge, even with the flow-through. The pilot shortage was among the most common topics of conversation at the convention. "Everybody's feeling it," said Flannery, who noted that with many of today's pilots approaching mandatory retirement at age 65, "we're at the beginning of the pilot shortage -- it's a tough one to solve, a structural issue."

Flannery said the shortage is not just a matter of pay -- even carriers that start pilots at $40 an hour face shortages. PSA's starting pay is $25 an hour, but the carrier also pays a $15,000 bonus to new pilots. It gets about 150 to 200 applications a month, and hired 450 pilots last year. Like some other regional carriers, "we spend a lot of time on campuses" pursuing students who are studying to be pilots, and sometimes offering tuition reimbursements, Flannery said.

In Charlotte, PSA provides one of the world's largest regional airline operations. Flannery said PSA has positioned nearly all of its recently added airplanes in Charlotte.

Of American's 654 daily departures from Charlotte, PSA flies 260 of them. American's Charlotte hub is the third-biggest single airline hub in the world after Delta's Atlanta hub and American's Dallas hub. That makes PSA's Charlotte operation one of the world's largest regional airline operations.

Which means that this year, the RAA picked the right spot for its convention.

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

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