Future of air travel: regional service, but on smaller jets

In the current industry shakeout, mid-size cities are the winners. Small markets, though, are losing service.

Bits of glue that once secured the Midway sign to the wall behind the ticket counter are all that's left of the low-cost carrier's presence at the Buffalo airport.

Without notice or ceremony, the sign was removed he night before Midway declared bankruptcy and pulled out of nine cities last week, becoming the first airline casualty of this year's economic downturn.

Midway's primary problem, a sudden and dramatic plummet in business travel, is plaguing all airlines. But most are weathering it better. They're restructuring routes, using smaller planes, and pitching specials to attract passengers.

Still, an economic shakeout now under way is producing some unusual winners and losers, as well as a glimpse of what air travel may be like in the future: more people flying on smaller jet planes.

Ironically, mid-size cities like Buffalo and Rochester, N.Y., long dogged by high prices and limited service, are on the winner's list even with the loss of Midway. The reason: The introduction over the past five years of small regional jets, known as RJs, has given airlines more flexibility and incentive to fly into medium-size cities.

"The airlines are still in an expansion mode in their use of small and regional jets, and carriers like Southwest and JetBlue are regularly adding new cities," says Doug Abbey of AvStat Associates, an airline consulting firm in Washington. "So while travel is down somewhat in terms of absolute numbers, airlines are still filling up a very large percentage of their seats."

But there are losers in this tighter economic marketplace: rural communities and small cities from Topeka, Kan., to Alamogordo, N.M., where airline service is disappearing, in part, because they can't support service from even a regional jet.

"It's really a disaster out there," says Jonathan Ornstein, CEO of Mesa Airlines and head of the Regional Airline Partnership based in Phoenix, an airline advocacy group. "People do not at all appreciate what's coming down the pike here."

Several factors combined to bring about the crisis for small communities, which traditionally have been served by 19-seat turbo props, once known as the workhorses of the regional airline business. First, was the Federal Aviation Administration's well-intentioned move to improve safety.

In 1997, it decreed that small commuter airlines had to adhere to all the safety regulations that the major airlines do. That meant the same paperwork is required to fly a 19-seat turbo prop from Albuquerque to Alamogordo as it takes to fly a Boeing 747 from New York to Chicago.

"Our costs have increased 70 percent since them," says Mr. Ornstein. He says half of that increase is due to the increased federal regulations. As a result, Mesa has had to dramatically cut service to small communities, as well as raise prices.

The federal government has also been cutting back on the Essential Air Service program. It provides subsidies to rural communities to help entice carriers to serve them. "A total of 67 cities have been cut or have been notified they'll be cut by Oct. 1," says Maurice Parker of Regional Aviation Partners. "More than 40 of them now have no air service at all."

Add to that the dramatic drop in business travel, which Ornstein calls "the bread and butter" of regional carriers, and he says that flying turbo props becomes a money-losing proposition.

Another fallout is that many regional carriers are abandoning turbo props in favor of RJs. Because RJs are bigger, typically 32 to 50 seats, it's less economical for carriers to fly to small cities like Hot Springs, Ark.

But they turn out to be a good deal for the Rochesters and Buffalos that have a steady-but-moderate flow of business travelers. While both of these cities lost Midway, they still have JetBlue, a well-financed low-cost carrier that is thriving.

The RJs have also helped major airlines adjust to the lean economy. Delta recently replaced its 140-seat 737 on the Boston-to-Washington shuttle with a 32-seat jet. That allowed it to keep frequent flights, while limiting losses.

Midway didn't have that flexibility. The company had also predicated its economic success on business travelers, who tend to pay significantly higher fares.

While business travelers make up 7 to 10 percent of all passengers, they account for about 40 percent of major airlines' revenues. When the downturn hit, many either stopped flying or got creative, changing the way they buy tickets.

"Many business travelers are far more Internet savvy than they used to be, and the availability of all of this data allows them to shop more efficiently," says Deborah McElroy, president of the Regional Airline Association in Washington. "In general, they're now paying lower fares, which adds to the decrease in revenues."

But profit pinch doesn't appear to have hurt business at the Buffalo airport, at least not yet. George Romanos, a barber there for 33 years, says his customers keep coming. "I am concerned about business here and in Buffalo if the economy continues to be bad," he says. "But business for me now, it's the same. I survive."