Regional airlines: the inside track

Think of air travel today and the image that comes to mind is a massive jet zooming across oceans and continents, taking executives from Montreal to Hong Kong, or tourists from Berlin to Jamaica.

But what about flying from Whitehorse to Vancouver? Or from Lubbock, Texas to Omaha, Nebraska?

This part of the industry is handled by “regional” airlines. And they are becoming very big business. “One in seven passengers is flying on a regional airline,” says Mara Lederman, an economist and assistant professor at the Rotman School of Management. “In 2000, the regionals carried 85 million passengers and made four million departures.”

Lederman and Silke Januszewski, an economist at the University of California, San Diego, are exploring the role of regional airlines and, in particular, the types of relationships they have with the major carriers.

Regional airlines service short-haul routes under “codeshare arrangements” with major carriers. Regionals operate flights under the majors’ brands and majors ticket these flights as their own. “For example,” Lederman explains, “Comair, a regional, operates flights for Delta Air Lines under the name ‘Delta Connection.’ Comair’s planes are painted to look like Delta’s and Comair’s schedule is coordinated with Delta’s. From a passenger’s perspective, these are Delta flights.”

What fascinated Lederman and Januszewski is that majors vary substantially in the types of relationships they have with their regionals. Some own all of their regionals, others own none, and some own a selection.

To understand this, the team developed a model of the costs and benefits of owning versus not owning. They tested it using data on U.S. majors’ use of regional airlines in the spring of 2000.

“The benefit of ownership is control. Majors want good service. If they own their regional, they have control over its operations. Otherwise, they must use a contract to give incentives for good service. That can be very difficult to do.”

So why don’t majors always own their regionals? Majors’ pilots and regionals’ pilots earn very different salaries, says Lederman. “If a major owns its regional, it has to deal with pay differentials, which can lead to labour unrest.”

Airlines weigh these costs and benefits. “There are various factors – from climate patterns to whether the flight arrives at a hub airport – which affect the importance of having control over your regional. On routes where control is important, we find that majors tend to own their regionals.”