Analysis: Regional airlines consolidating to cut costs

ATLANTA (Reuters) - Regional airlines are consolidating to reduce overhead so they can offer lower rates to their larger airline partners, while major airlines are selling their feeder carriers to create a larger pool of smaller carriers with which to do business.

"It's a game of survival, not of growth," said Richard Aboulafia, an analyst with the Teal Group. "The good old days of having six majors, each with their own collection of supporting regionals, are gone."

Traditional or "legacy" carriers "have the critical mass to mandate very tough contractual terms," he said.

Much of U.S. regional air service is governed by capacity purchase agreements, which typically allow regional aircraft providers to be reimbursed for labor, fuel and other operating costs.

Feeders have agreements with larger airlines to provide flights for the larger airlines, generally to smaller markets.

This month, SkyWest Inc (SKYW.O) said it would buy ExpressJet Holdings Inc XJT.N in a deal expected to result in significant cost cuts. ExpressJet is the top regional carrier for Continental Airlines Inc CAL.N, which just got U.S. antitrust approval to merge with United parent UAL Corp UAUA.O and create the world's No. 1 carrier.

Delta Air Lines Inc (DAL.N), the current industry leader, sold regional carriers Mesaba and Compass in July and had shopped around Comair, its remaining wholly owned regional unit.

AMR Corp's AMR.N American Airlines has tried several times in the last decade to shed its regional affiliate American Eagle. Airline consultant Robert Mann said American Eagle is a high-cost operation with no clients other than its parent, which could make it a tough sell.

"Nobody would buy it without a huge commitment both in the sense of rates to be paid as well as duration of contract," Mann said.

Robert Herbst, an independent airline analyst and founder of AirlineFinancials.com, said Eagle could be sold or spun off within a year and may attract interest from Republic Airways Holdings (RJET.O), which operates a host of feeder carriers.

"There's a reasonable opportunity for Republic to look at American Eagle as an acquisition," Herbst said. "That would solidify Republic as a nationwide and largest regional carrier."

ECONOMICS STRATEGY

At the same time that large U.S. carriers are consolidating and moving to improve the economics of their regional flying, feeder airlines are facing more competition from low-cost airlines such as AirTran Airways AAI.N, Southwest Airlines (LUV.N) and JetBlue Airways (JBLU.O).

"In the end, the regional that has the lowest cost structure is going to win the bids from the majors," said Michael Derchin, an airline analyst with CRT Capital Group.

Many analysts said Republic has the best business model for a regional carrier. The Indianapolis holding company has its own discount brand, Frontier, as well as feeder carriers operating under names such as Chautauqua Airlines and Republic that fly for more than one legacy carrier.

Republic has said that it supports industry consolidation.

"They've got so much flexibility," Herbst said. "Now that it has Frontier, Republic could grow to the point where it basically becomes a mainline operator and use its own feed ... for its mainline-type aircraft."

(Reporting by Karen Jacobs and Kyle Peterson in Chicago)