Regional Aviation is arm of aviation transport shuttling demanded traffic from smaller population catchment of an airline-operating structure to another, or feeding traffic to major cities of high-traffic density and economic-scale (Nancarrow, 2015). Regional Aviation (RAAA’s AOC) members in 2011, directly employed 5,000 people, with turnover $1B in revenues, carriage of over 2 million passengers, and 23,000 tonnes of freight (Regional Aviation Association of Australia — Productivity Commission 2011, 2011). Today, it plays a pivotal role into providing accessibility and services to the geographically, economically and politically isolated regions. Regional aviation in Australia has numerous operating structures, operators and catchments, and entails common issues of macroeconomic/risk issues, hardware and manpower driven constraints, competitive environments and impacts, airports, government-policy/regulations and business-structure constraints. In context to Dug Nancarrow’s presentation on regional aviation, its players, landscapes and trends, opinions with multiple facilitated perspectives about issues in regional aviation will be discussed in conjunction to the niche arm of the aviation industry, with objective to provide sustainable, efficient and utilized facilitation for regional aviation oriented businesses, served catchments, government and regulatory-bodies (IATA, 2015).
As per Dug Nancarrow’s presentation, Regional Australian aviation (airline-centric) is an interesting segment of the industry, going through buyout-consolidation and bankruptcies resulting with only 12 independent regional AOC operators. Some major regional Australian carriers are QantasLink (multi-hub network; subsidiary-intermingle), Virgin Australia Regional (multi-hub, bought out SkyWest, 50/50 RPT/Charter, subsidiary/partner-intermingle), REX (Hazelton/Kendell/AirLink/Pel-Air inclusive multi-hub), AirNorth (DRW, QF alliance), Skippers Aviation (PER; FIFO-orientation), Alliance Airlines (BNE/ADL/CNS/MEB/PER/TSV; FIFO, QF-alliance), Cobham (wet-lease from QF, defence contract based), Maroomba (PER), Sharp Aviation (HLT), Airlines of Tasmania (HBR; RPT/tourism-charter), Hardy Aviation (DRW), Hinterland (CNS), King Island Airlines (KNS), Skytrans (CNS) and West Wing (TSV). From these, FIFO operations were discussed; its originated demands and fluctuation, operating structure, timings and infrastructure consumption (Nancarrow, 2015).
With that said, the first issue is demand turbulence and macroeconomic influence in regional aviation businesses. Australia is presented as a low-scale large geography, with much population centralized around the major cities and the east coast regions. These are ingredients which fed a post-liberalization history of fragmented start-up operations (high AOC-volume) with focus around niches, geographies and industry-betas (such as mining, service sector, RPT, tourism/business charters, leisure/seasonal ops) (Raaa.com.au, 2015). With the case study of FIFO ops (Nancarrow, 2015), demand turbulence and macroeconomic influence fed the period of sunken demand in FIFO operations. With contributors being high-AUD, loss in foreign mining contracts, the Global Financial Crisis, and high fuel costs, FIFO airlines (Hoyle, 2015) have declared bankruptcy/AOC-surrender, fallen under acquisition, and mergers in feedback. This highlights the need for regional aviation to consolidate and reform to produce economics of scale, volume and diversification of operating-profiles in portfolios. Alongside fragmentation of the industry and market behaviours, issues of competitive-behaviours of “big-bad wolf” airlines injecting disproportionate capacity and lower CASK at successful regional operations (with smallest aircraft of QF-link and VA-Regional being double the capacity of REX’s SAAB340), forcing pure-regional airlines into a market/demand and product/revenue wedge. This is seen in the case of QantasLink’s announced ADL-WYA route, where the airline dropped into REX’s monopoly at Whyanalla , snapping 35% ASK share on the route overnight (Australianaviation.com.au, 2014). Despite overall agreement in methodology, barriers of entry to business-efficiencies of virtual-network growth/scale produced by competition surpass applicable-methods of carrier-carrier relationship such as interline, free-sale, codeshares and anti-trust immunity. Implementation of the stated could facilitate high-value traffic flow, and demand-oriented inventory management for profitable operations (Codeshare and Alliance Revenue Management, 2013). This could mean that FIFO operations can be feasible with inventory flexibility, overheads management and scale-driven bargaining power with another carrier which may have another focus such as an RPT with feed requirements (and vice versa, with FIFO-traffic streamlined online onto affiliate’s network, and supply/outreach to low-demand catchments). This will unlock many opportunities for all airline- parties and developing businesses and catchments, without damaging the diversity of product offerings specific to locality-demands/loyalty. The above suggested must although, be well managed under a unionised and regulated country like Australia, with culture-incompatibility and sensitive inventory-allocation issues arising previously in Europe. This arised with smaller regional feeder airlines and their relationship with larger European airlines and alliance partners (Airline Business Model – Feeder Airlines and partnerships (EUROPEAN COMMISSION), 2008), and can have varying level of legitimacy in context of independent conditions of AOC-carriers under the RAAA.
With discussion of replacement aircraft for progress in the regional Australian aviation industry, another issue is MRO, replacement aircraft, depreciation and crew resources. Niche operating structures with small fleets of smaller aircraft to regional destinations are often stuck in operational-undertows and underlying high-costs. And with an aging fleet and uncontrolled staff-turnover, this brews inherent inefficiencies which must be managed. While regional airlines looked at independent shops for limited maintenance, and 3rd-party contracting (manufacturer/sale contract-dependency and distant shuttles for line heavy checks and works), REX Regional and Hawker Pacific consolidated their works into their own hands and diversifying their portfolios with independent CASA pt42 approved facilities at ADL and MCY respectively (Aviationbusiness.com.au, 2015). This also presents REX with 3rd-party tender-competitive capability, while also having overhead-savings, and punctual results with minimization of mechanical-related delays/cancellations (REX Regional Investor Relations 2014, 2015). While MRO management of fleet is crucial, with many opportunities for regional RPT operators to utilize (Shay, 2015), an underlying issue REX face (being the major multi-hub independent regional O/D-sourced airline) is its ageing fleet (which is representative of many operators in Regional Australia Today). With an average fleet age beyond 20 years old (Planespotters.net, 2015), REX Regional is faced with a dilemma of the lack of aircraft available in the 30-seat category with adequate economics (ERJ135 heavier with jet-powerplants, hence more expensive to operate). While unavailable, REX may deem it appropriate to business, citing new aircraft in association to high depreciation costs as suggested by lease-rate drops and sale-rates (REX- Regional Success, 2015). Another issue which also coincides with regional aviation issues is high turnover of staff and low-loyalty, with manpower utilizing the REX (or any regional airline) to “fill in the hours at a pay” or “gain experience” (in aspiration to work for a larger carrier or business) (REX investor Relations 2014, 2015) (Winged Wayfarer, 2015) which may result in low job-satisfaction, disproportionate turnover rates to industry, and high sunk-manpower costs with low productivity (ABC News, 2005). While most conditions are inherent with little to no foreseeable or logical solution due to size; management and working on balances of the business is crucial in order to retain cost control and effectiveness of capital and expenditures to reduce risks and combat with larger lower-CASK operating aircraft of network-competitors of scale, or loyal markets of other pure-regional airlines (with efficiencies mandated). In the case of REX, being deemed well managed due to backgrounds and management capability of board members, growth management and volume/operational economies of scale (REX investor Relations 2014, 2015), many of their regimes in management of tangible-environmental, divisible cultures and retainment of manpower and hardware, all deem to be extremely effective and well-recognized.
And finally, the other large issue highlighted in Nancarrow’s presentation is government/policy/regulation-oriented impacts onto regional airlines, especially in context of airport infrastructure, liberalization and revenues. With historical protectionism and standardization to all RPT regulations (including fixed fares/frequency and subsidies along with pricing power for charters), aviation in the bush has come under exposure of today’s policy-makers, pushing asset-privatization, tax increases and budget cuts, forcing regional airlines (and even airports) to consolidate as mentioned above (The Australian, 2015). While welcoming news of Federal grants to regional airport are observed, analysts still witness an overall cost-impact to airlines beyond landing/terminal fees. This includes a future alteration in AirServices enroute charges/payment schemes, and cuts to the Remote Air Service Subsidy (Infrastructure.gov.au, 2015) (Australianaviation.com.au, 2015), both major elements of an airline’s operating costs. Comparisons of current AirServices charges (effective 2015) to proposed charges in 2020 entails an 8.8% increase in chargeable distance enroute (MTOW<20T), and substantial increases in terminal navigation and ARFF charges thanks to monopolistic positioning, and mounting demand from foreign airlines to cost-proportionate navigation/airside/ARFF fees. This is turn, leaves regional carriers to pay more for low-demand infrastructure, and can leave substantial increases in costs for the airline (Airservices Australia March 2015 pricing update, 2015) (Airservices Pricing Proposal 2016-2021, 2015). Alongside this, subsidies/rebate revenue impacts have reduced cash-flow in regional carriers, with members of the RAAA calling for increased subsidies citing slashes of 83% in federal-subsidies since the Howard government (O’Sullivan, 2014). This led to regional airlines, such as REX, defocusing its operations and diversifying its portfolio to areas of favourable revenue-tailwinds, with QLD state subsidies of RPT services (and WA to a lesser extent but feasible business cases) (Freed, 2015). This leaves local councils in subsidy-headwinds, forcing local councils to make tough decisions or lose out, whether it be lease/tender opportunity-costs to retain REX services at WGA (MEDIA RELEASE; REX, DOUGLAS AEROSPACE AND WAGGA WAGGA CITY COUNCIL, 2015), or Broken Hill airport cutting revenue streams of passenger and terminal handling for REX to retain services (4-traders.com, 2015). While it’s optimal for regional airlines to look beyond its hub and diversify/alter its operations to favourable conditions, better management on behalf of governments (namely Federal and NSW) is required. The Federal government cannot bank on paper-deregulation and spending on airport environments alone as a source of bringing and catalysing traffic growth, especially while making aviation in the bush tougher actually detering it. For NSW, favouritism to Sydney and lack of decentralization and facilitation of growth, accessibility and tourism in regional NSW (and same case applies for many other states) is a disregard of 30% of NSW’s GDP and much diversity in GDP-sources (greater in other states) (Economic Development Strategy for Regional NSW – NSW Trade & Investment, 2015). Federal and State governments lead, and local councils follow, hence requiring a top-down focus on regulations/policy.
With issues of demand fluctuation and macroeconomic influence, replacement-aircraft and MROs, government influence (liberalization and infrastructure), competition, regional airlines have had to consolidate and diversify portfolios, increase bargaining power and scale, and take socially-suboptimal choices to stay afloat, driving the bottom line for regional airlines is higher cost base, unfavourable passenger volumes, and lower yields, resulting in thinner margins and a trajectory to losses and further-consolidation, impacting the regional aviation industry and accessibility to the bush (REX Regional Investor Relations 2015, 2015). With solutions also stated, the recovery of regional aviation and its unique attributes requires collaborative understanding beyond airlines (and what they require to stay afloat) and to the extent of governments, to ensure sustainable, efficient and utilized facilitation for regional aviation oriented businesses, served catchments, government and regulatory-bodies (IATA, 2015).
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