Despite airline troubles, region carriers profitible and expanding

PHOENIX — At a time when the nation's major airlines are being buffeted by skyrocketing fuel costs, heavy competition and bankruptcies, some regional carriers are posting growing profits and looking to expand.

Phoenix-based Mesa Air Group Inc. is one of the high-fliers. It plans to go to Hawaii early next year, adding planes for an interisland service that will compete with Hawaiian and Aloha Airlines. Also turning in impressive growth and profit numbers are Republic Airways Holdings and SkyWest Inc.

The regional airline sector is growing and profitable thanks to contracts with the major airlines — which guarantee minimum amounts of revenue and pay some costs — and because larger airlines are turning over smaller routes to concentrate on those with heavier traffic.

But it is the airline industry, so there are companies in serious trouble and the business remains risky — also because it is so dependent on the larger airlines.

Regional carriers usually fly between smaller destinations and major hubs under large airlines' names, logos and ticketing. The large airlines guarantee revenue to the regional carriers, which don't have the expensive union contracts and pension obligations of the major airlines.

"We have a good business model because to a degree we are like the fuelers or like Boeing (Co.)," said Mesa CEO Jonathan Ornstein. "They need our product and we're cost effective."

The regional airlines have deals with the major airlines which pay their fuel, landing and insurance costs, said Ray Neidl, an analyst with Calyon Securities. That pass-through cost structure buffers them from a lot of the costs that weigh down the larger airlines.

"They're cash-flow machines, which is unusual in the airline industry," Neidl said of the regional carriers.

A few regionals are struggling or have gone into bankruptcy, following the path of their big airline partners, but others, including Mesa, Indiana-based Republic and Utah-based SkyWest, have enjoyed growing profits and significant stock gains.

Mesa doubled its profit in the fiscal year that ended Sept. 30 to $56.9 million. SkyWest grew its third-quarter profits 41 percent to $56.9 million over last year's and Republic's third-quarter earnings were up 63 percent to $14 million.