Delta's regional carrier partnerships shows signs of stress

Delta Air Lines depends heavily on its partnerships with regional carriers to operate Delta Connection flights all over the country, but it has fractured some of those relationships as it cuts back its flights on smaller planes.

A recent court ruling shows some of the conflicts between Atlanta-based Delta and one of its regional carriers, Mesa Air Group's Freedom Airlines. The ruling was in favor of Delta, allowing it to terminate a Freedom contract to fly 22 50-seat ERJ-145 regional jets for Delta Connection flights.

Delta is in the process of drawing down Freedom's flying and expects Freedom will no longer operate flights for Delta Connection by the end of August, said spokesman Trebor Banstetter. Phoenix-based Mesa is restructuring under Chapter 11 bankruptcy.

What led to the lawsuit were flight cancellations by Freedom in 2007 and 2008. When Freedom failed to meet contractual requirements to keep flight cancellations to a minimum, Delta moved to cancel the contract and terminate the flying by Freedom.

Freedom's challenges were exacerbated by operational problems at New York's John F. Kennedy International Airport. Mesa chief executive Jonathan Ornstein said in a written statement that Freedom "sought to act as a good partner and work with Delta as a member of Delta Connection."

"Unfortunately, Freedom's willingness to proactively cancel flights in JFK at Delta's request for the benefit of Delta was held against Freedom and was used as the sole basis to terminate our contract," he said.

The judge's decision said Delta had the right to cancel the contract with Freedom, reversing a previous ruling and injunction. But it reveals the challenges for regional airlines to comply with contractual operational standards, when Delta itself asks them to cancel flights in advance of a storm so it can reschedule passengers.

The suit unveiled other problems, including over-billing by Freedom and invoice controls at Delta that was "very sloppy at best." Delta did not discover the full extent of the over-billing until months later, and managers acknowledged that various groups at Delta were "not communicating well."

As Delta and other airlines cut back on flying with small regional jets and try to improve their margins on the contracts to cut their own losses, they are enforcing contract terms more strictly. The Freedom contract involved 50-seat regional jets, which are less economically viable when fuel costs are high.

For carriers like Delta, "all this affects their bottom line so they've got to clamp down on everything," said Allan Tamm, senior consultant at consulting firm Avicor Aviation. Freedom was "in a really bad situation."

Delta "used the opportunity to get out of a contract to dump aircraft they no longer needed," said Vaughn Cordle, managing partner of AirlineForecasts LLC.

"By putting the squeeze on the partners, they squeeze out more profits," Cordle said. It was an "action against a partner that no longer became a partner when times got tough."

The ruling on Mesa and Freedom  v. Delta could affect future contract terms between regional carriers and major airlines.

Regional airlines "used to operate as partners. Now, they're nothing more than contractors," Cordle said. Going forward, "No commuter in their right mind would sign a contract with contingencies like that."