More Rj's A Good Thing?

[BoeingBoy]

If someone already posted this and I missed it, I apologize....

From the Boyd Group:

More Indications of Declining RJ Demand

The slide in "regional" jet demand is continuing. Last week, Chautauqua Airlines shifted its Embraer order, reducing the number of 50-seaters from 16 to 9, and upping its order for the manufacturer's 70-seat E-Jets. Separately, it's been reported that Air Canada has quietly slashed its order for Canadair RJs, while leaving its Embreaer E-Jet order essentially intact.

Our newly-updated fleet forecast indicates that by the end of this decade, many 50-seat jets (and possibly the stretched versions of the Canadair RJ) will be seeing early retirement to the sunny climes of the Arizona desert. Factors: increasing fuel costs, ATC restrictions, higher labor, and increasing consumer resistance. RJs will be a part of the airline mix for years to come, but in a declining role. And when these babies come off lease, they may well have an after-market value similar to that of a litter of kittens.

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Also pointing to the decline in the role of RJs is the fact that the economics of the airline business don't bode well for small units of capacity.

The airline industry may be glamorous, but its historical economics are strictly in the shallow end of the pool. While costs have gone up over the past 25 years (labor, fuel, airport fees, etc.) the amount of money earned per mile has consistently gone down.



According to data from ATA, fares in real terms adjusted for inflation have dropped a cool 50% since 1978. Even in nominal terms, not adjusted for inflation, fares have essentially gone nowhere. In fact, in nominal terms, the US airline industry was getting a higher average yield in 1988 than in 2003.

The trend: small units of capacity have higher ASM costs. Declining yields - which will probably accelerate with the expansion of LCCs - will squeeze the range of mission applications for RJs. Not good news for smaller communities, at least in the long run.

 

[Prince of PAWOBs]

Separately, it's been reported that Air Canada has quietly slashed its order for Canadair RJs, while leaving its Embreaer E-Jet order essentially intact.

Isn't it ironic that a Canadian company would forsake another Canadian company's product in favor of a Brazilian product? Haven't the Canadians learned anything from the US about what happens when you spend money abroad that you could keep in your economy?

Actually, maybe they did.

 

[mweiss]

This shouldn't be a surprise. The only thing that could have made RJs cost-effective at all is the lower labor cost. The increase in frequency that can come out of using RJs also increases yield...some.

But with the concession rounds at mainline, RJs are not much of a good deal anymore.

 

[ITRADE]

Actually, the irony here is that US is on the cutting edge of the 70 seat market - something that everybody is turning to.

Clearly, folks are finding that the Embraer product is more appealing than the 70 seat CRJ - although if you can't get the ERJs fast enough, get the CRJs.

Chalk one up to US on this point.

 

[BoeingBoy]

mweiss,

"The only thing that could have made RJs cost-effective at all is the lower labor cost."

Not necessarily true - look at the airlines that report either consolidated and mainline CASM or mainline and regional CASM. Even for DAL (with their high pilot pay), overall CASM is higher than mainline. This leads one to believe that even with the lower labor cost, the CASM of the RJ's is higher than mainline.

Even Mesa (one of the lowest paid) has a higher CASM than DAL mainline.

Looking at some of the cost factors, RJ acquisition cost is about the same per seat as a mainline plane, labor cost per seat may be lower, fuel cost per seat is higher, and because of the range limitations (no transcons, European, etc) the utilization is lower. The result is higher CASM.

Jim

 

[BoeingBoy]

ITRADE,

I agree that U is "leading", especially with the -170 (assuming the teething problems are just that). What I would argue is that the -170's (and the CRJ-701's) should at least partially be replacements for the smaller RJ's.

While the 70-seaters have higher seat-mile costs than mainline jets, they have lower seat-mile costs than smaller RJ's. Getting rid of some of the smaller RJ's (all eventually) would lower our system CASM, although it wouldn't affect mainline CASM.

Jim

 

[mweiss]

This leads one to believe that even with the lower labor cost, the CASM of the RJ's is higher than mainline.

Agreed on all counts, but without the cheaper labor costs they never would have been even considered. If I gave the impression that I thought RJ CASM was the same or lower than mainline CASM, I apologize; that was not my intent.

 

[BoeingBoy]

Hey, I probably had a "senior moment" and read something in that wasn't there.....

Interestingly, most of the "majors" flew planes in the coming "E-jet" size not too long ago (100 seat). AMR still has the F100, NWA still has the DC-9. We had the F-28 and F-100.

If you look at the pay scale for MAA (not the first year pay the captains are getting now), the rate for the -170 is not that much lower than the last pay rate for the F-28.

Jim

 

[funguy2]

If UAIR were using the E170's to develop new service, or upgrade service to small towns, like Binghamton and Wilmington, or even "right-sizing" PIT, then I might call the move "leading edge". However, UAIR is not, they are replacing mainline service like PHL-IAH with a 70-seat RJ instead of a 50-seat RJ... Not particularly inventive...

AMR, on the other hand, is using their CRJ-700's to open routes like DFW-BOI, and Fayetteville, AR - LAX.

 

[Furloughedagain]

By the way... XNA -- Northwest Arkansas Regional (Fayetteville) is one of the fastest growing small markets in the nation.

With Wal-Mart's corporate headquarters in town -- and Wal-Mart's corporate requirement that every product sold in its stores must have a representative in XNA 24/7 -- the market was virtually untapped until a few years ago.

Today XNA has literally dozens of flights a day on almost every airline including the nonstops to LAX on AA, who also flies F100s and MD88s in there.

Just a little back-story on, what I find to be, a very interesting airport.

 

[mweiss]

There are a couple of interesting exercises that could be done in this area.

Perhaps RJs would work well in offering point to point service in markets that otherwise are too small to support nonstop service. What would be worth examining is the additional costs incurred in a connection, relative to the increase in CASM associated with a shift from, say, 737 to RJ.

Costs associated with connections:

• Increased mileage. This is less of an issue when, say, connecting in DFW between LAX and MCO, than connecting in PIT between ISP and DCA. However, any increase in miles increases the ASMs required to fulfill an order. It'd be interesting to see how many "wasted" ASMs exist in the industry today.
• Stopover costs. An extra landing and takeoff costs money in descent and ascent, arrival and departure patterns, landing fees, gate fees, gate agent and ramper costs, etc., etc.
• Increased maintenance. I have no idea how much this is, but there are maintenance processes that are cycle-based, so an increase in cycles causes an increase in maintenance costs.

Costs associated with more nonstops on smaller aircraft:

• Increased CASM
• Increase in ground crew costs associated with more departures from and arrivals to outstations. This one is more subtle, but if you only have a handful of mainline departures for hubs, you'd need more departures to fly nonstop.

So which costs more? I'd love to know the answers to that question. It probably differs from market to market.

 

[BoeingBoy]

mweiss,

You've touched on the point...

The RJ niche is supposed to be:
1) opening long thin markets to nonstop service and
2) adding frequency in off-peak times and
3) service to cities that do not have the traffic to support mainline-sized planes.

What we are seeing (at least partially) is the replacement of mainline by RJ's to free up the mainline airplanes for service elsewhere. Like PHL-ATL where we compete with Delta & Airtran mainline with RJ's.

Jim

 

[Rico]

If UAIR were using the E170's to develop new service, or upgrade service to small towns, like Binghamton and Wilmington, or even "right-sizing" PIT, then I might call the move "leading edge". However, UAIR is not, they are replacing mainline service like PHL-IAH with a 70-seat RJ instead of a 50-seat RJ... Not particularly inventive...

AMR, on the other hand, is using their CRJ-700's to open routes like DFW-BOI, and Fayetteville, AR - LAX.

Actualy you are wrojng, MDA will be starting a few new routes in the near future that will develop market share in focus cites and hubs. The long range plans include many new city pairs designed to work into the point to point flying. Expect a lot of long distance legs into the future as well in which we can bypass LCC competition, or go after AAL/DAL/CAL/NWA on long routes (2hrs+) in which our competition expects passengers to just suffer through sitting on a ERJ or CRJ for that amount of time.

Remember that right now, there are still only about a dozen Planes on the property, so the options of what you can do so far are limited. The company is still trying to see what the best use of the Aircraft is to maximize revenue as well, so you will see routes shift around

Most of the "replacement" has been either on softer frequencies for the 737 or RJ routes where they are turning business away, The EMB-170 fills in between these two areas well. Many others were using a 737 or 319 because of the range factor, more or less wasting a larger jet that could be used better elsewhere.

Like I have said before, the EMB-170 is what US has needed for sometime, and it is a HUGE advantage for us to have them right now.

 

[funguy2]

Rico... I am not an insider, so I do not know the long-term plan... All I know is what I see the company do... If thats the long-term plan... great... let's see it. AMR only ordered 20 or 25 CRJ-700's, and yet they seem to be able to use them effectively... The fact that there are only a few on the property sounds like an excuse. Fill in frequency, meet demand between CRJ-200 and 737... its all good... but I guess those markets were deemed expendable when the F100's were retired.

As I said, I dont see UAIR doing much here... hopefully the future holds something worth paying attention to. Somehow, I don't think it does, given UAIR's years of vision-less management.

 

[Rico]

Well, I am no "insider," moreso than I have seen a few "planned" routes that I am clueless if they have been announced or not, so I will wait until I know they are common knowledge, But they all seemed like real smart choices to me. US has been waiting for sometime for an aircraft like this, so they have many options to try out.

As for the AAL had a head start for sometime on restructuring their flight system, and have had a more workable hub structure over US. So they have a little more freedon to develop new routes. But at this point, it is time for US to turn on them, and poach their market share for a change.

But, even I know that priorities must be set. Defending PHL is one of them, placing the right sized aircraft on the right route is another huge issue for US, and leading the transformation towards a point to point structure all provide the 170 with a lot of necessary missions besides new routes. The best thing would be a balance, in which each demand was balalanced with the other.

MDA will be up to 21 aircraft by Septemeber, with each new aircraft comes new strength to US. MDA is growing as fast as possiblle, greatily improving our reliability and performance, Watch our numbers inthe future and you will be impressed with what has been accomplished.

We finally have a competitive advantage, we need to make the most of that advantage as soon as, and as much as possible.

Thanks