ANALYSIS: United E-175 order marks milestone in US refleeting

Washington DC
This story is sourced from Pro
See more Pro news »

United Airlines is the latest US mainline carrier to announce an aircraft order aimed at replacing 50-seat lift with larger jets, with its order for up to 70 Embraer 175s earlier this week.

With the deal United, along with American Airlines and Delta Air Lines (and their regional partners), have firm orders for 117 76-seat jets and options for an equal number. This puts the US regional airline industry refleeting at anywhere from a third to halfway along, based on assumptions that orders will range from 200 to 400 aircraft from Bombardier and Embraer.

"We've been saying that we estimated that some 300 to 400 aircraft over the next, let's say year and a half to two years of orders to be delivered over the next, may be three, four, five years," says Frederico Curado, president and chief executive of Embraer, during an earnings call on 30 April. "So, if those numbers are correct, so far we have probably about a third of those orders already committed."

Curado says that he anticipates that the next order will likely come from American regional subsidiary American Eagle Airlines.

Further orders aside, United's deal is a milestone in the fact that the three largest US mainline carriers have now formally signed up for regional refleeting. This is seen as positive for both the Chicago-based airline and the industry.

"With jet fuel prices going up they need to replace 50-seaters with 76- or 90-seaters, so there's no surprise that they placed the order," says Helane Becker, an airline analyst at Cowen Securities. "It's more efficient lift for United [and] that's what we're seeing in the industry."

Ron Baur, vice-president of fleet at United, says that the E-175s are 10% more fuel efficient per seat than 50-seat aircraft, in an employee newsletter on 29 April. The new jets will be used to replace the smaller aircraft at an undisclosed rate once deliveries begin in 2014.

The airline's order is split between 30 firm and 40 options with deliveries in 2014 and 2015.

Executives at United had previously said that an order for large regional aircraft was unlikely until 2014 as they focused on optimising their existing regional fleet this year. It had 34 regional aircraft with fewer than 50-seats, 350 with 50-seats and 174 with more than 60 seats at the end of the first quarter, according to its April fleet plan.

United regional fleet, 31 March

United Airlines

United's decision to carry the risk of the order on its balance sheet versus at a regional partner took some by surprise. Analysts say that legacy Continental Airlines, which merged with the airline in 2010 and whose executives make up the majority of the current management team, took a similar course when ordering 50-seat jets in the early 2000s, while legacy United preferred that their partners carry the risk.

Bryan Bedford, chief executive of regional carrier Republic Airways, says that he sees the order as a way for United to lock in E-175 delivery slots, during an earnings call on 30 April.

"It was a savvy move on United's part to lock down some E-jet deliveries," he says.

Bedford was not optimistic about Republic winning the contract to operate the aircraft. "Until we have greater clarity on our labour costs it will be very difficult for Republic to compete for any new business," he says.

Other competitors for the contract could include SkyWest Inc and Trans States Airlines.

An operator for the E-175s will be selected at a later date, says United.

United's joint agreement with its pilots made the E-175 order possible. The contract harmonised scope restrictions on its legacy Continental and United pilots, and allows for up to 255 large regional aircraft - those with 60-seats or more - by 1 January 2016. The agreement was ratified this past December.

"I anticipated that once the Continental network was free of scope restrictions that you'd see this kind of activity occur," says Robert Mann, a New York-based airline industry analyst at RW Mann & Company.

He says that in addition to replacing 50-seat aircraft, the E-175s could also be used to replace small mainline aircraft and further optimise United's flight schedule.

The airline will remove its last five 108-seat Boeing 737-500s during the second quarter, said John Rainey, chief financial officer of United, during an earnings call on 25 April. The move will create a gap between its 71-seat Bombardier Dash 8 Q400s and 118-seat Boeing 737-700s.