Regional jets: Reign over

Philadelphia
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Regional jets may never regain their former glory but smart regional operators are finding new ways to shine, writes Mary Kirby in Philadelphia

When US Airways ordered 170 regional jets with Bombardier and Embraer seven years ago, the carrier got more attention for playing the role of Solomon and judiciously splitting the order equally between rival airframers than it did for the mammoth size of the deal. Today, a regional jet order of this magnitude would send shockwaves throughout the industry and prompt more than one analyst to question the sanity of the carrier's management.

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The "jet mania" days of yesteryear are long gone. Orders for new-build 50-seaters have dried up and, apart from some limited Embraer ERJ-145 production in China, airframers have ceased making small regional jets for the commercial market. Larger-capacity types such as the Bombardier CRJ700/900 and Embraer 170/190 - the 70-seat versions of which, incidentally, played a prominent role in US Airways' 2003 order - are by no means enjoying a heyday either.

And while there has been some resurgence in popularity of turboprops, the landscape also "has not been all rosy", says Saab Aircraft Leasing chief executive Michael Magnusson, pointing to Republic Airways' recent announcement "where it is yanking all the Bombardier Q400 turboprops out of Denver".

Airframers generally share the belief that recovery will occur in 12-24 months. Yet analysts are increasingly sceptical that a significant turnaround is forthcoming for the US regional landscape. "This is a non-cyclical business. It is clearly depending on pass downs rather than market demand, and just as importantly there is strong evidence that this market would be lucky to avoid further shrinkage," says Teal Group vice-president analysis Richard Aboulafia.

Even if there is "some kind of market comeback", he says, "it won't be anything like the boom market that 30- to 50-seaters enjoyed in the second half of the 1990s and 70- to 90-seaters enjoyed in the earlier half of 2000s".

BROKEN MODEL

Under the spectre of a significant regional aircraft orders slump, and with no clear recovery in sight, regional airlines have bowed to pressure from their major partners and agreed to return to the drawing board to reshape their feeder deals. The majority of regional service in the USA are governed by capacity purchase agreements, under which the regional aircraft provider is reimbursed for all direct expenses, including labour, fuel and aircraft rental, thereby enjoying mitigated earnings risk.

In a report written for aviation consultancy IAG, industry analyst Douglas Abbey says capacity purchase agreements "worked well enough", producing sustained economic returns for all parties concerned when 50-seat regional jets first came into fashion during the 1980s and well into the 1990s. But he says they now "no longer reflect real world competitive airline realities". Abbey adds: "Today, low-cost carriers have become a much more formidable threat on what were traditional regional airline markets."

Abbey points to the Boston-Baltimore route as an example. "Once the exclusive domain of 30- to 50-seat regional jets, the segment is now served by AirTran, Southwest Airlines and JetBlue. The reality is that low-cost carriers are vastly more productive enterprises. They operate with substantially better cost structures than regional airlines and therefore have the potential for staying power, which regionals simply cannot withstand."

Indeed, a regional jet "gets cut to ribbons on an available seat mile basis when it competes with these carriers", says consultancy firm The Boyd Group, which is forecasting that, among the 1,632 CRJs and ERJs operating in North America in 2009, only a staggering 565 will be flying by the end of 2015. Ultimately, this means "a good-bye to hundreds of airplanes headed for the desert".

The surplus "is going to be much bigger than many are predicting", says Saab's Magnusson. "Legacies' markets are shrinking all the time, so general needs for 50-seat feeds are going down, but on top of that, there is consolidation, with Northwest Airlines and Delta merging and cutting back the hubs. I wouldn't be surprised if there was 100, if not 200, regional jets surplus from that Delta merger."

PAINFUL CUTS

One carrier that is smarting from a reduction in regional jet flying is Mesa Air Group, which filed for Chapter 11 bankruptcy protection in January following a decision last year by major partner United Airlines not to renew contracts in 2010 covering 26 CRJ200s and 10 Bombardier Dash 8 turboprops. Before that, Mesa filed a lawsuit against Delta in 2008 after the major attempted to end a contract that covered the operation of 34 ERJs.

With regional deals such as these no longer assured, you do not need to look far for evidence of reworked capacity purchase agreements. Continental Airlines, for example, recently reached agreement with its main regional partner ExpressJet to remove eight Embraer ERJ-145s from a capacity purchase agreement between the two carriers. Instead ExpressJet will dedicate the aircraft to both a multi-year contract for United Airlines, which starts in May, and the carrier's charter business.

"There are some differences in the United deal versus Continental," says ExpressJet interim chief executive Pat Kelly. ExpressJet must set the revenue rate with United "every year" and "there are direct pass through costs", the biggest being fuel, says Kelly. However, the Houston-based carrier expects full-year block hours "to increase between 10% and 15% as a result of this flying for United".

Another regional operator that is focused on finding creative arrangements for 50-seat regional jets is SkyWest. A primary provider of regional feed to Delta Air Lines and United, SkyWest has started flying five CRJ200s from Milwaukee, Wisconsin, for low-cost carrier AirTran Airways.

Under a pro-rate agreement with AirTran, SkyWest operates the regional jets under its own brand and is responsible for all seat inventory, revenue and pricing on the routes. "We have a lot of flexibility in this arrangement," says SkyWest chief financial officer Brad Rich. Nonetheless, the three-year deal provides far less security than a classic capacity purchase agreement, as it can be terminated by either party after 15 May 2010 with 120 days written notice.

An operator that is venturing even further outside a classic regional operator's box is Republic Airways. This carrier is parent to Chautauqua Airlines, Lynx Aviation, Republic Airlines and Shuttle America, and, in 2009 it acquired mainline carriers Midwest Airlines and Frontier Airlines.

In February, Republic placed a firm order for 40 Bombardier CS300 CSeries narrowbodies, which will be configured with 138 seats in a single cabin arrangement and delivered in mid-2015. A brand that represents the unification of Frontier and Midwest will ultimately fly the aircraft.

What Republic is doing "is a better strategy" than staying still in the current US regional market, says Teal Group's Aboulafia. "Smarter regional players have back-up plans. Look at Embraer and its business jets. Anywhere is better than here."

For regionals that are unwilling or unable to break into the mainline market, 100-seaters will be more difficult to incorporate into their fleets because of pilot scope clause restrictions that prevent them from operating larger-sized jets for their major partners.

"We've seen American Airlines exercising options on 25 Bombardier CRJ700s, but that had been on the books for many years," notes IAG analyst Abbey. "At this point, the thinking of airlines is 'we need to recalibrate the fleets', but these need to synch to when the 50-seaters are moving out in large numbers before they can calibrate upwards."

TURBO CHARGED

Using turboprops for some regional jet replacement is an option that Bombardier is confident will be pursued. Between early 2000 and December 2009, the Canadian airframer delivered 65 Q400s to US operators, including to Alaska Air Group subsidiary Horizon, Pinnacle Airlines subsidiary Colgan and Frontier.

While the 11 Q400s operated by former Frontier unit, and now Republic subsidiary, Lynx Aviation are being culled from Republic's fleet, Bombardier "clearly believes there is a role for the Q400 in North America", says Gordon Pratt, who is director for the Q400 aircraft programme. He points out that the Q400 "enters services that were either previously flown by jets or are still flown by jets and are being supplemented by turboprops at different times of the day". A stretch of the Q400, dubbed the Q400X, also "remains high interest to existing and potential new customers", says Pratt. "It's going to be a very versatile airplane. In terms of seat mile costs, it has the potential to be a tremendous airplane."

Abbey adds: "I think operators will tell you, and original equipment manufacturers will certainly tell you, that there absolutely is room for more turboprops in the US fleet. The arguments are water tight in terms of comfort, economics and performance - basically all the criteria that fleet planners look at. But there is clearly - and sadly - hesitancy in codesharing operations to make that commitment."