From the point of view of US majors, JetBlue Airways and other lower-cost carriers have already wreaked havoc in medium- and long-haul markets with heavy traffic. They have been increasing market share with lower fares and reducing yields and revenues for the established airlines.
Now the majors worry that JetBlue will begin to make substantial inroads on small- and mid-sized markets with the new 100-seat Embraer 190 jet set to enter the carrier's fleet later this year. These are markets where travellers have not previously had access to low-fare carriers and where trips may involve cramped regional jets over longer distances than intended. Because these city pairs have little, if any, competition, they can still exact fare premiums for legacy carriers.
Just as JetBlue raised the bar with its growing fleet of Airbus A320s by offering leather seats with substantially more legroom than that available on other carriers, free 36-channel live television at every seat, an abundance of onboard baggage space and fares substantially below competitors, the Embraer 190 is expected to set a new standard.
"It's the JetBlue experience in a smaller jet," says chief executive David Neeleman. Indeed, it may even be better than the A320. JetBlue's 190s will also have leather seats and TV screens at every seat, but its aisle is wider, its seats are wider, there is plenty of headroom and luggage space, and the seating is two by two, so there is no middle seat. "We're very excited about this aircraft," Neeleman says. "We think it will really shake up the domestic airline industry."
The airline believes there is no shortage of market opportunities for the 190. "There's an embarrassment of riches on potential routes," Neeleman says. While not committing to specifics, he says that routes from New York to Oklahoma City (2,140km or 1,160nm), Knoxville (1,030km) and Baltimore (290km) all could be served profitably with the 190. Existing flights on those routes today are operated by regional partners of the major US carriers, generally using 35- and 50-seat regional jets, and command substantial fares. "Our fares would be 50-70% of theirs," Neeleman adds.
Adam Green, JetBlue's manager of route planning, says the 100-seat Embraer aircraft opens up markets the airline would not be able to tap into using its 156-seat A320s. The game plan is to focus on routes that board between 200 and 600 local passengers a day each way, he says, leaving larger markets to the A320.
Mid-size markets
"There are only about 200-230 city pairs that make sense with a 150-seat aircraft," says Dave Bushy, JetBlue's vice-president of flight operations, while mid-sized markets are the largest segment of the US domestic market. The airline estimates there are 807 markets with between 50 and 100 passengers a day each way; 532 markets with about 200 daily passengers each way; 359 markets with about 400 passengers a day each way; and 130 markets with about 600 daily passengers each way.
To serve these potential markets, JetBlue has ordered 100 Advanced Range 190s and has options for 100 more. Under the firm-order schedule, it will take delivery of seven this year, placing the first three in service in October. Then it will take 18 a year until 2010, reaching a fleet of 100 in 2011. At the same time, it will be adding an average of 17 A320s each year.
Overall, the carrier's projected fleet plan results in a 24% compound annual growth rate through until 2011, Bushy says. With a 4,250km nominal range and a cost per available seat mile just about 1¢ higher than the A320 on a comparable stage length, Bushy thinks the 190 "will be difficult to compete with".
The carrier has a multi-part revenue strategy for the aircraft. It plans to begin service to small- and medium-sized markets more appropriate for the 190 than for the A320 and also to begin non-stop service in markets linked today only through legacy-carrier hubs.
The aircraft will also be used to start high-frequency services in some markets. Instead of starting with four or five A320 round trips a day between, say, New York and Chicago, JetBlue could start with eight 190 round trips, the carrier says, replacing 190s with A320s as the market matures. It will begin routes with its trademark low fares and enough frequency to stimulate new traffic.
In addition, JetBlue expects to use the 100-seater to begin "connectingthe dots" on its route map. Both Burlington, Vermont, and Syracuse, New York, are currently served with three daily round trips to its main base at New York JFK. Those flights could be supplemented with 190 non-stops to Florida cities in peak season so that south-bound travellers need not connect at JFK.
The 190 will be used to serve seasonal markets as well. Bermuda, which is one of dozens of potential destinations being considered by the carrier, could be served by an A320 in the summer and a 190 in the winter. JetBlue is equipping all its 190s with dual head-up guidance displays, and rafts and life-vests necessary for over-water routes. The airline expects to use the 190 to add frequency on existing A320 routes at off-peak times when the A320 is too big.
The 190s will be concentrated at first on routes from JFK and Boston, and later in Washington. JetBlue's growth at JFK is restricted because it is building a new terminal, which will open in 2008, giving it capacity for 240 daily departures. Currently at 110 departures a day, JetBlue will increase them as best it can in the interim, the carrier says.
In Boston, however, it will move in May into a terminal vacated by Delta Air Lines, giving it 11 gates, up from two. The carrier on average operates about nine departures a day from each gate, across the board. "We'll probably keep the 190s close to home in existing cities to begin," says Neeleman. "In 2006, you will begin to see new city announcements for 190 service."
At the end of 2004, Embraer's firm order book for the 190 stood at 155, with 45 orders from Air Canada and 10 from Copa, but other carriers, such as Denver-based Frontier Airlines, are also looking at the 190. The smallest of the four-member E-Jet family – the Embraer 170 – was the first to be certificated last year. As deliveries of the 170 ramp up this year there are now over 50 in service with five carriers, including US Airways and United Express, and consumer reaction has been overwhelmingly favourable. In the case of United, its regional partner Republic Airways is operating the 170 with three classes of service. Overall, the order backlog for the 170/190 family stood at 297 at the end of December (see table).
In creating the new family of aircraft in the 70-110-seat category, Embraer believes it has carved out an unserved niche that will attract growing numbers of orders from both low-cost and legacy carriers, and their regional partners.
100-seater markets
Frederico Curado, Embraer's executive vice-president of civil aircraft, says the company's analysis of US domestic flying finds that there are 1,100 markets serving 105-500 daily passengers each way, the lower end served by regional jets and the higher end served generally by aircraft such as the Boeing 737. "We see that about half of those markets are perfectly suited to 70-110 seaters," he says. In addition, about 95% of US narrowbody flights over the past decade were within some 3,000km, well within the range of its new aircraft.
Just as United and US Airways have begun to use the 170 to "right-size" an aircraft to a route, offering "mainline service at express cost", Curado believes that other carriers will be anxious to do the same.
Samantha Panella, analyst at US investment firm Raymond James & Associates, agrees that JetBlue's operation of the 190 will increase pressure on legacy carrier pilots to relax scope clauses over the next few years. "We think the 170/190 will be the next growth platform," she says.
Panella points out that generally 70-seat aircraft are the maximum size allowed in most legacy pilot scope clauses – some are even limited to 50 seats – and no legacy pact allows regional partners to operate a 100-seater. Because of the weak financial condition of the legacy carriers, acquisitionof the new smaller jets will necessarily be limited to their regional partners,she believes.
Whoever owns the aircraft, liberalisation of restrictive pilot scope clauses would allow legacy carriers to consider replacing a growing number of aging, inefficient narrowbody aircraft with new Embraer jets or potentially Bombardier's proposed larger CSeries aircraft. If Bombardier does goes ahead with its 110-130-seat family, however, the aircraft would not enter service until 2010, giving Embraer a considerable head start.
CAROLE SHIFRIN WASHINGTON
Source: Airline Business
