The US regional airline industry has seen dramatic changes in the past few years. Now the relaxing of scope clauses is bringing a new twist of fortunes

Another reshaping is under way in the US regional airline industry, led by mainline carriers operating under Chapter 11 bankruptcy protection. With the ability – and imperative – to restructure radically to reduce costs, United Airlines and US Airways have broken through the 50-seat barrier and cleared the way for their regional partners to fly larger, more economical regional jets.

Other airlines are following suit, where necessary wielding the threat of bankruptcy to force their pilots' unions to relax the scope clauses that restrict the size and number of jets their regional partners can fly. As a result, limits on 70-seat regional jets have been raised significantly and, in some cases, allowance made for the operation of 90-seat jets. The effect on manufacturers' orderbooks has been dramatic.

As the industry meets for the annual Regional Airline Association convention in Cincinatti, Ohio, from 16-19 May, the question being asked is whether the scope relief trend will continue, allowing greater numbers of 70- and 90-seaters and perhaps even 100-seaters to be operated – and whether this will lead to a convergence between regional airlines and low-cost carriers (see box P42).

The regional-jet manufacturing industry has seen dramatic change over the past two years as the once rapidly growing 50-seat market has hit a brick wall built of low fares, high fuel costs and relaxed scope clauses. Bombardier and Embraer have been forced to scale back production of their 50-seat jet families, and to hope that orders for 70- and 90-seaters will keep flowing to fill the gap. "This is the first year the CRJ700/900 will exceed the CRJ200," says Barry McKinnon, Bombardier vice-president, airline marketing and analysis. "We are experiencing a switchover."

Shrinking orderbooks

The 50-seat regional jet backlog has gone into reverse since the beginning of this year, with the combined orderbooks for the Bombardier CRJ and Embraer ERJ families dropping by 40 aircraft over the first quarter. Combine total firm orders, options and other commitments and the turn-around is even more dramatic – a drop of more than 400 aircraft since the end of 2003. It is clear a dramatic change is taking place.

What is not clear is where, and when, the 50-seat jet market will bottom out, and whether the 70/90-seat market will grow to the scale achieved by the small regional jets. "We believe the market could be as big as the 50-seat in time," says McKinnon, pointing to the "fairly large fleets" of 70-seat jets already at American Eagle and Delta Connection and now allowed by United and US Airways under relaxed scope clauses. The 90-seat market remains restricted, but even that is changing.

Bombardier and Embraer see continued demand for 50-seat regional jets, albeit at lower numbers. Continental Airlines and Northwest Airlines still have scope clauses restricting their regional partners to 50-seaters, and the latter last month exercised options on 15 more CRJ200s – the first for Northwest Airlink carrier Mesaba. "The 50-seater is still very useful for adding frequency, and there are still turboprop replacement opportunities," says McKinnon. "But most of the fleet is in place and it will not grow a lot."

The manufacturers still hold options on about 900 35- to 50-seat regional jets, but McKinnon expects many of those to migrate to 70- to 90-seaters. This would help shore up the orderbooks for larger regional jets, the backlogs for which are still comparatively light. First to market with the 70-seat CRJ700 and 86-seat CRJ900, Bombardier had delivered 222 aircraft by the end of the first quarter, and had 94 in backlog. Embraer had delivered 56 of its 70/78-seat E-170s by the end of March, and had 131 E-170s and 78/86-seat E-175s on backlog. Also, the Brazilian manufacturer had 170 of its 98/106-seat E-190s and 108/118-seat E-195s on order at the end of the first quarter – none of them for regional airlines.

One reason for the relatively slow build-up of the 70/90-seat backlog is the complex web of relationships between regional airlines and mainline carriers and the complicated cross-relationships of scope clauses. A regional may have approval to add larger aircraft for one major, but the scope clause in its codeshare with another may prevent it operating bigger jets. Getting round these restrictions takes time.

Republic Airways Holdings formed Republic Airline to fly 23 E-170s for United, but delays in receiving its air operator's certificate (AOC) meant the first aircraft had to be flown by the company's Chautauqua Airlines subsidiary, which operates ERJs for American, Delta, United and US Airways. But Chautauqua's codeshare with American bars it from flying 70-seaters, so the holding company is paying a fine – $36,000 a day – until the E-170s are transferred to Republic after it gets its AOC, now expected by June.

Republic, meanwhile, has won a contract to operate a further 16 E-170s for Delta. The holding company and its majority shareholder, Wexford Capital, have also agreed to invest $125 million in US Airways in return for an agreement for Republic to operate E-170s and E-190s for the carrier. Under the deal, the company would acquire the 25 E-170s flown by Mid Atlantic Airlines, the subsidiary formed by US Airways to operate the 70-seaters.

Republic has also offered to acquire Shuttle America from an affiliate of Wexford in anticipation of increased demand for the E-170 and to provide the ability to operate aircraft larger than 70 seats, such as the E-190, while still complying with the scope restrictions of some of its major airline partners. Shuttle America operates Saab 340s for United, and Republic plans to add E-170s as soon as possible and phase out the turboprops by the end of this year. The company has 40 E-170 options that are convertible to larger E-175s, E-190s or even E-195s.

United's restructuring under bankruptcy protection has had perhaps the greatest impact on the industry. Regional Atlantic Coast Airlines was forced to reinvent itself as low-cost carrier Independence Air after its United contract was cancelled, and it has been forced to return CRJ200s as it struggles to survive. Now United has cut Air Wisconsin Airlines loose, and awarded 70-seat flying to SkyWest Airlines and GoJet – a new subsidiary of Trans States Holdings formed to get round the scope restrictions of its codeshare with American.

Domino effect

Air Wisconsin, in turn, has agreed to invest $125 million in US Airways in a bid to find a home for its 70 CRJ200s now flying for United. In a domino effect, this has threatened Mesa Air Group's agreement to fly 50-seaters for US Airways. As a result, Mesa has struck a deal for its Freedom Airlines subsidiary to fly up to 30 CRJ200s for Delta, replacing the capacity once provided by Atlantic Coast.

As the large regional jet market gathers pace, an interesting division may be emerging: the CRJ700/900 seems to be going mainly to regionals, while the E-170/190 is going to either mainline carriers or new operations. Air Canada, for example, has ordered both CRJ700 Series 705s (essentially CRJ900s with 75 seats) and E-175s. The CRJ700s will be flown alongside CRJ100/200s by regional subsidiary Air Canada Jazz, while the E-175s and later E-190s will be operated by the mainline carrier as narrowbody replacement aircraft. US Airways' CRJ700s are flown by regional pilots at its PSA Airlines subsidiary, while its E-170s are flown by furloughed mainline pilots at specially formed Mid Atlantic.

Republic, for one, views the E-170/190 family as a new phenomenon, and not simply a larger regional jet, hence its moves to gain the ability to fly aircraft from 70 to 100 seats and to close the gap between regional airlines and low-cost carriers. Even biggest Bombardier customer Comair, owned by CRJ700 operator Delta Connection, has its eye on the E-170 as it looks to take 25 new 70-seaters by 2008. President Fred Buttrell has told employees that he viewed "moving to this equipment [the E-170] as critical".

Where a carrier is limited to 70 seats by scope, as many regionals are, Bombardier argues that the CRJ700 beats the larger E-170 with a 10% lower cash operating cost per trip. Embraer executive vice-president, civil aviation market, Fred Curado agrees that, where 70 is the limit and seats are a commodity, the E-170 loses out on economics – as was the case at GoJet, he says. Where the limit on seats is higher and comfort is a factor, the balance shifts.

Bombardier's response is the CRJ700 Series 705, which McKinnon describes as a "high-comfort" regional jet, with a 10-seat first-class section and on-demand in-flight entertainment in Air Canada's configuration. However, if the market shifts towards 90 seats and beyond, Embraer's position strengthens, until it gets to the 110- to 130-seat segment targeted by Bombardier with its CSeries small airliner.

Today Mesa operates 86-seat CRJ900s for America West, which is in merger talks with US Airways, which will allow its own and affiliate regional carriers to operate significant numbers of 90-seaters."Under US scope there is no way [for regionals] to go beyond 90 seats," says McKinnon. But with low-cost carrier JetBlue Airways set to place the 100-seat E-190 into service later this year, it remains to be seen how the majors and their regional partners will respond.



Source: Flight International