Archive For The “Regional Airlines” Category

The Declining ME3

By |

The results are grim. Etihad reported a loss of $1.9bn.  Emirates announced its first decline in profits in five years.  And Qatar is besieged and indications are to expect it to report 30% lower revenues because of the neighboring countries blockade of airspace.  What was once the future, and the center, of the Airbus and Boeing wide-body sales efforts has run out of steam with alarming speed.

To make things worse, the ME3 had big plans to “invade” the US.  With far better service levels and new aircraft, they were well placed to win over business travelers.  The threat was obvious to the US majors, who rather than compete, ran for cover in Washington DC.  These earlier proponents of Open Skies suddenly didn’t like the idea of competitors having access to “their” market.  US business travelers could easily have taken a US-flag flight to the Gulf.  But for equal (or less) money they could fly on an ME3 flight – where they are offered award winning service and industry leading cabin design.  The market spoke and the US majors shrank schedules to the Gulf due to a lack of traffic.

But it got even worse.  The US government decided to hit business travelers hardest when they imposed security regulations that forbade travelers from bringing laptops into the cabin from certain countries, including the home airports of the ME3.  For a business traveler, this is akin to saying “go away.”  Business travelers have zero tolerance for disruptions and immediately changed to flights connecting through the EU.  The impact was to freeze out ME3 business traffic. The ME3 quickly had to cut back US services.  The US majors are determined to rid themselves of the ME3 threat.

The security limits have since been lifted.  But the message was clearly received.

Not satisfied with their first moves, the US majors seem bent of following through with additional efforts to stop them.  American canceled its codeshare with Qatar, claiming it and the other members of the ME3 are receiving state subsidies.  Though Qatar seems determined to become a shareholder in that airline.  Delta has taken a 10% stake in AF/KLM, while welcoming that group as a fellow shareholder in Virgin Atlantic.  What United has planned is not reported as yet, but it is unlikely to sit out the opportunity to also cement its alliances with Star Alliance partners including Lufthansa, which competes against the ME3 in Europe.

These moves by the older network airlines speak to more than holding the ME3 at bay.  These moves provide old network airlines a chance to literally lock up markets.  This becomes a profound problem if one looks forward even a few years.  What was an opportunity for travelers to have more choice is being curtailed.  Consolidation does not and never will work in favor of the consumer or traveler.  Cutting choice only serves the interests of the supplier, never the buyer.  How the US airline consolidation was ever allowed remains a mystery for those familiar with antitrust law.  (Useful primer) This is a story that needs to be re-told and the implications, including the fact that consolidation has chilled new entrants, examined closely.  When six majors become three, competition is essentially eliminated.

On top of the competitive threats that consolidation brings, consider the plight of employees.  Pilots are in ever shorter supply.  A knee-jerk reaction in Congress to an unfortunate accident raised transport pilot requirements so high as to cause a pilot shortage in the industry. It was already nearly impossible for a cadet pilot to get a job at a living wage and repay their eduction, and the shortage is thankfully raising wages.  (US Regionals are paying new hires between $38,000 to $65,000k with bonuses plus training costs of about $30,000.) The cost of education and pilot training are prohibitive, causing a large drop ut rate. Regional airlines face wafer thin margins under today’s Capacity Purchase Agreement structure.  Meanwhile the regionals are seeing some new hires progressing quickly from joining the regionals to moving on to a major in under a year.  The pilot shortage is pulling people through the system – but that means regionals are continually searching for new talent.

Non-pilot employees don’t have an especially attractive career either.  Working for an airline has proven to be a rather good way to see your benefits and wages cut and have a high likelihood of losing your job to consolidation.   Look at the next chart and try persuading yourself that an airline job is a great career.  You must do more, earn less (never mind inflation) and run the risk of working in an industry known for retrenchments and layoffs.

The Bottom Line

The ME3 problems are ensuring they are a declining force in the US market.  But even as we understand that City States cannot typically generate sufficient traffic for a large carrier, we also can see what happens when truly open skies are closed.  The double-digit ME3 growth rates were unsustainable long-term, but the recent actions demonstrate why one should show them sympathy.  They were not beaten by competitors, but by governments.

We should show appreciation for their disruptive behavior that demonstrated to the traveling public what true airline service could be like, with modern fleets, innovative interiors, and world-class service.

Read more »

US Regional Airline Association annual report

By |

The RAA provided its RAA Annual Report 2017 today.  Here a few highlights from their statistics.

 

Looking at these charts, how strong an argument can you make for a new generation regional jet in the US market? We don’t think the market looks especially attractive for an OEM to offer something new and more expensive.  The growth is in mainline, not regionals.

The RAA Chair put is this way: “RPMs and ASMs reached an all-time high in 2016 for all U.S. airlines, but the regional sector did not produce record-breaking figures. ”

 

 

 

The next chart shows that regional jets are flying fuller than before.  But so are mainline jets. The light blue columns show that in 2016 the seat capacity was around 60.  The mainline jets averaged closer to three times that and are also fuller.

The RAA Chair summarized: “Ultimately, our industry operated fewer flights but on larger aircraft traveling longer distances last year. We carried fewer passengers, with enplanements dropping again in 2016.”

 

 

 

 

Here we can see how the mainline airlines are taking back traffic from regionals.  The US fleet is working harder with fewer planes are doing the work.

The RAA Chair said: “This marks a new reality for small and medium-sized communities, and the primary driver for this industry contraction is a growing pilot shortage. Without immediate intervention, this crisis will worsen as major airlines prepare to hire the equivalent of the entire regional airline pilot workforce within the next three years alone, in order to keep pace with retirements and growing air service demand. ”

 

 

 

 

 

 

In summary, it appears the OEMs (Embraer and Bombardier) should continue to focus on optimizing the aircraft they have.  Newcomers like Mitsubishi might want to look outside the US regional airline industry.   There might be opportunities among some mainline carriers in the US, but they are up against the CS100 and E-190-E2 if they decide to try that.  The case for expanding scope clause does not look compelling.  Mainline pilots are winning the battle for securing their jobs.  The US regional airline industry is being squeezed.  When is the pilot shortage situation going to get the attention it needs?

Read more »

Premium – The Regional Airline Sector – Long-Term Trends and Short-Term Outlook

By |

Welcome to AirInsight Premium content. This page is only available to active members.

Already a member?
LOGIN HERE

Interested in becoming a member?
GET STARTED TODAY

Read more »

Delta’s CS100 selection – regional impact

By |

Less discussed, so far, in terms of follow on impact of Delta’s decision to select the CS100 is its impact on the US regional airline market.  Any discussion on the US regional airline market brings up the scope clause issue.  This week the RAA has its annual conference, and we are certain this issue will be discussed again.

Except, this time the discussions should be a lot more nervous.  We think Delta’s decision is one that pilots should take careful notice of.   The airline stated the selection of the CS100 impacts aircraft from 76 seats and up.  With the CS100 starting at the regional aircraft level, what the airline is effectively saying is that its mainline pilots will now do the some of the flying that potentially could have been undertaken by regional partners.  Delta mainline pilots must be very pleased.  Scope clause has worked for them, bringing in more work that might have been done by regional pilots at lower pay scales.

But this could impact regional airlines in a negative way.  Regional airlines are already under pressure as mainline carriers negotiate them down to bare bones.  Which is why typical US regional air service is, to be charitable, unpleasant.  The idea of being able to fly a larger aircraft, with the widest economy seats in all airline service, is a fantasy few dare to dream of.  The CS100 offers an 18.5 inch wide seat!  That compares to interrogation room standards one finds elsewhere.

Pilots at United and American must be watching the move at Delta with glee.  Since the US airlines inevitably follow each other with respect to pilot contacts, Delta’s move is highly likely to be copied.  No US airline wants to get into a labor fight now – there’s plenty of money to share, provided competition stays rational in terms of capacity growth and pricing.  Which means, low capacity growth and keeping fares as high as the market will bear.  In other words no big up gauging and price wars.   Mainline pilots are seeing a more stable career with profit sharing and better pay.  Happy days for mainline pilots.

We therefore see scope clauses staying exactly where they are.  This means tougher times for the makers of certain regional aircraft of course.  Take a look at the table.

* MRJ90 payload estimated

For US regional airlines constrained by the scope clause the market is a choice of two – the CRJ900 and E-175.  The other aircraft are too heavy to fit within current scope.  Which is bad news for the MRJ90, which is getting even heavier.  Embraer, wisely, has decided to develop it E-175E2 last in its E2 process.  Time might see the scope move to allow the E2, meanwhile Embraer will keep building and selling the current E-175.  Bombardier is under no critical pressure on the CRJ, but the aircraft might benefit from refresh in terms of engines. The CRJ900 had a cabin refresh announced at RRA yesterday.

Since Delta has moved their mainline pilots all the way down to 76 seats, has the entire regional discussion changed?  Perhaps the big US network airlines will simply not need to worry about scope anymore.  Which could mean the future could see the MRJ90 and E-175E2, unconstrained by scope, in the hands of mainline pilots.  This is not good news for the CRJ program, but might be good news for CSeries. Delta’s decision really does carry weight and we have not yet seen how their decision will impact the industry.  This is going to be interesting to watch.

Read more »

Premium #213 – The US Scope Clause – Aberration and Annoyance

By |

"Scope Clauses" are collectively bargained contractual terms in pilot union agreements with US major carriers that place restrictions on how many and what size of aircraft regional airlines may operate.  Typically, these restrict regionals to aircraft under 86,000 pounds and no more than 76 seats. Their goal is to protect union jobs at the major airline from being eliminated by regional airlines operating larger aircraft.

Here is a summary of the current scope clauses with the three major legacy carriers in the United States. It is notable that the  details are quite precise.  These have been the subject of difficult negotiations, and while they have changed and grown somewhat over time, as aircraft have changed, any changes must be negotiated at the expiration of a contract, which typically run for multiple years.

Welcome to AirInsight Premium content. This page is only available to active members.

Already a member?
LOGIN HERE

Interested in becoming a member?
GET STARTED TODAY

Read more »

Employees and Enplanements – The US Experience

By |

People like to make jokes about air travel in the US. It the staple of every dinner party and also great value for any stand-up comic. Is service really that bad? After all, Americans are paying relatively low fares and they get to travel across a really big piece of real estate very safely, and perhaps even conveniently.

There is always some truth in humor, however. (more…)

Read more »