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Monday, March 6, 2006

Aircraft Notes: Consultants Mull Fate Of 50-Seat RJ

Is the 50-seat regional jet dead? And what is the proper use for the larger Embraer 190?

At the recent Federal Aviation Administration (FAA) annual forecast meeting, aviation experts concluded that it is much too early to write the obituary for the 50-seat RJ. Or is it?

Likewise, the jury is still out on what the impact will be from the 100-seat Embraer 190 from Brazil.

Both Bombardier [BBD] and Embraer [ERJ] have scaled back the production of their 50-seat RJs to a snail's pace.

Looking back at the plane's early days, consultant Doug Abbey of The Velocity Group noted the whole concept was "as shot in the dark. Fundamentally, it was not a market- based decision. It was a fortuitous accident."

Continental Airlines [CAL] and its code-share partner, ExpressJet [XJT], have the largest fleet of small Embraer RJs.

Continental uses the 35-seat or 50-seat RJ on long routes out of its hubs. ExpressJet will fly the ERJ 145 to Tulsa from Newark. Continental can charge a premium on routes like the Tulsa one because it does not have any competition, Abbey noted. However, if JetBlue [JBLU] started to fly its Embraer 190 from JFK to Tulsa, Continental would have a problem because JetBlue would be competing on both price and passenger comfort.

In addition, Continental's labor contract precludes its pilots from flying mid-sized or large RJs. The Continental scope clause requires that mainline pilots fly any aircraft with more than 59 seats.

The 50-seat RJ was introduced as the logical replacement aircraft for the 30-seat turboprops.

Joel Antolini, a senior vice president with Seabury APG, a turn-around specialist, said that more and more carriers want to bring back the turboprops because the small RJs are in "such disfavor because of the fuel burn."

One airline executive told him he would "rather have the turboprop back in the short-haul market because they are more economical. That literally blew me away," Antolini said. "When I was with US Airways [LCC] five years ago, I thought every market would have jet aircraft and that there would be no more turboprops. It looks like it is coming full circle. Because the airplanes are so new, the market will understand and price them so they will become more attractive at some point. It will take awhile.

"People will make them work even if it's just in a niche," Antolini said.

One niche is United Airlines' [UAUA] new use of San Antonio. The carrier has created a mini-hub with 50-seat RJs flown by Trans States to four other cities in the region.

"I know the folks at United - they are smart people," Antolini said. The yields on these flights are 30 percent, he noted.

If JetBlue or Air Canada are successful in their use of the Embraer 190, Abbey said the network carriers could be harmed. "It could be a huge threat to major carriers who are hampered by their scope clauses. JetBlue will clobber the majors at their sweet yield spots. And, the major can't respond."

Thus far, JetBlue is using the new 100-seat jetliners to "connect the dots" between existing markets such as the Washington to New York service or the New York to Boston shuttle, he added. The planes are also being used to expand into new markets. JetBlue will fly from Richmond to both New York and Boston. Its new service from Austin will go to both Northeastern cities.

The Air Canada model is not clean, but is a compromise to "appease both the mainline and regional pilots," Abbey said.

The Canadian carrier uses three planes in a very small band: the 70- to 100-seat niche, Abbey noted. Jazz flies the CRJ 705 with 75 seats while Air Canada flies the Embraer 175, also with 75 seats, and the 190.

Last week, Air Canada announced it was using the Embraer 190 to establish two new routes: New York to Calgary and Edmonton to Montreal.

Early last month, US Airways announced it was buying 25 Embraer 190s. It did not say how it would use the plane, which will be flown by its mainline pilots.

And, as bankrupt Northwest Airlines [NWACQ] tries to establish a new regional unit to fly 100-seat aircraft, its pilots have voiced opposition to any plan that transfers flying from the mainline pilots to the regional pilots. The pilots may strike if a new contract voids the current scope restrictions.

>>Contacts: Doug Abbey, The Velocity Group, (202) 338-1727; Joel Antolini, Seabury, (703) 467-9607.<<

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