Growth for the nation's regional carriers is projected to slow dramatically this year as the network carriers shed capacity.

The latest forecast from the Federal Aviation Administration (FAA) projects that the growth pace will pick up in 2007, but that long-term growth will be a notch or two below the 2007 rate.

After four years of double-digit growth, the regional carriers will have to make do with a period of slow but steady growth. The explosive growth - which peaked at 20 percent in 2004 - was fueled by the bankruptcies of the network carriers, said Nan Shellabarger, the primary author of the FAA Forecast who serves as the FAA's director of aviation policy and plans. The bankrupt carriers - primarily United Airlines [UAUA] and US Airways [LCC] - shifted flying responsibilities to their regional partners as each one pared back its mainline, domestic routes. The non-bankrupt carriers followed suit in an effort to hold down their operating costs.

However, Shellabarger said, in the current environment, the bankrupt carriers - Northwest Airlines [NWACQ] and Delta Air Lines [DALQ] - are not only reducing their own capacity but they are also cutting back the flying assignments of their code-share partners. Northwest's decision to remove aircraft from both Mesaba Aviation [MAIR] and Pinnacle Airlines [PNCL] stands as a prime example of this trend.

Since 2000, about 500 aircraft have been removed from the U.S. commercial fleet.

The Northwest and Delta bankruptcies - fueled in part by the rise in oil prices - threw a monkey wrench into the estimates the FAA made a year ago. When the forecasters gathered in March 2005, the FAA projected that the regionals would grow by 10.4 percent in 2006 instead of the 2.8 percent projection released last week. In fairness, the industry grew 2 percent faster last year than the 14 percent growth rate that was projected in the 2005 forecast book.

The commercial airline industry is expected to grow by 3.8 percent annually between 2008 and 2017. The FAA projects that the bulk of that growth will be recorded by the regionals and the low-cost carriers. Shellabarger said the regionals would add about 1.5 percent market share per year in the coming years.

Measured by both growth in domestic revenue per passenger miles (RPMs) and available seat miles (ASMs), the regionals are expected to outperform the network carriers. Growth is expected to drop 1.5 percent this year for the mainline airlines, but ASMs are projected to grow by 4.5 percent for the regionals. Mainline RPMs are projected to drop by 0.7 percent but increase by 7.1 percent for the regionals this year.

As oil prices stabilize this year and the load factors increase with the reduced capacity, Shellabarger projects that the industry will post a positive yield this year. However, after 2007 the yield is projected to decline as the growth of low-cost carriers continues to put pressure on the fares the network carriers charge.

Wall Street analyst Ray Neidl, of Calyon Securities, projects that the U.S. airline industry will break even this year. "The industry can make profits even with the average oil price of around $60 per barrel for the year," Neidl said.

A Big Footnote

In many cases, an apple-to-apple comparison is not available. The FAA this year produced a 90-page, one-volume forecast, whereas last year the forecast was several hundred pages longer and spread over three volumes. Missing this year is a great deal of information on airports, including statistics on the most frequently used airports by regional carriers and general aviation operations. FAA Administrator Marion Blakey, in her cover letter, noted that the agency is tightening its belt, and alluded to changes designed to improve the air traffic control process and to streamline operations for the carriers.

The driving force behind the forecast is to provide information to help match FAA facilities and services to the projected demand from all sectors of the aviation community. With 1 billion annual passengers projected by 2015, the FAA needs to react to avoid major congestion by that time.

Last year, for the first time since the Sept. 11, 2001, terrorist attacks, the number of U.S. airline passengers exceeded the peak set in 2001. There were 738.6 million system- wide passengers in 2005 compared to 697.6 million who flew in 2000.

"Even last year's record oil prices could not dampen the public's growing demand for air travel, driven by a strong economy that continues to expand," said Transportation Department Secretary Norman Mineta at the FAA Forecast Conference.

Much of the conference was occupied by various aviation interest groups staking out positions on the yet-to-be introduced FAA reauthorization measure. The legislation will spell out how the FAA and the Aviation Trust Fund are to be funded after Sept. 30, 2007. While DOT and FAA officials were mum on the 10-year proposal, it was strongly suggested that the government would scrap its current set of fuel and ticket taxes and adopt some form of user fees.

More than once during the conference, a speaker summoned the image of a table consumer goods and indicated that the cost of everything has gone up in the last 10 years - except for electronic gadgets and airline tickets. The oft-repeated line was that an airline ticket tax no longer has any relevance in supporting the FAA or the air traffic control system. The ticket tax could just as easily be levied on a gallon of milk - which has gone up in price - and it would have the same relevance, according to several speakers who support a new user fee system.

"I cannot tell you what the final plan will look like," Mineta told the assembled airline and airport representatives. "It is still on the drafting table. So I was a little taken aback, when in the last week or so, some people got ahead of themselves and began criticizing the proposal without knowing the details.

"Let me caution all of you to hold your fire until we are able to release our proposal. And, you have my promise that I will continue to insist on keeping the process fair and open throughout."

In her remarks, Deborah McElroy, the president of the Regional Airline Association (RAA), noted that the RAA has not taken a position on the merits of user fees. Aside from the impact the proposal may have on its members and their operations, McElroy said the association remains concerned as to what impact it may have on the smaller communities that are totally dependent upon a regional carrier to provide a link to the national air grid.

The Fleet

With the project growth of regional carriers, the FAA expects to handle more regional jets than ever before. "RJs create the same workload in the system," Blakey said, "but they bring in less revenue per operation for the FAA. In fact, one of the most dramatic changes in this year's forecast is the decline in seats on domestic aircraft. Over the next five years, we see it continuing to decline by an average of 2.3 percent per plane across the entire fleet. In 1999, the number of seats per plane averaged 130. We see it shrinking to 117 by 2011."

The U.S. commercial fleet is scheduled to grow by 154 planes this year and 188 next year, but the FAA notes that most of these new aircraft will be flying either for the regionals or the low-cost carriers. Sixty-three of the 154 new aircraft to be delivered this year will be to the regional carriers. In its tally, the FAA is including the Embraer [ERJ] 190 as a narrow-body aircraft purchase since the airplane is being delivered to JetBlue Airways [JBLU], not a regional carrier.

Over the next three years, the FAA forecasts the regional carrier passenger fleet will increase by 273 aircraft: 63 in 2006, 105 in 2007 and 105 2008. After that, the regional carrier fleet is expected to grow by 2.3 percent - an average of 80 aircraft - for each of the remaining nine years of the forecast period. The fleet will consist of 3,851 aircraft in 2017.

With both Bombardier [BBD] and Embraer virtually stopping all production of their 50-seat aircraft, the growth will be in the 70- to 90-seat market. The number of these larger regional jets is projected to grow from 1,758 in 2005 to 2,819 in 2017, an average annual increase of 4.0 percent.

Shellabarger characterized the demand for the 70- to 90-seat class as "robust" and attributed the demand to the relaxation of mainline scope clauses.

Use of the turboprop or piston-powered aircraft by regional carriers is expected to continue to slowly shrink. From 2005 to 2017, the fleet will lose 72 prop aircraft. By 2017, the 1,032 props in the fleet will be about 27 percent of the regional fleet.

The Very Light Jet

Although the FAA has yet to certify the first very light jet (VLJ), also known as the microjet, it expects that 100 will be delivered this year. Eclipse now projects that its plane will be certified by about July. It would be the first VLJ to hit the market.

The FAA is sticking to its growth rate projected a year ago - 500 VLJs delivered to the market each year. By 2017, there would be about 4,950 VLJs in the U.S. fleet. While many have cautioned that the production rate and the appetite for these 4- to 6-seat aircraft have been overestimated, Shellabarger said that some transportation prognosticators believe the FAA's growth estimates for this niche is "too conservative."

The General Aviation Manufacturers Association (GAMA) believes the FAA estimate is too high. GAMA's Peter Bunce noted that 1978 was the peak production year for all types of general aviation aircraft, with 17,811 delivered. Last year, the 15 manufacturers delivered 2,857 general aviation aircraft, including 522 business jets. In the last 10 years, Cessna has built 2,055 business jets.

"The VLJ makers are banking on the air-taxi concept taking off," Bunce said. "If it doesn't, they will fall flat."

The FAA forecasts that the number of general aviation flown hours would increase by 3.2 percent annually over the next 12 years. Much of that increase is being attributed to more business and corporate flying. Jet aircraft would account for 10.2 percent of the annual growth in flown hours. The FAA projections include the new VLJs as well as an increase in fractional ownership. Aircraft owned by a fractional ownership group are on average flown 1,200 hours per year, compared to the 350 hours for all other business jets.

>>The FAA Forecast is available at http://www.faa.gov/data_statistics/aviation/aerospace_forecasts/2006-2017/. Contacts: FAA, (202) 267-3883; Deborah McElroy, RAA, (202) 367-1170; Peter Bunce, GAMA, (202) 393-1500; Ray Neidl, Calyon, (212) 261-4057.<<