As it looks out to 2008-2009 and takes on more mainline equipment, Continental (CAL) will be switching some of the routes now served by its regional partners to its mainline operations, according to Chairmain and CEO Larry Kellner, who spoke before the Merrill Lynch Global Transportation Conference.

"The regional jets have done exactly what we expected them to do," he said. "They have helped us grow markets, add to the schedule and add frequency." He pointed to the Houston-Phoenix market as a perfect example. "We won't necessarily be adding capacity [at the regional level]," he said. "It is more likely you'll see some shift back to mainline operations."

When asked to clarify what the thinking is with its new request for proposal replacing the lift once provided by Express Jet (XJT), he said that the size of its regional jet fleet - 274 aircraft - gives Continental tremendous flexibility to bide its time in hammering out regional service plans with an eye toward optimizing its network. (RAN, June 12) The airline does not expect to replace all 69 of the aircraft it lost when Express Jet opted to continue operating them after the two airlines could not reach agreement to lower the fees paid to the regional airline. Kellner also noted that the airline expects to increase regional available seat miles by 12.5 percent this year.

"We expect to look at everything from the Bombardier (BBD) Q400 to the new ATR since the 70-seat turboprop is something we can do under our scope clause," he said. "We will also look at the alternatives of the 70- to 90-seat regional jets, studying that piece of the market. Most likely we will replace a smaller portion of capacity. We are open-minded."

At the same conference, Mesa (MESA) Executive Vice President and CFO Peter Murname indicated that while the price of fuel makes turboprops an "interesting equipment choice," his airline does not want to acquire new turboprops. He pointed out the production schedule for the Bombardier Q400 is long, at 12 to 18 months. "It would be difficult for someone like us to go out and acquire that equipment," he said. "The cost of bringing them in the fleet would be very high. There is not quite the opportunity everyone thinks there might be with them."

SkyWest (SKYW) Chair Jerry Atkins, however, sees opportunity in the Continental contract. He indicated that there are 50-seat CRJs on the market now, although Embraer has no used ERJ 145s available. "That increases our chance of getting that," he said, "and, in general, whether it be Continental or Delta, there are some shorter haul, large turboprop opportunities that are certainly a possibility that we are very enthused about."

Kellner indicated that Continental feels little loss with Express Jet keeping 44 long-range aircraft. "We think the RJs work best in the two to three-hour range max," he said. "As we try to go beyond that, we worry that the passenger does not have the capacity to do that."

Kellner said the airline's main concern was having 205 planes to cover the core regional market. "There is a significant economic upside as we continue to look forward to optimizing that regional network and, given our position, we don't feel pressure. There is lots of availability in the fleet on both the ERJ and CRJ side."