Small Jets To Carry 21% Of All Traffic

If the numbers are right, regional airlines can expect growing business opportunities in the coming decade - the initial boost in business will be felt this year. In its annual forecast of the U.S. aviation industry, the Federal Aviation Administration (FAA) predicts that the regional carriers will fly 128.7 million passengers this year - 11.6 percent more than in 2003.

By 2006, regional airlines will carry 153.9 million passengers. The FAA projects an average 6.3 percent annual growth each year for 12 years so that by 2015 the regional carriers will have 226.2 million passenger enplanements.

The regionals will account for 21.4 percent of all commercial traffic in 2015. In 2000, regional airlines regional airlines carried just 11.9 percent of all commercial traffic. By comparison, the regional's market share in 2015 will be about that same portion of the market that the low-cost carriers now control.

In the 12-year forecast period, enplanements will actually grow at a slower pace than revenue passenger miles (RPM). The RPMs this year are expected to top 50.9 billion - a whopping 26.4 percent jump over the 2003 mark. The annualized growth rate is projected to be 8.4 percent. In 2015, the FAA predicts the industry will fly 106.4 billion RPMs. The RPMs will grow at the faster clip because the average passenger trip increases over the forecast period.

After the 2001 terrorist attacks, the network carriers took steps to reduce their costs by transferring routes to their regional code-share partners. "This expansion of nontraditional regional markets is expected to be one of the main drivers of the growth during the early years of the forecast. While the transfer of selected routes is expected to accelerate during the early years of the forecast period, this phenomenon should diminish considerably during the mid to later years," according to the FAA forecast delivered last month at a Washington conference.

The total available seat miles (ASM) is projected to grow by 26.4 percent this year to 78.6 billion miles. This growth primarily reflects the transfer of mainline routes to the regionals and the delivery of a large number of 50-seat and 70-seat regional jets this year. Over the next 12 years, the total ASMs are expected to grow 5.2 percent per year.

Two trends within the industry appear to be contributing to the accelerated growth: larger regional jets and longer flights.

Most of the growth in the fleets will result from the acquisition of ever-larger regional jets. In its forecast the FAA doesn't distinguish between the 50-seat class and the 70-seat class. At the moment, U.S. regional carriers operate 1,192 regional jets with seating for more than 40 passengers. In the next 12 years, the FAA projects that another 1,901 planes of this size will be added to the flying mix. It further projects that 60 percent of these new planes will be put in service by 2009. By 2015, the smaller regional jets, those carrying 30-40 passengers, will account for just 3 percent of the fleet.

Over the next three years, the FAA estimates that 5.4 regional jets will enter the fleet for every one turboprop that is retired.

As a direct result of the increasing number of regional jets in operation, the average trip length is getting longer. Over the next 12 years the average trip length will grow from the current 370 miles to 470 miles.

Another way to look at the pattern is to compare city-pair matchings. In 2001, the regional carriers were flying 612 city-pairs more than 500 miles apart. Nearly 310 of these city-pairs were served exclusively by regional carriers. In 2003, the regionals were flying to 1,136 city-pairs that were at least 500 miles apart. More than 180 of these destinations had never been previously served by either the major or regional carriers. In 2003, 100 of the city-pairs were beyond 1,000 miles apart.

At the same time, the number of short-haul flights have decreased. In 2003, 336 city-pairs that are less than 200 miles apart lost nonstop regional service. The decline can also be attributed to the regional jet because it is more efficient to operate the plane on longer routes. Turboprop planes had been servicing these communities. Also in this era of increased airport security, more passengers are inclined to drive distances less than 200 miles rather putting up with security screenings.

Deborah McElory, president of the Regional Airline Association (RAA), called for a fewer regulations governing small aircraft in smaller cities and for a reduction in the security requirements at these same small airports.

One issue acting as an anchor restraining the regional airline industry is the scope clauses contained in labor contracts with the major airlines. Without a doubt, this was the hot-button issue at the FAA conference last month.

"The new reality dictates that the major and regional airlines must be able to match the appropriate size aircraft to the market," McElory said. "Scope clause restrictions, which some airlines have been able to revise but not eliminate, should be reevaluated in the cold, hard light of the difficult economic climate faced by the network carriers competing with low-fare airlines. JetBlue [JBLU] CEO David Neeleman recently predicted that mainline pilots won't grant management relief from restrictive scope clauses, allowing JetBlue to build market strength against the majors when JetBlue begins flying the Embraer [ERJ] 190 next year. Scope is an 'old school' concept that is not appropriate today. It does not serve [the] long-term economic interest of the regional airlines, the major airlines or the pilots that work for both operators."

McElory noted that scope is not just a labor issue. Instead, she said, scope clauses "deprive communities of competitive alternatives and increased non-stop service in a deregulated environment. Limitations on air service should not be acceptable to Congress or federal policymakers. Air service is the lubricant that keeps the economy running smoothly."

Geoffrey Crowley, CEO of Air Wisconsin Airlines, suggested the stubbornness of the Air Line Pilots Association could generate internal disputes within the union. How can the union represent both major and regional pilots, he asked, while it works to protect the jobs of one class at the expense of the other?

"The issue will come to a head," he predicted. "The artificial barriers don't allow us to compete."

Crowley cautioned, "we have to find a way to solve our labor problems without impacting the customers."

Prior to Sept. 11, 2001, the scope clauses prevented many regional airlines from operating regional jets larger than 50 seats. In 2002, scope clauses were relaxed so that American Eagle, Mesa Air [MESA] and Atlantic Southeast Airlines could fly larger jets. Last year, Horizon Air, Freedom Air, Comair and AirWisconsin won the rights to fly the larger jets. The FAA anticipates that the rest of the majors will obtain scope amendments.

Other issues facing regional carriers:

• The major airlines are taking routes away from their regional partners when demand again warrants a larger jet, said Douglas Abbey, a partner in The Velocity Group. However, the major carrier is then deploying the regional jet to a new route to build business.
• The largest regional airlines "have simply become brand management organizations," Abbey said, flying for several different major carriers. The companies have become skilled at juggling the demands and challenges of competing carriers. Mesa, Atlantic Coast Airlines [ACAI], SkyWest [SKYW] and Chautauqua Airlines all fly for more than one carrier, he noted.
• While the original role that was envisioned for the regional jet was point-to-point flying, it has evolved in its current task of feeding traffic to major hubs. In the future, Crowley said there would be limited opportunities for point-to-point flying because these direct, non-stop flights pull traffic from the hub.

Furthermore, the growing number of low-fare carriers cannot profitably serve most secondary markets. The regional jet, he said, clearly has the job to connect these cities to the major hubs. He cited his own hometown, Appleton, Wis., which has flights by four different regional carriers to six different hub cities.

• As the leases for the current generation of smaller regional jets begin to expire, Abbey said there will be a large number of used jets available for re-use. He predicted that some new airlines will be formed using these used planes as the backbone. "It will be easy to do," he added.

"There will be a used regional jet market," said Crowley. "It will put pressure on us. We need to maintain our differential and we need to be more competitive with other regional carriers."

• At least two regional carriers are considering a second-generation regional jet for delivery beginning in 2007, Abbey said, when the oldest of the original regional jets will be nearing the 15-year mark. This next generation will be in the 50-seat range.
• Airport congestion will put new pressure on small turbofan operations, he said, especially at Boston Logan, New York LaGuardia and Chicago O'Hare.
• As stage lengths get longer for regional jets, the industry needs to recognize some passenger discomforts in flying small jets, said Crowley. "We don't kid ourselves, we realized there is a limit to flying in a narrow tube for long distances." However, he said, the longer-haul flying should really be permitted only in monopoly markets where the carrier is providing service via a non-stop flight.

Abbey added that longer flights are possible on the new roomier aircraft now coming to market.

• There is an advantage for a major airline to use an independent regional airline rather than its own subsidiary, Crowley said. "We bring more of an entrepreneurial attitude toward flying. We are more focused on customer service and costs. While the wholly owneds are cost effective, they are burdened by the decision-making process tied to the major partner. Thus, they are a little less cost-effective and a little less customer-focused."

>>Contact: Deborah McElory, RAA, (202) 367-1170; Douglas Abbey, The Velocity Group, (202) 338-1727; Geoffrey Crowley, Air Wisconsin, (920) 749-4188.<<