CRAN sat down with Douglas Abbey, executive director of the Regional Air Service Initiative (RASI), to get his take on where the regional airline business is today and where it's headed. RASI's mission is to promote an understanding of the critical role that the regional airline industry plays in commercial aviation and the Essential Air Service it offers to the traveling public.

CRAN: Where is the 50-seat regional jet (RJ) market headed as regionals take on more 70-plus seat aircraft?

Abbey: Scope is still an issue, and right now I think we need to focus on these 70- and 90-seaters. These are second generation [RJs] and they are very different animals. The JetBlue order [for 100 Embraer 190s] sort of precipitated a number of people saying, 'Well, what does JetBlue need with an RJ? Is this going to be JetBlue Express?' No, this airplane is quite similar [to JetBlue's existing fleet]. The issue continues to unfold and morph.

JetBlue clearly has a very positive halo effect, and I think it's caused everybody to rethink [their fleet makeup]. It clearly has enhanced credibility [of that aircraft] and, conceivably, of that size. I think JetBlue is a unique case. The 195, at 100-plus seats, is something that clearly is going to draw the attention of organized labor at the major airlines.

CRAN: Are the lines blurring between what the low-fare carriers are trying to do and what the regionals have shown they can do successfully?

Abbey: There's always been a blur. It's always been black, white and huge elements of gray, and the space between the largest RJ and the smallest mainline has always been an area that has caused apoplexy on the part of organized labor, among other things.

Now we have, for example, at American ... a large gap between [aircraft with] 50 and about 140 seats. Granted, American could take as many 37 seaters as they want. I think there's a fairly strict limit on 50 seaters, but there clearly is a very limited number of 70 seaters allowed [under the scope clause].

These holes exist at every one of the major carriers. It varies from major to major but the upshot is, between 50 and 130 or 140 [seats], there is a growing gap, and this clearly is a market opportunity for new 70 and 90 seaters. We're seeing them come in good numbers but not the numbers we'd like because they are so restricted [by scope] and because they're new. They're new technology and again it blurs this distinction in this gray area. The larger the airplane the more likely the mainline is going to want to fly it.

The economics have to prevail and if you can make it work with a mainline flight crew, then that's great. If you can't make it work with that sort of labor structure then something else is going to have to be envisioned.

As these new airplanes come around, and with Atlantic Coast's recent attempt to reestablish itself as another type of airline, I think we go to a larger picture, and that is the bifurcation of what passengers want. I think what's been proving the case is that passengers want low fares. And the people best able to provide it at a profit are the low-cost carriers. The majors continue to confuse matters by creating airlines within airlines -- Song, for example, -- and we'll see how that works. You know, history has not been kind to this sort of business strategy. But in the case of Delta, if you can keep JetBlue at bay, or match them and not lose revenue and traffic then it's a zero- sum game and Delta's quite happy with that.

CRAN: What's the future then? What are we going to see?

Abbey: I think everybody recognizes that the Southwest/JetBlue business model is one that does work. No major carrier has developed, it seems, an appropriate response to this new paradigm, and time will tell whether [the majors] can be all things to all people. I suspect not, because again we have, really, this large-scale bifurcation in the industry. That's the problem. How do you cater to business travelers yet carry the large numbers of tourists and low-fare travelers?

CRAN: Where does this leave the regionals?

Abbey: I think there are other things that prevail on the regionals, and the one thing I am most eager to see is that, as we get these second-generation airplanes, as scope limits do move up, I think we'll see a substantial number of 50-seaters become, not necessarily redundant, but traded in. The oldest in the United States is now 10 years old. We have not seen any really measurable amount of used transactions. In other words, all aircraft tend to migrate -- to other countries or to secondary operators, what have you. We haven't seen that yet.

Change is slow. I think Embraer and Bombardier are proving every day that they are producing better and better airplanes. I think we can also anticipate that as the number of 70 seaters increases, we'll probably see a number of 37, 45 and 50 seaters move out of the system. That's where I think we'll really have some interesting developments in this business. I think they're very marketable commodities. I would like to see a new-start airline take a bunch of them when they become available in decent numbers. Right now there aren't. If they're parked or redundant, it's simply because the airline has gone out of business. But those airplanes get snapped up pretty quickly. ... Eventually the acquisition costs of an [Embraer] ERJ 145 and a [Bombardier] CRJ 100 or 200 are going to come down and we will see a buoyant used market.

I think it will be a more likely business case at that time for start-up regionals to be low-fare carriers. Will we see them nationally? I suspect not. But will we see them popping up in cities of 1 million or so people where the business leaders feel that they are underserved, or there are large O&D markets like, for example, Des Moines-New York, that aren't being served? Yes, I suspect you probably will. That's when we're going to start to see this merging of low-fares, relatively low-cost -- RJs are not low-cost airplanes -- but if you can buy them for a fifth or an eighth of what they cost new, then I think you'll have a better chance of it. That's coming down the road in larger numbers. That may be five years from now.

CRAN: What is your take on Atlantic Coast Airlines (ACA) decision to make a go of it as a low-fare carrier?

Abbey: The Atlantic Coast story is a unique. I don't know that we can take this as a trend. I think everybody is going to be watching it quite seriously.

Regionals have over the course of the past 20-odd years cast their lot with the majors. There's no such thing anymore as a large-scale independent regional airline. Cape Air was the preeminent example, but even they now have a code-share with Continental. That said, we have very few independent regionals anymore. They have become lean, mean fighting machines because they are not saddled with the large capital expenditures and overhead that the majors are -- you know, management systems, reservation systems, pricing analysts, advertising.

So this becomes an interesting model for Atlantic Coast. Washington is a somewhat unique market. It's got three airports. DCA is high-yield, BWI and Dulles sort of slug it out for the low-fare -- although I think BWI prevails in that regard -- but there are good-sized markets like Burlington and Portland and Charleston and Greenville that have been pretty much high-yield monopoly markets for years. These cities typically don't have a vast amount of low-fare service, so it will be interesting to see.

CRAN: If ACA is successful making the transition, do you think other regionals will follow?

Abbey: I'm sure that this is being watched and I'm certain that management of other companies would have to look at this as a way to help perpetuate growth, but there clearly are limits in terms of where those growth opportunities are. So if you're SkyWest, for example, it obviously has to be in somebody else's backyard. SkyWest is pretty much national right now. I think [SkyWest Chairman] Jerry Atkin made it abundantly clear he's looking to perhaps purchase aircraft as large as 130 seats. I think as long as it's not a conflict with Delta or United, Jerry's got responsibilities to his shareholders as well.

CRAN: Where do you see the scope clause issue headed?

Abbey: This thing moves inexorably, but it does move over time. You have to frame that also within the context of a competitive airline industry. It took Delta's competitors a number of years to sort of realize what they were doing [with Comair] in Cincinnati and how successful it was and how it could be translated to their own hubs. Nobody likes to cede a competitive market advantage to its competitor, so Delta is still at the forefront of 70 seaters at this point. Everyone else is going to have to get on that bandwagon to be competitive. You can't leave a market void like that to somebody else simply because you're restricted.

US Airways went through a very difficult ... process but indeed they got, and will have, 70 seaters on property. There's very much a 'me-too' mentality in the industry: 'If my competitor's at this level then I have to be at a minimum at that level, too.' And so that invariably is how it shakes out.

Indeed, the scope barriers do move, they do come down over time. But as the aircraft become more mainline-like in size and weight, and with so many major carrier pilots and flight crews on furlough, it seems likely to me that a Jets for Jobs type protocol may be in order, however that is to be ironed out individually at the airlines.

[Editors Note: US Airways developed the Jets for Jobs program to offer pilots laid off from the mainline carrier the opportunity to fill slots on regional jets. This controversial program has been rejected by some pilots unions over proposed wage scales.]

>>Douglas Abbey also serves as president of the AvSTAT Associates, which tracks statistics for the regional airline industry. He can be reached at 202-338- 1727.<<