Medium Sized City Development Sparking Changes in Route Development

Major new industrial growth in mid-sized cities across the nation offers valuable opportunities for those who serve the employees going to, from and between these cities, according to analyst Mike Boyd, who also predicted that this development will make mid-sized jets between 75 and 150 seats the growth area...

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Major new industrial growth in mid-sized cities across the nation offers valuable opportunities for those who serve the employees going to, from and between these cities, according to analyst Mike Boyd, who also predicted that this development will make mid-sized jets between 75 and 150 seats the growth area to watch.

Boyd, who heads Colorado-based Boyd Group, also predicted a shakeout among regionals. "There are too many operators and too many regional jets which will create a big squeeze on revenues," he said. Similarly, he sees a shake-out with low-cost carriers because they over ordered aircraft and the number of markets that can support LCCs is shrinking or in the full throes of competitive battles.

"Investment isn't happening in the major metropolitan areas," Boyd told the Regional Airline Association (RAA) meeting recently. "The investment is happening in Lansing, Moline, Bloomington, Charleston, and Montgomery along with a lot of other medium sized cities."

Boyd pointed to the deep south where major investments from Asia include Hundai in Montgomery, Ala; Eurocopter and a Russian steel mill in Columbus, Miss; a BMW factory in Spartanburg, S.C.; a major Brazilian-system GM truck facility in Shreveport, La; an Infiniti factory in Jackson, Miss; and a major global exporter of rail equipment in Erie, Pa. He also noted that Charleston has become the second largest container port in the U.S.

"These facilities are generating significant international investment and increases in business traffic between one another and international destinations," he said. "This is traffic low-cost carriers (LCCs) cannot easily access because they do not have flexible fleets and they cannot capture the international traffic. But this is where the real revenue growth will be between 2006 and 2011. This is the legacy-carrier marketplace."

Pointing to the emerging communities of interest this international investment generates, Boyd predicted the spoils will go to the carriers offering service between Shreveport and Lansing and Shreveport and Shanghai. This new business strengthens hub-and-spoke systems that offer the international connections, and higher yielding traffic.

"An American can defend key mainline markets with the feed from these mid-sized markets that are too small to support LCCs," he said. "All these revenue premium traffic flows will go to Northwest, United and American. The airlines that are best positioned for long-term growth are Northwest, American and Continental."

Boyd predicted a shake out among the LCCs, saying that Southwest, AirTran and jetBlue have more than 200 aircraft in the 100- to 150-seat range coming on line in the next three years, at a time when the high-density markets are becoming scarce. "This will make it tough to fare skim," he said, especially now that legacy restructuring has narrowed the cost gap between majors and LCCs. "The hard truth is that limited fleet flexibility equals limited revenue generation capability."

Boyd indicated that growth of aircraft below 70 seats will stop, adding that there is low demand for new units and a glut of existing aircraft that do not have a large, discernable secondary market at this point. "The main battle field will be 70- to 150-seat jets," he said. "The 747-8 will mainly replace the current 747-400. The whale jet - Airbus A-380 - proves that the spirit of the Concorde has returned to Europe. It may have wondrous technical capability but it can't land anywhere and eats airport real estate. The number of markets for it is limited to about 300 worldwide."

In North America, 1,800 new units are needed, half of which will be in the 81- to 125-seat size. Aircraft under 80 seats will only be 13 percent of the market exacerbated by a low demand for RJ-cabined airliners, regardless of size.

"The early 50-seaters will be retired," he said, adding, "the next big fleet re-equipment will be the replacement of Northwest's DC-9s and American filling the gap between 50 and 140 seats. American only has 25 70-seat RJs. However, it will not be until 2012 that the next wholesale re-equipment will occur with the advent of what Boyd calls the "plastic" aircraft, such as the Boeing 787.

Boyd also anticipates a large evaporation of orders from the two hottest markets - India and China. "Watch for a wild west show in China and India," he said. Despite this, he said that the real revenue growth will be traffic to and from China and suggested that businesses "get Sino-centric or you are not going to be connected."