Boyd on RJ's 30 April 07

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[FONT=Tahoma, Ariel, Lucida]Regional Jets As Financial Hot Potatoes[/FONT]
[FONT=Tahoma, Ariel, Lucida]RJs As Financial Refugees[/FONT]
[FONT=Tahoma, Ariel, Lucida]The day of the "regional jet" is declining faster than the membership at an Imus fan club. [/FONT]
[FONT=Tahoma, Ariel, Lucida]And, more critically, whole new economic relationships are going to evolve between small lift providers ("regional airlines") and the major carrier systems that have traditionally paid them for their services. [/FONT]
[FONT=Tahoma, Ariel, Lucida]In fact, the direction of the invoices and the money may well start to go in the opposite direction from that of today.[/FONT]
[FONT=Tahoma, Ariel, Lucida]Narrow-Cabin. Narrow Future. There is no longer any question that there's already a glut of 50-seat RJs. Major airline systems are making it clear, both in their public statements and in their fleet decisions, that the economics of these machines are getting problematic. Without question, the larger, 70-to-90 seat CRJs will have a longer half-life than their smaller RJ brethren, but even here, there are clouds on the horizon, in that many, if not most, CRJ-900s are coming on line in 76 seat configurations instead of 86-90 (due to ergonomic and scope reasons), with a corresponding upward push on their ASM costs.[/FONT]
[FONT=Tahoma, Ariel, Lucida]Toss in the market competition from the Embraer E-Jets, which have mainline cabins and comfort levels that are equal to or better than 737s, and it becomes clear that the folks in the financial world who're "holding paper" on 50-seaters - be they CRJs or ERJs, or even smaller FRJs - may increasingly find the value of those documents to be be heading toward what's in the bargain bin at Wallpapers-To-Go. [/FONT]
[FONT=Tahoma, Ariel, Lucida]More ominously, there is no secondary market - anywhere on this planet - for any large number of RJs. None, at least in the role of flying machines.[/FONT]
[FONT=Tahoma, Ariel, Lucida]Our forecast clients are not surprised. Back in 1998, our data indicated that the number of RJs in operation and on order exceeded what the US airline industry could support by 2002-2003. And we advised our clients that the ambient and oft-repeated rosy projections of unending demand for these contraptions were just so much happy talk based on the safe groupthink that tends to permeate much of the financial industry.[/FONT]
[FONT=Tahoma, Ariel, Lucida]But as recently as a couple years ago, according to the lore, RJs were an unstoppable trend. It was in all the papers, remember? And who can forget the famous "Proposition RJ" scheme, which had small communities drooling all over themselves, believing that in exchange for a couple grand contributing to a magic "study" on scope clauses, they, too, could get the wonders of jet service at their local airports. [/FONT]
[FONT=Tahoma, Ariel, Lucida]This despite the fact that RJs were never designed for, nor do they have particularly good economics for, serving small communities. (The "regional" in "regional jet" referred originally to their target customers - regional airlines which needed an airplane with which they could expand to bigger and longer markets. Being able to serve Fruitcake Falls Municipal was never in the equation.)[/FONT]
[FONT=Tahoma, Ariel, Lucida]Listening To The Din. Instead Of Looking Over The Horizon. The RJ situation is somewhat similar to the get-rich-quick ostrich farm scheme of a few years ago. The idea was that for health reasons, consumers were going to give up beef and go for delicious, delectable, low-cholesterol ostrich meat. The demand for these dumb birds, according to belief, was going to go through the roof. One ostrich egg, it was claimed, could result in acres of birds with their heads in the ground, leading to hundreds of thousands of dollars in quick easy profits selling Big Bird Whoppers to Burger King. [/FONT]
[FONT=Tahoma, Ariel, Lucida]Unfortunately for the investors, the result was a gastronomic Edsel-ville. Bad research leads to bad results. And, apparently, it leads to being stuck with a lot of really ugly animals with no economic use whatsoever.[/FONT]
[FONT=Tahoma, Ariel, Lucida]Regional jets, not surprisingly, went through a similar process. Unlike ostriches, they did have strong economic value in the early years, until a range of economic factors came into play. Nevertheless, these shifts were almost entirely missed in some circles, which until fairly recently continued to claim that RJs would be a growing, permanent part of global airline fleets. Demand ad-infinitum. That was then. This is now, with financial entities finally seeing the potential for a lot of birds sitting on a ramp, all dressed up with no place to fly.[/FONT]
[FONT=Tahoma, Ariel, Lucida]In both cases, again, the research was faulty. Ostriches and RJs have both turned out to be financially-ugly birds. At least with the ostrich egg, the poor schlemiel who got stuck could make a really impressive omelet. Not so easy with a fleet of excess 50-seat jets. [/FONT]
[FONT=Tahoma, Ariel, Lucida]The New, But Limited, RJ Trend: Pay-To-Play. US Airways has already noted it has too many 50-seaters in its fleet. Other carriers are also moving to reduce their exposure to the number they lease from small lift providers. The move is well underway to replace these with larger units of capacity, albeit in some cases with larger CRJs, which likely only postpones another day of fleet-reckoning by a few years.[/FONT]
[FONT=Tahoma, Ariel, Lucida]That brings up the question: so, where do all these 50-seaters go? Ultimately, the answer is unavoidable: into the crusher to begin a new life as a can of Miller Lite. [/FONT]
[FONT=Tahoma, Ariel, Lucida]But in the meantime, there's a new game in town. Where historically majors leased-in RJ lift, paying operators mostly on a cost-plus basis, going forward the play will tend toward doing a 180 - RJ operators who are stuck with excess birds actually paying to use major carriers' brand-identity, and flying entirely at-risk. [/FONT]
[FONT=Tahoma, Ariel, Lucida]For the major, it's a win-win. As long as the RJ operator is clean and reliable, the big airline gets a fee, the major gets some market exposure, and the operator takes all the risk, hoping that the major carrier's brand-identity will be enough to get enough passengers on secondary, non-served markets to pay the freight. [/FONT]
[FONT=Tahoma, Ariel, Lucida]The only problem with this is that these pay-to-play RJ operations will face increasing economic hurdles. First, any such markets would need to have a near-zero level of competition with existing flights of the major airline brand. That means mostly off-hub flying, and/or flying markets the major carrier wouldn't consider on a bet. Second, it means that any such flying would, in most cases, need to support the all-up O&D RJ sector costs, with minimum or no flow traffic revenue. [/FONT]
[FONT=Tahoma, Ariel, Lucida]What this points to is that the trend toward RJ pay-to-play is going to be severely limited. There aren't enough such RJ-viable markets to support more than 50 to 75 aircraft in the US, at wildly-optimistic best. Compare and contrast this with The Boyd Group Global Fleet Forecast, which indicates that by 2017 almost 700 RJs will become excess to the needs of the US airline industry. The math is ugly.[/FONT]
[FONT=Tahoma, Ariel, Lucida]This is one of the factors that will result in average per-unit capacity in the US airline fleets moving from 127 seats today to over 148 seats by 2017. [/FONT]
[FONT=Tahoma, Ariel, Lucida]Airport facility planners should take note. And in the meantime, plan on it being increasingly a buyer's market for RJ lift.[/FONT]

 

[Dave Grohl]

Boyd loves to hear himself talk...

 

[BoilerUP]

Boyd does seem like Master of the Obvious...

 

[Minimaniac]

Anyone with a 50 seater to sell can find a buyer... think China. The 50 seaters were a fad brought on by then-cheap fuel costs (No more scary props for our regional customers! Fly us!). Gas is now expensive. Therein lies the end of the small RJ's purpose. Bigger RJs will stick around simply because the crews cost less and 86 seats at a time is close enough to the loads normally carried by 319s and 737-300s on off-peak times of day.

 

[ex j-41]

To bad we can't send a bad writer to the scraping yard.
Airlines are going to put a 747 from GSO to CLT. Because the public doesn't like RJ's.

 

[Morning Wood]

I was at a meeting that Mike Boyd gave a similar speech to about 5 years ago. A lot of what he said has come to be. I don't agree with everything he says, but he's actually a pretty smart cat.

 

[Superpilot92]

Tell that to CHQ. There isnt a Glut of 50 seaters out there they had to scramble for CRJs because there where no 50 seat ERJs anywhere.

 

[Papa Woody]

Sounds like a pompous meaningless rant to me. Although a good writer with colourful metaphors, he should write children's books instead.....more money and inherently more amenable to fantasy.

 

[crashpad]

The limits of the RJ is just around the corner. Get on with the majors as soon as you can. When the music stops playing, Tens of thousands will be stuck working at the 'small lift providers' until retirement. If you think pay and work rules are bad now, wait until the flying jobs market shrinks tighter than a fully applied tube of Preparation H. Standard work rules will include; $0/pay for DH, airport ' hot reserve', 50k/yr captains and 25k/yr FOs, sharing hotel rooms (just like the rest of small town corporate America), employee payed health insurance due to renewable employment contracts (ie: JetBlue).
I think we're beginning to see a lot these related changes at every small lift provider already.

 

[Propsync]

I think the airlines have created a pretty mess. They blew up all of this 'jet service' only to not want to have the cost of it 5-10 years later. I didn't think PDT was going to be around for much longer after 9-11, I figured they'd dump the fleet like PSA and get jets (I know, there's more to that story). In reality, the airlines should have gone to the ATR and Dash 8 for anything inside a 300 mile stage. Hence, PDT is now (I'm guessing) a pretty good money making operation for Airways in comparison to PSA.

Now the passengers EXPECT jet service everywhere. But fares still aren't coming up fast enough to make RJ's even closely viable, and fuel remains high. Should the airlines cut their losses now and go back to turboprops, or are they stuck with RJ's?

 

[BoilerUP]

Should the airlines cut their losses now and go back to turboprops, or are they stuck with RJ's?

Some companies realize there isn't much value for a used 7-10 year old CRJ, owe too much on the planes relative to their market value, or are unwilling to accept the downside risk of financing new-generation large turboprops like the Q3/400 or ATR 72.

 

[On Your Six]

Clearly we need more Dash 8-400s to replace the fuel-thirsty CRJ/ERJs out there. Looks like Colgan was ahead of its time................ Those Q400s make a lot of sense when flying around the NE because distances don't require significant range and most aircraft don't get to spend much time at typical cruise altitude. Plus, you can fill those suckers up pretty good and they are reasonably comfortable - much more so than the typical CRJ with its low windows and small bins.

Can we trade in the CRJs for Q400s one-to-one? Let's get more Q400s out there!!!!!!!!!!!

 

[GogglesPisano]

It's not what he says, it's how he says it.

He spits out metaphors like someone eating a muffin with half a mouse inside.

 

[NuGuy]

The limits of the RJ is just around the corner. Get on with the majors as soon as you can. When the music stops playing, Tens of thousands will be stuck working at the 'small lift providers' until retirement. If you think pay and work rules are bad now, wait until the flying jobs market shrinks tighter than a fully applied tube of Preparation H. Standard work rules will include; $0/pay for DH, airport ' hot reserve', 50k/yr captains and 25k/yr FOs, sharing hotel rooms (just like the rest of small town corporate America), employee payed health insurance due to renewable employment contracts (ie: JetBlue).
I think we're beginning to see a lot these related changes at every small lift provider already.

Heyas CP,

I think you're right. When the market shrinks enough, the majors will turn the tables on the small jet providers in a HUGE way.

They'll turn it into a franchise like deal where if you want to fly with the widget on the tail, the provider will have to pay a fee to the mothership, same as when you buy a Subway, part of that goes to Joel (or whatever the ex-fat guy's name is).

Nu

 

[DiverDriver]

Sounds like a pompous meaningless rant to me. Although a good writer with colourful metaphors, he should write children's books instead.....more money and inherently more amenable to fantasy.

A metaphor such as the F terminal at ORD being: The fall of Saigon re-enactment?

 

[Speedtape]

Heyas CP,

I think you're right. When the market shrinks enough, the majors will turn the tables on the small jet providers in a HUGE way.

They'll turn it into a franchise like deal where if you want to fly with the widget on the tail, the provider will have to pay a fee to the mothership, same as when you buy a Subway, part of that goes to Joel (or whatever the ex-fat guy's name is).

Nu

That day has already come and gone! Skywest paid $450 million for more franchise territory, and to prop up one of the hands that fed them. They had no choice, for at the the time, 40% of their revenues came from the carrier that was the endangered species. Now, with what amounts to Skywest giving the Widget CPR, the Widget lived on to get what amounts to the quad-druple, bypass that it so desparately needed! Without the Skywest cash infusion, there would be no Bankruptcy Exit; the victim would have been DOA! However the infusion was mutually beneficial, and it was a heck of a deal when all things are considered for both parties. Hopefully, all parties will live happily ever after!

 

[eaglefly]

That idiot has been on an RJ rant for years. Flew in one, wasn't happy and takes every opportunity to declare the obvious unprofitability of the 50-seat RJ.

I think his philosophy is that if he keeps saying the same thing every six months, sooner or later (after 5-8 years), it will come true, so he can say, "WA-LA !, SEE I TOLD YOU SO !"

Smart, he's not.

 

[RJAA]

How can one stand a CRJ from TUS-ATL! That is all I have to say.

 

[YourPilotFriend]

What's the definition of an RJ? You know there are A380's that are planned regional jets.

 

[Occam's Razor]

What's the definition of an RJ? You know there are A380's that are planned regional jets.

Let that be a lesson to you, boys and girls!

Read and follow all medication label instructions...or you could end up like Mr. Rainey here!