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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]
[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]
