Delta's Grinstein May Change USE of Small Regional Jets - Bloomberg Article...

[On Your Six]

We have all heard this before. But, Grinstein is being a little more open and public about his feelings toward the 50-seat RJ... Looks like a comprehensive review of the RJ either has begun or will begin soon - I am sure the CASM and the comfort-factor on 2+ hour flights are being closely considered.

Read below:


Delta Air's Grinstein May Change Use of Small Regional Jets
June 10 (Bloomberg) -- Delta Air Lines Inc. may change the way it uses small jets under Chief Executive Officer Gerald Grinstein, who in the past said he doesn't like the planes for longer flights and is reviewing all operations to stem losses.

Grinstein, 71, who took over at Atlanta-based Delta this year and said the airline may seek bankruptcy protection, expects to finish a review of operations in the third quarter. He is seeking to cut costs after $3.6 billion in losses since 2000 at Delta, the biggest user of the smaller jets.

The 50-seat jets, which have higher unit costs than larger planes, have become less economical to operate amid competition in more markets from carriers with lower costs. Delta, the third- biggest U.S. airline, is likely to follow rivals in curtailing use of the jets, JP Morgan analyst Jamie Baker said.

``Delta is revisiting its commitment to 50-seaters and in our opinion would probably like fewer than are currently on order,'' said Baker, who met with company officials in the past month.

Delta owns or leases 264 so-called regional jets, or RJs, including 49 with 40 seats, 180 with 50 seats and 35 with 70 seats, all made by Montreal-based Bombardier Inc. The airline's jets, along with 136 flown by Delta's partners, operate as Delta Connection. Delta is receiving 23 of the 70-seat jets this year and placed an order in February for 32 of the 50-seat jets to be delivered next year.

``Our plans, currently, are unchanged as it applies to `04 and `05 growth,'' Fred Buttrell, chief executive of the Delta Connection unit, said in an interview. ``Beyond that, we will be subject to some degree to the strategic review.''

`Largest Operator'

Former Delta President Frederick Reid helped expand Delta's fleet of small jets, saying last August that the company was ``the largest operator of regional jets in the world.'' Reid resigned in March after CEO Leo Mullin quit.

Grinstein ``hinted at what would be a more comprehensive review of the RJs in the network,'' said Chris Renkel, a spokesman for the Delta Air Line Pilots Association in Atlanta. Grinstein got ``rousing applause'' from pilots at meetings in April when he criticized previous management's use of the regional jet, saying it was an inferior product on longer routes, Renkel said.

``From Jerry's perspective, you fly more than 2.5 hours on an RJ and it's a cramped ride,'' Buttrell said. About 210, or 7 percent, of Delta Connection flights exceed 2 1/2 hours, he said.

Delta may also scale back flights from its Salt Lake City hub, reducing the need to use 50-seat jets, Baker said. The Utah city is a Delta hub for funneling flights in the western U.S. The smaller Delta Connection jets provide similar service at Delta hubs in Atlanta and Dallas.

Higher Costs

``The industry is migrating toward bigger planes and fewer hubs,'' Baker said.

With business travelers reluctant to pay higher fares, the higher unit cost of flying the 50-seat jets is a less profitable proposition, said Mike Boyd, a consultant with the Evergreen, Colorado-based Boyd Group.

The cost for flying each seat a mile is between 25 cents and 30 cents on routes 200 miles or less and falls to 12 cents on routes longer 900 miles, where comfort becomes an issue, Boyd said. By comparison, East Coast rival JetBlue's unit cost was 6 cents for the first quarter.

Delta's contract with the pilots has limited the use of small jets to prevent the airline from moving pilots from higher- paying jobs at the main airline to lower-paid work at the Delta Connection carriers. For example, Delta can only fly 57 of its 70- seat jets.

Bargaining Chip

Additional restrictions on regional jets at Delta Connection may become an issue with pilots as the airline seeks concessions of $800 million, Baker said.

In 1992, 20 small jets operated in the U.S. and most carriers used turboprop planes on shorter routes, according to the Regional Air Service Initiative. Now, U.S. airlines fly 1,368 regional jets, the manufacturers' group said.

Passengers initially welcomed the new small jets because they offered more comfort, speed and perceived safety than the turboprop planes they were replacing on shorter routes. After the Sept. 11 attacks reduced demand, airlines introduced the smaller jets on longer routes, replacing larger planes.

America West Holdings Corp., parent of America West Airlines, phased out 12 regional jets last year as it cut flights at its Columbus, Ohio, airport hub. US Airways Group Inc. said in May that it would reduce flights at Pittsburgh, the base for its MidAtlantic Airways regional-jet operation.

 

[General Lee]

A lot of this is what he stated in his SLC meeting. The 50 seat market doesn't make enough revenue on certain routes with the lower fares out there. I can see why the RJDC is getting nervous....


Bye Bye--General Lee

 

[MedFlyer]

That's the thing about this article, it doesn't actually quote Grinstein anywhere. In fact, Grinstein wasn't even interviewed for this article. It's all just second hand information and analysis.

Maybe Grinstein will actually get smart and use the RJ's for more point to point flying...instead of cramming everyone through ATL.

 

[bvt1151]

Wrong way!!!! If Delta really thinks larger aircraft and fewer hubs is the answer, the Delta name will not last the decade. After all of the bankruptcy warnings in the last three weeks, nothing has convinced me of Chapter 11 more than this article. Name one airline that has returned to profitability by purchasing larger aircraft. Can't think of one? Hmm...

 

[~~~^~~~]

A lot of this is what he stated in his SLC meeting. The 50 seat market doesn't make enough revenue on certain routes with the lower fares out there. I can see why the RJDC is getting nervous....


Bye Bye--General Lee

The RJDC forecast this and you probably can remember our arguements when I told you the RJ was self scoping due to the seat mile costs. There is a finite market for any airplane and ALPA knew it too. Scope as we currently know it is alot more about keeping votes and keeping power than protecting jobs, or restoring our industry.

Actually your MEC should be careful what it wishes for. Delta needs productivity enhancements and 737-200's and MD-80's are scheduled to be gone before any RJ's. The RJDC has effectively stopped an US Air style job grab.

ACA, Mesa, and to a lesser extent, Skywest, have begun working towards a future under their own code, flying 737 sized equipment on routes once populated by legacy carriers. SLC is not exactly an ASA, or Comair hub.

It might be a little early for you to begin singing "ding dong the witch is dead..." And as you know, Delta has to be a network carrier to survive and even if the RJ flight is a loss, it might be the only way to get 15 to 20 additional people in your 767 to make it profitable across the pond....

 

[General Lee]

bvt1151,


Wait one second, can you compare history to what is happening right now? I don't think so. What did the internet do for airlines in the past? It wasn't there. The lower fares are probably here to stay---so to combat that and the expected growth in travel---you need larger airplanes to spread out the costs. The 100-120 seat market is the next "big thing"----and Dalpa knows this. After we give back some pay etc--expect a larger 100 seat order, and Grinstein knows that Dalpa will fight for this type of flying, at a reduced rate when everything is said and done. The 50 seat market had it's day in the sun---and it helped us when we needed it---after 9-11. There are some market pairings that can use 50 seaters---but the majority can not and especially not against LCCs in direct competition.

Also, didn't someone say that an airline cannot "shrink to profitability?" Getting larger airplanes is not shrinking--it is being smart.

Bye Bye--General Lee

 

[~~~^~~~]

bvt1151,
Dalpa will fight for this type of flying, at a reduced rate when everything is said and done.
Bye Bye--General Lee

Thanks for answering my question General. Do you want a copy of ASA's pay rates so you can see what you'll have to undercut? American's new rates are not far off either.

 

[General Lee]

Fins,

I never said it was "dead." I just pointed out to BVT1151 that there are some markets for the 50 seater. Some of the current 50 seat markets should probably be replaced by 70 seaters---which you would like. More seats will help combat the lower fares. I can forsee Dalpa giving the OK for 70 seat replacements over the 50 seaters, but Dalpa will try to keep the 100-120 seaters for our returning furloughs. And yes, we need feed--any way we can get it--to help fill the 767ERs going across the pond. But, 50 seaters may be inhibiting growth because we could probably bring in MORE passengers on larger airplanes---70 seaters or others---with the lower fares out there.

Bye Bye--General Lee

 

[MedFlyer]

bvt1151,

There are some market pairings that can use 50 seaters---but the majority can not and especially not against LCCs in direct competition.


Bye Bye--General Lee

You got that backwards. Most market pairings can support an RJ, but the majority can not support a 737. Remember, DL's mainline loadfactors are now starting to drop because DL is adding too much capacity. Replacing RJ's with 100 seaters will drive loadfactors and yields even lower.

RJ's also don't compete with LCC's on most routes. Even on routes where they compete head to head...they really don't compete. For example, PHX-SLC....yes WN flies this route, but DL doesn't have to compete against them. Most people on DL's flight from PHX-SLC are connecting on to other cities w/o WN....like BIL,PSC,EUG,RAP,YYC,etc.

The average May loadfactor on a DCI CRJ was 69% which means the average 50 seater had about 35 passenger and the average 70 seaters had 48 passengers. If you replaced either of those with a 100 seater you'd end up with a loadfactor of 35% or 48%!!!! Sure you could fill up the plane more if you lowered fares, but DL can hardly afford to lower fares even more.

There are definitely some routes that are full and need a bigger plane, but most RJ routes are RJ's for a reason.

 

[bvt1151]

Save me one of those pom pons from the bankruptcy rally.

The reason you can't find the current situation in airline history is because it isn't there. There is, however, an obvious trend in US Domestic airline travel...smaller aircraft. Remember when it was 747's, DC-10's and L10-11's going cross country? Now its SWA 737-800's and JBLU A320's. Why? Because the fortress hub does not work anymore. It worked in the 80's and 90's when you could charge an arm and two legs for a ticket, but now the fortress hub network dilutes revenue too much and increases ATC delays. Why are all the RJ's in ATL? To feed the 767's. If it weren't for the large aircraft in ATL, you wouldn't see nearly as many RJ's because there would be no need to feed. Finally those RJ's would be released to do the doubly profitable point to point routes. As smaller international aircraft such as the 7E7 come into the market, there will be less need for international connections and you will see much smaller cities receive international service...IND, MCI, BNA, etc.
Here's how it will play out: Delta will acquire more, larger aircraft. These will achieve lower CASM's, but without connecting passengers, they will only be 25% full. So Delta has to connect to them. This means more flights to fill the bank to connect to that one large aircraft flight...more ATC delays...more dissatisfied passengers...more costly connecting flights...less money. Delta goes deeper into the red, and blames CASM's so they pursue more large aircraft because, after all, they have the lowest CASM. In order to fill those aircraft, they need more small aircraft flights, at a much higher CASM...and the cycle continues.
Remember that when you connect a passenger, you're dividing that revenue by 2. If you were only using that small aircraft on a point to point route, you may end up with a higher CASM, but you would have a RASM twice as big. This is what Southwest has figured out. They guarantee a point to point profit on each of their segments, which generates huge profits when connections are factored in. Jetblue has a large O&D base in JFK, but they could soon run into the same fortress hub problem. Same goes for Frontier, AmWest, Spirit and ATA.
In Delta's current (flawed) route structure, the 50-seat airframe has reached its limits. However, if Southwest can find 300 routes a 737 can operate on, proportionality says there are 600 routes a 50-seater can operate on. However I'm sure you can find many an article about the 737 market being saturated decades ago. Its a good thing SWA didn't beat that dead horse.

 

[lowecur]

If DL mainline acquires a 100 seater, they will have to retire some MD 80S & 757's. The only saving grace is if UAIR or UAL tanks, and those a/c could be used to fill the vacant routes. I don't see either scenerio playing out, so any help to the furloughs would be minimal and transient until a major blow off occurs to the capacity.

 

[On Your Six]

There will ALWAYS be a role for the 50 seat RJ - especially in a hub situation. Markets like SLC-Pasco or ATL-HPN will likely never require anything more than a 50 or 70 seater. But, you need that pricey feed for the major trunk or international routes. The 50 seat RJ will be around for a long time so long as there are non-LCC contested thin routes that provide valuable feed.

I am a little skeptical of the general concept of 2+ hour point-to-point flying using RJs. Sure, it sounds ideal because of potential lack of volume warranting a 737 (maybe only enough demand for 60-70 seats per day on some routes). However, convenience would likely be the deciding factor for consumers (especially business travelers) because the fares would likely be pretty high to cover the RJ costs. In a hub situation, high fares tend to reflect the ultimate destination - flying passengers from Newburgh to Santiago, Chile. That was OK during the latter 90s when "price didn't matter." However, with the proliferation of LCCs (and JetBlue's impending use of EMB-190s on midsize and small markets), the public now tends to have LOW-FARE MENTALITY on most routes. Business people are no longer always willing to pay top dollar for quick, convenient flights if they only need to endure one stop to the final destination (so long as it saves them money).

Former Delta President Fred Reid was a big fan of the RJ and the potential for spreading point-to-point service across the country. However, two big negatives have come to light with regard to the RJ - high CASM with low potential yield in a low fare market and passenger discomfort beyond 90 minutes of flight. Passengers tend to view props and RJs with the same level of discomfort - small airplane with small cabin. I think AirTran's recent decision to drop Air Whiskey says a lot about how managements view the use of the RJ going forward... Cost, potential for yield in certain markets and comfort are becoming more important factors in the new LCC world.

That being said, the 50 seat RJ will always have its place in the airline business - feeding hubs in non-LCC markets where you can still charge a price premium.

That's my $0.02.

 

[General Lee]

Lowecur,


Say again? Why would we need to retire 757s and MD88s if we wanted to get 100 seaters? What about at SLC? We have retired most of our mainline aircraft out there because we needed to put them in other markets. A friend out there told me that the SLC Chief Pilot said that a 100 seater would be perfect for them in SLC because there are a lot of markets that might not be able to sustain a 737-300, but are too small for a Skywest 50 seat RJ. (Like Missoula and Kalispell in the Summertime....) Can you rebutt that theory? I didn't think so. Rmember, Grinstein is ex-Western and he likes the Montana stuff--and said so in the SLC meeting. Not everything needs to go thru ATL---that was Leo's idea--and he is gone. The MD-88s still have long term leases (I think thru 2010), and the 757s are great on Song--and could be used for more allnighters and more attacks on Jetblue if needed.

Bye Bye--General Lee

 

[bvt1151]

However, convenience would likely be the deciding factor for consumers (especially business travelers) because the fares would likely be pretty high to cover the RJ costs.

.

A point to point RJ will always be cheaper (more profitable, rather) than any connecting aircraft. This is a basic theory of airline economics. On a point to point route, all ticket price is designated for that flight, whereas a connecting flight automatically divides the ticketprice by two, and adds an additional cost at the hub that wouldn't have been needed had the RJ been used. The only reason airlines connected in the first place was because the markets were too thin to sustain point to point with the large aircraft available. Now we have small, medium-range aircraft available.

Former Delta President Fred Reid was a big fan of the RJ and the potential for spreading point-to-point service across the country. However, two big negatives have come to light with regard to the RJ - high CASM with low potential yield in a low fare market and passenger discomfort beyond 90 minutes of flight. Passengers tend to view props and RJs with the same level of discomfort - small airplane with small cabin. I think AirTran's recent decision to drop Air Whiskey says a lot about how managements view the use of the RJ going forward... Cost, potential for yield in certain markets and comfort are becoming more important factors in the new LCC world.

Once again, RJ's are very high yield aircraft when flown point to point. There are many point to point markets not served because no LCC operates an RJ. JetBlue is moving that way with the EMB-190. They didn't go bigger, they went smaller because the smaller you go, the city pairs you can profitably serve grow exponentially. AirTran was not running their RJ's this way. They ran into two problems: First, they were using contract carriers, always costs more (irrespective of labor costs, but then again thats why CHQ and MESA are successful). Second, they were trying to connect the RJ's to feed Atlanta traffic. Its the same situation Delta is in. Had AirTran bought their own RJ's and run them between cities other than super-congested Atlanta, you would have seen them stay. I'm not arguing that the RJ hasn't outgrown the route structure, I'm arguing that the route structure needs to be changed.

That being said, the 50 seat RJ will always have its place in the airline business - feeding hubs in non-LCC markets where you can still charge a price premium.

Feeding hubs is the worst thing you can do to an RJ. It amazes me that people still think RJ's are turboprop replacements. Turboprops were great connectors because of their extremely low operating costs at extremely short stage-lengths. The RJ does not enjoy the same benefits, but rather their benefits come on long thin routes over 300 miles. That being said, there is still a huge market for the turboprop at routes less than 300 miles that several regionals are noticing. Make way for the Q-400!

 

[General Lee]

Why did the new CEO at Southwest state that if the Majors got their costs in line with respect to the hubs--since they are money makers--that even Southwest could be in trouble? He seems to think hubs could be huge profit makers. (and he runs point to point) Remember, hubs make money because you only need to buy equipment for each gate once, and have very productive people on the ground that work mulitple flights all day long. One major problem we have is that we (at ATL and CVG) have more planes that are too small and can't bring in extra revenue. We have replaced all of our larger airplanes with smaller RJs since 9-11, and now we lack the right number of seats to bring in meaningful revenue. When the fares are lower, the need for more passengers to make up the difference is apparent.


Bye Bye--General Lee

 

[bvt1151]

Why did the new CEO at Southwest state that if the Majors got their costs in line with respect to the hubs--since they are money makers--that even Southwest could be in trouble? He seems to think hubs could be huge profit makers.

Better yet, why would the new CEO at Southwest reveal their weakness? Sounds more pheasible to me that they would tell the Majors what they wanted to hear to keep them going down the wrong path. Its what I would do.

If the CEO of Southwest really thought fortress Hub and Spoke could run him out of business, he would be doing it. But there are no fortress hubs planned for Southwest, are there?

The problem with the hub is you have to hire enough staff and acquire enough gates to run your operation at the busiest time, leaving gates and personnel highly innefficient. Southwest does not run "banks" as does a traditional hub and spoke, so they greatly reduce their "footprint" at an airport respective to their flight load.

 

[General Lee]

BVT1151,


Maybe you haven't been to ATL yet (??), but we are busy there all of the time. No inneficiences here on the ground people, just the ridiculous 3 hour sits for pilots, which Grinstein said he may change to a rolling hub---which would make it even more efficient. As far as us falling for a "dastardly plan" set up by the Southwest CEO---I doubt that. Come on man, you are grasping for straws here. We know at Mainline that we are due for pay cuts, and we also know that we have too many 50 seat RJs. There will be a compromise. Less pay, but more larger aircraft. (100 seater and up) That is the only way to fight the LCCs---more seats.

Bye Bye--General Lee

 

[Heavy Set]

Don't underestimate the comfort factor...

bvt,

Wow - you're an airline genius. If given a choice, would passengers fly on an ASA/Comair CRJ between ATL and Rochester or an AirTran 717 given the same price? Airline economics don't work the same way in a low-cost/low-fare environment - I think that's On Your Six's point. Most passengers are much more cost-conscious now than before. If fares drop, you can't cover the costs as well if you only have 50 seats - you need high-frequency like Indy Air is proposing. Most regionals don't operate in a high-frequency mode...

Regardless of the economics debate - one fact remains constant. RJs are not viewed as comfortable. Every time I fly on an ERJ, I watch as the onboarding passengers GASP in dismay when they see how narrow and small the cabin is - I have seen it many, many times. The CRJ is slightly better in terms of roominess, but the bins are way too small (especially for business travelers who might want to use their laptops in flight) and the windows are oddly low causing back and neck pain. I am not the only one who believes this - it is a popular view... Comfort counts and both AirTran and Grinstein know it.

 

[lowecur]

Lowecur,


A friend out there told me that the SLC Chief Pilot said that a 100 seater would be perfect for them in SLC because there are a lot of markets that might not be able to sustain a 737-300, but are too small for a Skywest 50 seat RJ. (Like Missoula and Kalispell in the Summertime....) Can you rebutt that theory?

I have no idea what you are trying to say. You say that Missoula & Kalispell could not sustain a 733, but that they are also too small to support a 50 seat RJ. So a 100 seater would do the trick? Knock, knock - Hello McFly, is anyone home?

If what you're proposing is to replace Skywest's CL65's with 100 seaters, then you guys better be prepared to take all the CL65's back from Skywest. On a previous thread, it was verified that DL would be stuck with those leases if the contract was broken.

 

[sweptback]

If given a choice, would passengers fly on an ASA/Comair CRJ between ATL and Rochester or an AirTran 717 given the same price?

Given the same price, there's many factors that go into it. Which airline gets them there at the time they need to be there? How about frequent flier allegiance? There's a lot of perceived benefits in frequent flier programs even if a customer only has a few miles banked and has no chance of redeeming a frequent flier ticket anytime soon. You see where I'm going with this. I'd venture to say that most passengers don't care one bit which airplane they are booked on. Most online booking sites don't even say what airplane type is operating the service until you have nearly booked it, and even then hide it on another page! Only the seasoned travelers will actually know or care that a regional jet is operating the flight, and for every one of those people, there's four more that don't care one bit as long as they get there on time.