Do RJs make money?

[Flyer1015]

Your $69 might have been on Ifly, I'can't find a ticket that cheap in Delta!

Just searched JFK-TPA, one way, and the date that was already on by default... Dec. 19, on www.delta.com


$67.70

 

[MickeySlapnutz]

Back to basics! Too many financial analysts are trying to reinvent the wheel in the aviation industry. The fact remains that it’s still just a matter of simple arithmetic. Let’s compare a CRJ 200 in this example: The Total operating cost of this RJ is approx. $2400.00 per hour. You can figure that the average ticket costs approx. $350.00 per person (call it a round trip). At our company the average CRJ flight is approx. 1.3 hr. Load factor most of the time is 23 or better. In this case (3120/175=17.8) the load to required to break even is 18 pax. With this in mind you can say that we are making money most of time for our big Mother!

Right on! They are cash cows. Plumbs to be picked. Cash registers...just ring the bell and take the money.

Now go buy some FLYi stock and just sit back and rake it in!

 

[Crash Pad]

If it costs $1500 an hour for an RJ then Comair should just become its own carrier. Even I can put 15 people on an airplane at $100 dollars a crack.
Doug Voss a little known industry insider once said "there is no market for the RJ"... another guy Chuck Howell "You just can't make money with an RJ unless someone else pays the bill"
You will note that there is only one carrier that doesn't have someone else foot the RJ bill. That would be FlyI.
The thread started out with a good theory. Airlines have tried to reinvent the wheel... Take an airplane that can't make money on its own but will supply connecting passengers. We lose on one leg but gain on the high volume leg.
Towns like, Macon, CHS, CHW, Hickory NC... Every city on the Skywest route map can most likely not support an RJ. Even if the towns could they certainly can't support 5. Which when I land and see a USAir, United, American, Delta, NWA, and CAL RJs on the ramp I think "Does XYZ city really need that much air service.
Gordon Bethune once had a meeting at CAL in which he said "we are going to stop doing everything that doesn't make money"... That is the wheel. That is how buisness works. You can get caught up in buzz words... Route structure, frequency, RPM, CASM, On time %, Completion factor, etc... At the end of the day an airline has one job in the world... Make Money.

 

[Cadillac]

This thread reminds me of college essay exam questions. The kind where the test asks a question, and someone gets the wrong idea and goes off for their hour and a half in the wrong direction. Then they don't understand why they failed the test when THEY FORGOT TO ANSWER THE QUESTION.

While you guys bicker about CASMs and RASMs, the answer to the question "Do RJ's Make Money," was correctly answered by Bender Gonzales. Yes, they do. But only because the people flying the planes and serving the pax do it for a third of the cost of what mainline pilots will do it for.

 

[DirkkDiggler]

I think "Ben Dover" hit this one, but it probably went over most everybody's heads. The RJ's don't have to make a profit on a leg by leg basis. They provide feed to a mainline hub, where those passengers board other mainline flights all over the world. That's why US Air flies into Erie, PA 6-8 times a day with flights leaving an average of half full (on a good day). They are trying to lure everyone who flies out of Erie into Philly or Pitt so they can carry on to anywhere else US Airways flies. The RJ isn't required to make a profit from Erie to Pitt in order for it to be considered a success by mainline. It just has to snag those Erie passengers and funnel them into the US Airways system.

 

[Terry Hunter]

I think "Ben Dover" hit this one, but it probably went over most everybody's heads. The RJ's don't have to make a profit on a leg by leg basis. They provide feed to a mainline hub, where those passengers board other mainline flights all over the world. That's why US Air flies into Erie, PA 6-8 times a day with flights leaving an average of half full (on a good day). They are trying to lure everyone who flies out of Erie into Philly or Pitt so they can carry on to anywhere else US Airways flies. The RJ isn't required to make a profit from Erie to Pitt in order for it to be considered a success by mainline. It just has to snag those Erie passengers and funnel them into the US Airways system.

BINGO!

The RJ's are simply a marketing tool to grab passengers out of the small reach areas, and get them to a hub for a main line ticket.

50 seaters have a really tight profit/cost margin, and are probably on the headache list of financial analysts at mainlines. But why do we see "regional" jets doing cross-national flights?

 

[DirkkDiggler]

And why is the magic number 50 giving these airlines a headache? Scope clauses. The 50 seat RJ is the 1900 of tomorrow.

 

[Crash Pad]

Yep they don't have to make money on there own. That is why every airline is in BK. The idea looks good on paper.

 

[surplus1]

RJs are not "different" from any other airliner. When operated correctly they can make money. So can a 747 when it is operated correctly.

There seem to be two major problems associated with the inability to make money. 1) The legacy airlines don't know (in today's market) how to operate their airliners profitably, and that is true whether they are 737s, 747's or anything in between. 2) The legacy airlines never had a clue, in any market, how to operate small airliners like the RJ and have made a total mess of it. In both cases they operate on the concept of "mraket share" and that can't work in a deregulated system of low fares. The only thing that business concept produces is excess capacity, and that's where we are.

The "fee-for-departure" concept, invented by the major airlines, is mostly responsible for the inability of the RJ to "make money". Once that system was forced upon the regional airlines by the major airlines, the concept of why RJs existed in the first place was completely destroyed. As a result, a very profitable platform became unprofitable in a hurry.

First there was over expansion. Too many RJs were added to the various fleets, at the direction of the legacy carriers. Second they were being sent to places they were never intended to serve for reasons that included no logic at all; again at the direction of the legacy carriers. "Market share" at any cost is a recepie for failure, and they are all failing, with very rare exception.

The big bosses at the legacy airlines couldn't operate their own aircraft successfully and they had no idea whatever as to how to operate RJs. However, "fee-for-departure" gave them the "right" to make the decisions and they did. They ordered their feeders and subsidiaries to buy aircraft that they did not need and to operate them in markets where they were not needed, and to continue to do so, even when they couldn't make a nickle. They "paid" to fly them empty if necessary. This resulted in "book profits" at the regionals that didn't really exist, and huge losses at the majors who were footing the bill.

When the revenue sharing concept was in place the RJ was a cash cow. It only went where it was needed and it NEVER kept going there if it was loosing money. The small carriers (like Comair) didn't buy airplanes that they didn't need. When their so-called "partners" (like Delta) said we want you to fly from A to B, and that route couldn't produce the revenue, the regional said "no thanks". When the major said we want you to feed flight 300 by flying from B to C and the revenue share was not enough to cover the cost, the regional said NO, we can't do that. The majors didn't like the fact that they could not "control" where the RJ went or when it went, so they forced them to give up the revenue sharing and went to the "fee-for-departure" idea. This gave them the "control" that they wanted but it also produced an ever increasing "loss" for the RJ in what was now an artificial system. The "control" that the legacy carriers demanded and got was also a formula for red ink.

The so-called "failure of the RJ" is in fact induced by the mismanagement of the legacy carriers. It took Delta all of 4 years to change Comair from the most profitable airline in the country to a money losing albatross. If Delta hadn't forced (and I mean literally) Comair into fee-for-departure by buying it, Comair would not be as "big" as it is and it would not be going to many of the places it now serves, but it would be making money. Why? Because its management knew how to run a "low cost carrier" operating RJs, whereas Delta management had no clue and still doesn't.

The same principles apply to the LCC's, which do make money. They are niche carriers that are not trying to be all things, to all people, all of the time. SWA, although it is now virtually a legacy carrier, has always made money. It goes only to the right places, at the right times, with the right equipment. So do Air Tran and Jet Blue. They just don't go where they can't make money with the equipment they operate.

FlyI is not a good example of why RJs can't make money. They let themselves get boxed into a scenario of continuing to go to the same places they served as a UAL feeder, with the wrong airplane and they didn't get their "right" airplanes in time. A CL 200 can't compete in a market that requires a B-717 or an A-319. "Feed" is helpful but it was not the purpose of the RJ. If you have nothing to "feed" but you have a fleet of airplanes whose only purpose was "feed", you can't make it until you get out of that mold. FlyI's problem wasn't really their airplane, it was their timing. They were forced to make the move (by UAL) at the wrong time and they didn't have enough capital to adjust to a completely new way of doing buisness. In reality, they were among the first to buy off on the "fee-for-departure" idea. Therefore, when there was no one left to pay the fee they were unprepared to go it alone. In other words, I'm saying that ACA was based on a false premise to begin with (FFD) and tried to perpetuate it by serving markets that had never generated enough revenue to support their operation.

Comair never did that and that is why the airline was "bought" by Delta. It happened because Comair management refused to accept the concept of "fee-for-departure", so Delta bought the airline, imposed the system, and destroyed it in the process.

If SWA, Air Tran, or JetBlue, were trying to do what Delta does in the way that Delta does it, they too would be loosing buckets of money. Comair is loosing money because its parent company, which is also loosing not only money but the entire farm, forces it to do so. Business decisions are not made at Comair, they are made at Delta and they have been, in the majority, all wrong ever since Delta purchased the company.

The RJ isn't the problem. The problem is the people making the decisions. To keep it simple, they don't know what they're doing and the proof of that pudding is the pot.

Skywest currently "makes money" or so it is believed. The truth is that if UAL and DAL no longer "paid" Skywest to fly, they would be no better off than FlyI and it wouldn't take long for their few bucks to dissappear. Their "business plan", like all the other regionals, is not of their own making. They go where they are told to go and they are paid for doing it, whether or not that route is a money maker. That's not a business plan, it's a phony charade. The product of fee-for-departure. Over capacity subsidized by two bankrupt major airlines. That's not a recepie for "success". Take away either of those to bankrupt "parents" and Skywest will go broke in a hurry.

The same can be said of Express Jet, American Eagle, Republic, and all the other "feeders", including the "low cost" Mesa. All of it rides on the fee-for-departure bubble and is not viable on its own. Those companies would not have expanded as they have in a revenue-sharing world. In fact many of them would not even exist or they would be like Great Lakes. Pinnacle and Mesaba wouldn't have any "jets" at all if they were not purchased by NWA.

The worst thing that ever happend to Comair was its acquisition by Delta Air Lines. The same thing applies to ASA, although to a lesser degree since they were always totally dependent on Delta feed. When it was purchased, Comair was not totally dependent on Delta feed. I'm not saying it would have emerged as a giant by any means. However, I am saying that it certainly would not be where it is today.

The current situation is not the fault of the RJ, it is the fault of Delta Air Lines and in a similar fashion that of the other legacy carriers. The "market share" concept, which every legacy carrier embraces, is a failure and so is every legacy carrier. with the possible exception of CAL. The people that are making money don't do it on the basis of market share. They serve those markets where there is a need for the sevice they provide and few if any other places. The right airplane, in the right market, at the right time, makes money, even when the price of a ticket is far lower than it ought to be.

Common sense should tell you that you don't fly a 747 in a market that only needs a 737. It should also tell you that you don't fly and RJ in a market that needs a 737 or that needs no service at all. When the revenue doesn't support the operation you don't go there. It's really not rocket science. Even WalMart doesn't put a super center in an isolated community of 5,000 people.

The only thing wrong with the RJ sits in the corporate headquarters of every legacy airline.

 

[hoover]

RJ's could have made money if they had been properly marketed. The RJ originally gained popularity with passengers as an alternative to a turboprop aircraft. But on many routes, a turboprop was more economical. That makes the RJ a premium product, and the airlines should have charged the passenger accordingly. But they didn't and now people are accustomed to paying the same fare for premium service.

 

[V1cutsrfun]

Just my .02 cents worth. Isn't the definition of insanity trying the same thing over and over again expecting a different result.

Lets see
Usair, Lots of RJ use
United, Lots of RJ use
Northwest, Avro and RJ use
American, RJ use
Delta, lots of RJ use and SOLD ASA
Flyi, nearly extinct
All but one in BK, lost pensions and bleeding Cash

Southwest, No RJ's
Airtran, No RJ's
Frontier, limited use of the RJ-700
Alaska, Limited use of the RJ (by camparison)

The RJ FAD is over

CAL is the exception, fuel prices dictate a diff biz strategy
Just my one share worth of Flyi stock's worth

 

[JohnDoe]

quote:
"The RJ's don't have to make a profit on a leg by leg basis. They provide feed to a mainline hub, where those passengers board other mainline flights all over the world. "


Trouble is, these days, that is not the only thing that they do. They are being operated point to point, etc., such that they are not "only" providing feed. Not all passengers are connecting. My wife has taken several trips lately where she had to connect, and BOTH legs were RJ's.

 

[DirkkDiggler]

That's a concern you'd have to take up with the accounting department!

 

[tuna pimp]

The $1400 block totals that you guys are looking at for OO do not include any sort of overhead burden. With this data you can analyze the profitability of the aircraft on a DOC basis, or assess comparable missions however it will not tell you whether the RJ flying is profitable or not overall. For this you need to take into account ALL expenses (fully allocated) involved in operating an airline.

 

[Ben Dover]

I think "Ben Dover" hit this one, but it probably went over most everybody's heads. The RJ's don't have to make a profit on a leg by leg basis. They provide feed to a mainline hub, where those passengers board other mainline flights all over the world. That's why US Air flies into Erie, PA 6-8 times a day with flights leaving an average of half full (on a good day). They are trying to lure everyone who flies out of Erie into Philly or Pitt so they can carry on to anywhere else US Airways flies. The RJ isn't required to make a profit from Erie to Pitt in order for it to be considered a success by mainline. It just has to snag those Erie passengers and funnel them into the US Airways system.

Dirk,
Thanks for validating my point.

The next two concept to grasp are those of fix costs vs. variable costs, and their relationship to breakeven point. Suffice it to say that airlines have high fix costs. The traditional carriers have invested zillilons of dollars in infrastructure centered at their hubs. Whether one passenger flies or a million passengers fly via that hub structure the cost is virtually the same. Hence the importance of "encatching" as many people as possible.