Regional Jet Economics - Mike Boyd

[LegacyDriver]

Legacydriver,

The RJs are replacing props and mainline airplanes on routes that used to support mainline planes---and could again but they are all parked. The fares are half, and the RJs cannot bring in enough revenue to the hubs to make them profitable. You need many many passengers to fill every plane at the hubs to create a chance for a profit.

Bye Bye---General Lee [/B]

But they are replacing turboprops (or *were*) in many markets. My question is, does this result in more traffic?

 

[MW44]

That is a good question. It's almost as if the legacy carriers spent billions fixing a problem that didn't exist. People complain when flying, period. The same ones that hated turboprops now can't stand flying on a cramped RJ. In most cases the turboprops were not competing against LCC's so their was really no need to replace them with rj's. If the legacy carriers had spent all that time and money to compete directly with the LCC's they might not be in such a bind now.

 

[NuGuy]

Okay, but does an RJ generate traffic that the turboprops it replaces can't?

Hiya Legacy Driver,

RJs NEVER generated traffic that the turboprops didn't. People are going to travel, or they won't. The size of the aircraft, or the type of propulsion only determines the squawk factor. I'm willing to bet that a very, very small percentage (on the order of 0.5% or smaller) of people would actively refuse to fly on a turboprop when they REALLY wanted or needed to go somewhere.

When RJs were new, and perhaps in a particular market one regional flew them, and other didn't, you might see some shift in one from the other, but now that everyone flys them, there is no significant difference. The same number of people are still flying.

When fares were high, and the idea of the RJ was to act as a "pathfinder" for long, thin routes, or hub bypass at a premium fare, it made sense.

Another way of looking at is now you are trying to carry the same people over the same routes in 5 limos that the LCCs are carrying in 1 bus, but in this case, the bus is nicer than the limos, but the limos cost more to run.

The legacy airlines got jacked into the RJ deal by stupid competition (IE "keep up with the Joneses") and trying to solve a problem that DID NOT EXIST. Now everyone is driving Ferrari's, nobody can afford them, and no one wants to be the first to get rid of theirs. Meanwhile, the frugal families, driving the Ford Family Trucksters, are laughing all the way to the bank.

Some of the more vengefull regional guys may cackle and laugh over the plight of the mainline pilots, but consider this: Not one of the LCCs fly's RJs. If all the legacy carriers go away, so does your RJ job.

Best,
Nu

 

[belchfire]

AirTran isn't stupid

That is what I was saying, in different
words. They figured out that it cost
about the same to run their own 717
as it does to give AirWiskey a profit
in an RJ...

The plus side is that it is a larger, more
comfortable aircraft with a "business"
class section,you don't have to give
up your carryon and they are in direct
control of the quality of service. Very
smart move, and I would love to go there
or to one of the few other operations that
are showing a profit in what is possibly
the most difficult chapter in passenger
transport history.

I have wondered a great deal about why
the mainlines are contracting out these
services to the rj's instead of running more
717's, a-319's...why USAir and DL are
creating dissention in their family by
getting outside contractorslike Mesa,
instead of running their own rj's if they
insist, or beefing up their own regional
airlines. The first thing AA did was park
all of the new 717s and keep running the
f-100's for two years. I wonder how much
that cost! Maybe it worked out better
(less training and cheaper leases vs.
fuel savings) I don't know.

FDJ 2 showed some numbers on NWA vs.
RJ. Yeah, 17% loss operating the RJ
or -4% on mainline...what we didn't see
was how big the -4% at mainline was. I
bet it was a much larger number than the
-17% on the rj's was. How much would
they have lost if they had all been
mainline flights? Dollars, not %! They are
really looking at the bottom line, dollars.
there are only three kinds of lies. Lies,
damm lies and statistics.

Boyd says on flights less than 300 mi
costs go "bonkers"...what about a
73 on a 300 mi trip? Bet they go bonkers
too! I love it when journalists/analysts
(like politicians) try to make a case for their
views by presenting one side of the story
as gospel.

Are RJ's profitable...probably sometimes.
Do they loose less money over the same
route with the same number of butts in
the seats (not percent of capacity, but the
same whole number of pax), bet your bum.

And when the mainline can loose less/show
a profit with one of their own planes on
that same route, guess what...they will
do it.

Bet Indy air gets more airbuses when/if
the number of enplanements justifies it.
For quite some time Midway was profitable
running RJ's and F-100's. IMHO only two
factors killed them. 1) Poor management
and 2) a weekening economy pre 9/11.

 

[fam62c]

RJ economics

I still say that this discussion is somewhat strange. The main question seems to be: is an RJ more or less economical than a 717 or 737? Let me pose the question another way: is a 737 less economical than a 767 or DC-10? The answer is.....that there is no answer to the question. It all depends on the route and the key is matching the correct aircraft to the route. Airplanes and routes come in all shapes and sizes and it's the fit that's important. The LCC's aren't flying "RJ's" but they're not flying 777's either. To say that they don't operate RJ's because the CASM's are too high wouldn't be true. They could acheive lower CASM"S with the 777 than with the 717 or 737. The LCC's have zeroed in on the most accessible and well traveled short to medium length routes where they are most able to compete effectively with the majors and that mission demands that 717,737,A-319 etc. RJ's have a certain niche and so far the LCC's aren't interested in short/thin routes. Additionally, they LCC's don't seem to be interested in having hubs that need feed. They are happy to pick off the passengers that want to go between cities and they don't want to mess with connecting passengers. This may change in the future and at some point LCC's may get into the feed business but for now they have plenty of passengers at the fare levels they offer. An "RJ" is just another airliner and a "regional airline" is just another airline. It's all about matching the plane to the market and creating the proper cost structure so each aircraft can be profitable when used in it's optimal role. Competition and the market will determine which airplane types are in which markets and what cost structure is necessary to make money.

 

[LegacyDriver]

Maybe the LCCs will pick up RJs when the Legacy Carriers being to die off. After all, if there is nobody around to compete for the routes then why not snatch them up and make them your own? You will eventually run out of 133-seat city pairs over time.

I think the Legacy Carriers are using the RJs to compete against each other more than against the LCCs. The LCCs cannot be beaten by Legacy Carriers no matter what airplane they fly.

It's like Delta, American, etc. are wrestling for a deck chair while Southwest, AirTran, etc. are firing torpedoes at the boat!

 

[Heavy Set]

It comes down to being able to cover the costs with enough seats. After that, any additional revenue is profit. You can't spread the costs over a limited number of seats and make a profit as airfares continue to fall on LCC routes - that's the big point here. An RJ on contested routes just won't work. Why would Delta put a CRJ on the Salt Lake to PHX route when it competes with SWA and AWA? You can't spread the costs very well over 50 seats... RJs should be kept on secondary and tertiary routes (non-LCC routes) so that they can charge a premium that allows it to cover costs per seat and make some profit...

As for the RJ and passengers preferring jets vs. big props, I have flown on RJs recently where the passengers were "horrified" by how small the airplane was (a 50-seat ERJ). I think there is an aversion to flying on anything "small" when compared to an A320 or 757. I think the regionals should consider more large, economical props for short-distance flights. There are plenty of ATR-72s in storage (ASA continues to use them) and the Dash 8-400 seems to be a winner in Europe where it is used on short stage flights profitably. In this case, we should be looking at the economics vs. the "prop aversion" problem because "RJ aversion" also appears to exist - passengers will never be happy unless they are flying on a 777.

We need to think more in economic terms going forward and the RJ doesn't make a lot of sense on LCC and short-stage routes...

 

[MedFlyer]

It comes down to being able to cover the costs with enough seats. After that, any additional revenue is profit. You can't spread the costs over a limited number of seats and make a profit as airfares continue to fall on LCC routes - that's the big point here. An RJ on contested routes just won't work. Why would Delta put a CRJ on the Salt Lake to PHX route when it competes with SWA and AWA? You can't spread the costs very well over 50 seats... RJs should be kept on secondary and tertiary routes (non-LCC routes) so that they can charge a premium that allows it to cover costs per seat and make some profit...

Here's the problem with your argument. In order for DL to compete on the SLC-PHX leg, they need to run 6-8 flights a day. If they convert all those flights to mainline, DL would be dumping hundreds of seats into this market. Yields on this route are already low and in order to fill the extra seats DL is dumping, they would have to trash the yields even lower!

Of course, when DL lowers fares, you can bet that HP and WN will respond. This creates a fare war. Who do you think will win a mainline fare war? HP and WN with CASM's of 7-8cents or DL with a CASM of 10+cents.

Sometimes you have to run RJ's on major routes in order to provide frequency at off-peak times. And sometimes, you have to use RJ's to be more selective with who you sell tickets to.

Everyone on this board complains that fares have fallen too low (and they're probably right), so your solution is to dump tons of extra capacity and drive yields even lower.

 

[Heavy Set]

Clearly DAL will need to lower its costs in order to better compete with SWA, Jet Blue, AirTran and others. The DAL pilots will do their part and negotiate lower wages - and hopefully all other labor groups will contribute as well (including regional employees).

Hopefully DAL will eventually incorporate what is good about Song (including low fares, entertainment units and food selections) into mainline flights (especially those that compete directly with LCCs). This may take some time, but I hope that it eventually happens because the Song experiment has proven that passengers will positively react to low fares, entertainment systems superior to those at Jet Blue and superior food selections vs. the other LCCs.

Throwing an RJ into the LCC routes is almost guaranteed to stifle profit potential because of the limited "upside" after the costs are covered. Utilizing larger airplanes on the LCC routes will at least give DAL an "opportunity" to make a profit given the ability to spread costs over more seats. With impending cost cuts (everyone expects them now), DAL should be able to compete better using mainline aircraft. Throwing more RJs into the LCC routes will not lead to higher profits... Just look to AirTran for an example - adios to the RJs...

 

[bvt1151]

RJ's offer more frequencies and therefore more revenue potential. Also they allow for the bypass of hubs with point-to-point service.
Contrary to what Boyd believes, the RJ is the greatest threat to the LCC.

 

[KingAirKiddo]

Clearly DAL will need to lower its costs in order to better compete with SWA, Jet Blue, AirTran and others. The DAL pilots will do their part and negotiate lower wages - and hopefully all other labor groups will contribute as well (including regional employees).

Nope, sorry...isn't going to happen, brother. We are NOT grossly overpaid in comparison to our peers at other regional carriers and will not give a freakin' cent (reference CMR, ASA, ACA, SKYW, AWAC, ExpressJet, Eagle). Comair may be at the top of the pile, but ACA (the next highest paid CRJ pilots) have payrates within 5% of what Comair pays. Everybody likes to throw Mesa and Chautauqua rates back at us--my contention is that our rates are not too high, THEIRS are TOO LOW. If matching the lowballing carriers is going to be the accepted norm, then Delta pilots should be flying the MD-88 for Spirit wages. What is the likelihood of that happening? I didn't think so...

Additionally, I am a bit perplexed by the mainline pilots who actually condone regional pilots (wholly owned or not) taking paycuts. THE SOLUTION TO THE RJ "PROBLEM" IS HIGHER PAY AT THE REGIONALS. THE MORE COSTLY IT IS FOR US TO OPERATE THESE PLANES, THE LESS ATTRACTIVE THEY ARE IN REPLACING MAINLINE SERVICE. Why can't some people get that through their heads?

I simply want to put in my time at my current regional airline employer and then move on to the majors someday like a good little soldier, but I'm not going to work for poverty level wages in the process (and certainly not while flying a jet for a profitable company). Go pick on some other group, such as the overpaid senior mainline flight attendants or better yet--MANAGEMENT.

Enjoy your weekend...

KAK

 

[Heavy Set]

Frequency is not the answer on LCC routes - especially when you have higher CASM on the RJs and passengers who HATE flying on uncomfortable CRJs. I bet most business passengers (who prefer frequency) would rather fly AirTran or Jet Blue vs. a cramped RJ with zero room to do any work. What's up the low windows? As a passenger, the CRJ could not be more uncomfortable on flights over 2 hours - even 1 hour is pushing it with the cramped leg room and the super-low windows (my back hurts after every CRJ flight as I attempt to look out the window).

Again, it goes back to spreading costs over the seats and the ability to make a profit once costs are covered. That's the point. On a CRJ flying an LCC route, you may cover the costs after 45 seats are filled (only charging LCC fares) and then you have 5 potential seats' worth of profit. After mainline costs are cut (and they will be negotiated cost cuts), mainline aircraft will be far more competitive and you have a larger upside for profit. Mike Boyd (everyone's favorite analyst - not), Ray Neidl and Sam Buttrick talk about this all the time - RJs should not be used on LCC routes - you can't make money with them IN A LOW FARE ENVIRONMENT - that's the point... As the LCCs expand (and yes, they are speading like viruses), the role of the 50-seat RJ will likely be marginalized to secondary routes where LCC competition does not exist and premium fares can be charged (to make a profit). That's the reality of the situation...

Hey Kingairkiddo,

I hate to break it to you, but cost cuts are mostly likely already being discussed for all DAL regional employees. If not, Comair and ASA should not expect much future growth in the future. Why should DAL expand using more-expensive Comair employees when it can instead outsource the same flying to CHQ, Skyway or even Mesa? Think about it. Nobody's wages are SAFE. If Comair/ASA is IPO'd, then Comair/ASA will need to compete with other regionals for Delta's contracts (or other majors). Costs might have to go down to compete for contracts - that translates into lower wages for all to preserve margins.... Nobody is safe in this LCC environment...

 

[Air Biscuit]

THE SOLUTION TO THE RJ "PROBLEM" IS HIGHER PAY AT THE REGIONALS. THE MORE COSTLY IT IS FOR US TO OPERATE THESE PLANES, THE LESS ATTRACTIVE THEY ARE IN REPLACING MAINLINE SERVICE. Why can't some people get that through their heads?

KAK

I wish more people would think the way that you do. It's not rocket science. Eliminate the B-scale and the problem is solved.

 

[Heavy Set]

That makes ZERO sense when you have cheaper alternatives like CHQ, Skyway and Mesa out there. Skywest has contributed to lower wages at the regionals too by flying the CR7 at CRJ-200 rates. DAL management will do "apples to apples" comparisons for both mainline and the regionals. The mainline costs will be negotiated downward and the regional rates will need to be addressed too - that is how managment will view things. They haven't forgotten about the Comair strike and how much it cost them... DAL management will not GROW its regional operations at a higher cost base when there are cheaper alternatives out there like CHQ which has already proven itself as a capable partner...

Do you honestly think DAL management will LEAVE MONEY ON THE TABLE and not demand that the regionals reduce their rates during this "pre-bankruptcy" time period? Everyone's wages are at risk and the CRJ role in a LCC environment will likely be altered significantly (Grinstein apparently is not a big fan of the RJ). That's the reality of the situation...

 

[General Lee]

Another problem here is that Delta mainline doesn't have any more mainline sized aircraft, (since they parked all of the 727s, L1011s, and MD-11s) and now the passengers are back in force. Delta doesn't want to buy any new aircraft until a pilot concession agreement is signed. (So we can pay for them) The only airplanes in the desert that could be used right now are the 11 MD11s---and I can't see them flying between SLC and SAN....Although it would be interesting.

Bye Bye--General Lee