Regional Jet Economics - Mike Boyd

[surplus1]

It is hard to be objective given the mainline pilots' agenda of getting rid of the RJ's at all cost and the RJ pilots' agenda of survival, but maybe you'll comment on this concept re why the RJs can "compete" with the LCC's.

I'm not and expert but the reason airlines use RJs really has nothing to do with which airplaine pilots like best or even passengers like best. The game is about making money or hurting your competition (while losing less money to do it).


SWA vs. DAL vs. AAI (AirTran) is the example (side look at CMR).

1. SWA operates 737's with seating capacity of 122 - 137.

2. DAL operates 737's with seating capacity of 107 - 128

3. AirTran operates DC9-95 with seating capacity of 111

4. CMR operates CRJ 200/700 with seating capacity of 50 - 70

The route is A to B. Scheduled block time is 1.5 hrs for all

Assumptions:

Break even load factor (guess - I don't know the real numbers) for SWA is 65%, for DAL 75%, for AAI 65%, for CMR 55 %.

Therefore:

SWA must average - 85 pax on each flight to break even.
DAL must average - 86 pax on each flight to break even.
AAI must average - 72 pax on each flight to break even.
CMR must average - 33 pax on each flight to break even.

To make it easy, they all charge the same fare.

To illustrate we assume that on each of these flights a total of 100 people want to travel at that time.

If there is NO competition, any of the airlines can make money.

SWA flies the route. Delta decides to compete and uses a 737 to match SWA. When DAL enters the market it takes 40% of the traffic from SWA. Result - SWA carries 60 and DAL carries 40 = Both lose money.

DAL changes the plan and uses a CMR RJ. Because people don't like the RJ (according to the mainline pilots), DAL only gets 35% of the market. Result - SWA carries 65 pax and CMR carries 35 pax. = SWA loses money. CMR makes a profit equal to fare of 2 pax.

AirTran flies the route. Same 100 pax are available for each flight. Delta decides to compete and uses the 737. Delta captures 50% of the market. Result - AAI carries 50 pax, Delta carries 50 pax = Both lose money.

Delta replaces the 737 with a 70 seat CMR CRJ. Folks don't like the RJ so Delta only gets 40% of the market. Result - AirTran carries 60 pax. CMR carries 40 pax = AirTran loses money, CMR makes a profit.

SWA flies the route. Delta decides to compete and uses the RJ-50. Same 100 pax available. This time Delta only captures 30% of the market. Result - SWA gets 75 pax = loses money. CMR gets 30 pax = loses money. However, if Delta can increase its share by 3% (3 more pax) then SWA continues to lose and CMR breaks even.

That gentlemen, is how the RJ competes with the LCC. The RJ is NOT the more popular aircraft but it doesn't have to be. The market is simply not big enough for two airlines (unless both of them are using RJ's). By introducing and RJ instead of a 737, Delta can always capture enough traffic to cause its competitor to lose money on the route.

In the illustration Delta only has to gain 16% of the market to force SWA to lose money. With AirTran it only has to gain 28% to force AAI to lose money.

Additionally, any time that Delta can capture 34% of the market it will make money with a RJ, but would lose money with a 737.

The RJ doesn't compete successfully because it is the most "popular" aircraft. It competes because it has a much lower break-even load factor, regardless of its higher operating cost overall. It was designed to "make money on slim routes" and that is exactly what it is doing.

There is a point where the market becomes big enough to support more than one 737 or DC-9. When that is the case, Delta competes with the 737 and removes the RJ.

The bottom line is the issue. Until the market gets big enough, between any two points, to support two mainline carriers, the RJ can and does compete effectively against the LCC. Sometimes it will lose money on the route, but it will never lose as much as the larger aircraft and, at the same time, it will force the LCC to lose money on that route. It's really not rocket science.

Standing by for incoming.

 

[Heavy Set]

The LCC environment has changed everything. SWA, AirTran, Jet Blue, Frontier, AWA, Spirit, ATA (with new 717s coming on board soon), Indy Air and others will continue to place pressure on pricing margins as they expand. DAL will reduce costs through negotiations and then it will need to reduce prices in order to preserve or grow market share. Once it reduces fares, it will need more seats to cover the costs. RJs on LCC routes (and there are many more LCC routes as the LCCs continue to expand) don't make a lot of sense from a cost or comfort standpoint when there are many alternatives. RJs make sense when there is a need for hub feed and there is zero LCC competition on the route. Delta needs to cut costs (it will through negotiation), incorporate the better aspects of Song into mainline, cut fares and increase capacity (add more 757s) to spread costs better on LCC routes... RJs are not economical or comfort-competitive on LCC routes. That's my $0.02.

 

[bvt1151]

It makes no sense that you would argue to send RJ flying to the lowest bidder. Both Heavy Set and General are more intelligent than to think that won't have a downward pressure on their own wages.

...unless they are more interested in seeing Comair and ASA fail than they are at seeing their own airline succeed...

According to Eclat Consulting and the DOT stats (I checked and the numbers jive):

From September 2002-September 2003, Delta operated their MD-88's at 12.6 casm.

Comair/ASA operated 50-seaters at around 10 casm.

And yes, aircraft financing, taxes, insurance and depreciation are all included in that. Please note these are aircraft costs, as the DOT breaks them down in P5.2, and overhead costs such as reservation systems and administration do not apply. There are no revenues reported in P5.2, either. Therefore, your arguement that Comair and ASA aren't actually viable options to mainline aircraft is moot. A 150-seat MD-88 has a higher casm than a 50-seat RJ. Where's Boyd on that one?

And you want us to take pay cuts?

*note: The next highest casm on an MD-80 was Continental at 6.5 casm...almost half Delta's.
Attributable to the high casm is the average stage length for Delta at 589 miles while the MD-80 average was 847 miles.

Crew costs casm were 4.2 for Delta...the next highest was 1.7 at American.

Average stage length at Comair was 448 miles, and 472 miles at ASA.

Clearly a correlation between casm and stage length.

 

[Heavy Set]

Hey, I don't WANT anyone to "take paycuts." But the environment has changed with the LCCs. Delta's management will likely force people to take paycuts to be more competitive - that's the reality of the situation. Think about it - if CHQ or Mesa can do the same for less cost, why would Delta want to expand its higher-cost subsidiaries when it could use CHQ or Skyway for expansion instead?

It doesn't make sense to pit a 50-seat RJs against Southwest and America West 737s on routes like Salt Lake - PHX. How can you cover the costs with the low airfares? If I am a business person, I would rather fly on an AirTran 717 to Buffalo out of ATL than on a cramped CRJ with no room to do my work...

The problem with Delta is that it doesn't have a lot of extra airplanes to put to work at the moment. Demand is starting to return and it doesn't have a lot of extra capacity to insert into the system. Zero plan for 100-seaters (good job Leo). If the economy continues to improve, what will Delta do to increase capaicity with growing demand? Putting extra RJs into the system will upset passengers who can select more comfortable LCC airplanes (i.e., AirTran 717s or Jet Blue A320s) and it will LEAVE MONEY ON THE TABLE because demand will exceed supply of seats.

Nobody wants a pay cut. That is why the DAL mainline pilots are upset - although they are very willing to negotiate now. The fact is that the LCC environment has changed everything, and the RJ pilots are going to have to realize that cost will become critically important in the future - and the RJ's role will likely change to more of a secondary role to avoid competing with LCCs in a low-FARE environment where profit is even more elusive...

 

[FDJ2]

Assumptions:

Break even load factor (guess - I don't know the real numbers) for SWA is 65%, for DAL 75%, for AAI 65%, for CMR 55 %.

CMR breakeven load factor is low because the mainline has to subsidize the operation. CMR only pays for its direct operating costs, the mainline then picks up all the other costs associated with flying that passenger on an RJ. If mainline only paid direct operating costs it would have had over $400M profit last year. The true breakeven load factor for CMR is difficult to determine since no one can accurately state what the true RASM and true CASM is on a CMR CRJ.

 

[MedFlyer]

The problem with Delta is that it doesn't have a lot of extra airplanes to put to work at the moment. Demand is starting to return and it doesn't have a lot of extra capacity to insert into the system. Zero plan for 100-seaters (good job Leo). If the economy continues to improve, what will Delta do to increase capaicity with growing demand? Putting extra RJs into the system will upset passengers who can select more comfortable LCC airplanes (i.e., AirTran 717s or Jet Blue A320s) and it will LEAVE MONEY ON THE TABLE because demand will exceed supply of seats.

DL mainline has plenty of planes for growth if they just increase utilization of the existing fleet. Right now, DL mainline only has planes in the air for 9-10 hours a day. If DL upped that number to 11-12 hours a day, it could easily "create" another 30-40 planes. It would also lower DL's CASM and save DL money from having to buy planes. Another 30-40 mainline planes would be plenty of capacity for the next 2-3 years until DL can take delivery of new planes.

DL has a plan for a 100-seater, but until mainline gets its finances in order, there's nothing DL can do. No one wants to finance planes for DL mainline right now.

While I agree that DL needs bigger planes and that RJ growth is likely to stagnate, I also believe your current idea is financial suicide on many routes. If DL increases capacity as much as you want, DL's yields will be driven into the ground. If fares go too much lower, it won't matter how many seats DL has in a plane....they will still lose money.

 

[General Lee]

Medflyer,

We at mainline would also like for management to better utilize our aircraft---but flying through the hubs can be tough to do that. But, Song and it's predecessor (DL Express) do have better utilization---and we are trying to do faster turns at certain stations---like RDU. Hopefully that will create more of a chance per aircraft to bring in more revenue each day.

But, Heavy Set is right about the SLC hub and some of the RJ routes out of there. I remember flying 757s and 767s through SLC and onto SEA and PDX--and they were always full with very little competition. Now, we seem to have RJs flying on many of those routes (Comair to SEA from SLC????)---and Southwest has been picking up more and more of the market share. The Comair flight from SEA is the last flight out at around 5pm----and that was a 757 a year ago. This is not the RJ pilots' fault--but rather Marketing giving up the route to Southwest. Hopefully Grinstein will change that---and he is from SEA.

Bye Bye--General Lee

 

[Heavy Set]

Yields on the international flights will always be pretty good given the lack of serious competition (or capacity) on most of those routes (excluding London, Paris and Frankfurt). Yields on the non-LCC routes should also be pretty good so long as the cost structure is reduced in line with industry norms (including regional employees). Clearly, the yields will be lower on LCC routes in order to maintain or grow market share until the cost structure is in line with desired margins.

I'll bet that Southwest makes a good profit on most individual flights despite having the lowest fares. There are many reasons for this (single aircraft type, no-frills service, quick turns, good yield management system, etc.). However, Southwest's pilots probably make more than American pilots on average (after huge pay cut) - and its flight attendants will likely make more than their counterparts at Delta and American after their negotiations.

IMHO, Delta needs to incorporate the good things from Song (lower fares, better entertainment system, better food selection, nice atmosphere) into its mainline system. Imagine if someday Delta had those great TV/audio systems and exotic food selections at EVERY seat within its domestic system... Sure, it would require a huge investment and it would take a few years to complete, but the Delta product would be much better than anything out there now - far better than Southwest offerings. Clearly, Delta needs to reduce its employee costs (all employee groups need to contribute - not just the sole union). Delta also needs a better plan of attack for revenue generation - Grinstein promises a new plan by August.

Sure, costs need to come down, but revenue also needs to be increased, and that means that the use of RJs on LCC routes needs to be reduced in order to increase the opportunity for profit. Fifty-seat RJs should be used selectively in markets that have profit potential given the CASM and lack of direct competition. We are talking about non-LCC routes like ATL- Newburgh, Salt Lake - Pasco, DFW - Mobile, and ATL - Melbourne (FL). Fifty-seat RJs should not be used on LCC routes like Salt Lake - PHX, Salt Lake - Portland, ATL - Houston Hobby, and ATL - DCA. You just can't spread the costs over 50 seats and make a profit in a low-fare environment. Plus, the RJs are not comfortable for most passengers on flights over 1 hour in duration. You need bigger airplanes and low/competitive fares to do well in this industry in the future. Look at Jet Blue with its huge Emb-190 order for mid-size markets and look at AirTran with its disposal of its CRJ feed - it would rather use 717s to take advantage of increased profit-potential on mid-sized routes. AirTran's managment seems to understand this argument - the CRJ is inappropriate for certain markets and it has axed them from its system... What is Delta's 100-seat plan? Even ATA will be adding 717s soon (it will even place them on some high-frequency Saab 340 routes like MDW-IND and MDW-DSM to capture more revenue and profit). Delta is way behind the curve with no 100-seater plan - it will now have to wait in line to take advantage of any mid-size market (and profit) opportunities like Jet Blue will do with the EMB-190. Neelman is a genius.

The 50-seat CRJ/ERJ should not be used to battle the LCCs - Delta will lose that battle as the LCCs continue to grow at its expense.

 

[General Lee]

We probably have a 100 seater plan, but don't have the finances without pay cuts. (we have supposedly test flown all of the major types of 100 seaters) Grinstein will have his "Grand Master Plan" in AUG---and if it is good---the pilots may take concessions to allow it to go forward. That is the key here---Dalpa will not give in to a crappy plan that allows for more job reductions and extra RJs. Nope. Grinstein's CVG "town hall meeting" had grandiose plans that included more West Coast flying, maybe Song on the West Coast, more ASIA flying eventually, and less dependance on RJs. That all sounds great.....but......how much$$$$?????

Bye Bye--General Lee

 

[Heavy Set]

AirTran is increasing its use of 717s as it discontinues use of CRJs. ATA may now be getting 717s. Jet Blue has as many as 200 EMB-190s coming its way to deploy on mid-sized markets. Frontier is now using A318s. USAirways is starting to use EMB-170s (70 seaters). Time for Delta management to wake up and order some 100 seaters soon...

 

[AFELLOWAVIATOR]

Hi all,

Actually, Boyd is on to something here.

Everyone knows that the CASM for RJs is very high, on the order of 14-16 CASM. Many regional airlines show a profit, even at that VERY high cost, due to hidden subsidies from their "parent" airline in addition to relatively low labor costs.

Many times, in a code sharing arrangement, the regional airline simply acts as a "provider", no different than when Dell outsources their tech support. The regional airline assumes no costs for marketing, ticketing, processing and in many times the mainline partner assumes the costs for landing fees and provides fuel at their own "discount" rate, not to mention "discounted" accounting for airports where ground services are provided.

Remove these components, and the profit quickly turns to a loss, which is why you don't see any independent, RJ only operators.

In addition, the revenue side of the equation is drying up. Back in the heady days of the 90's, you could soak J Busniessman from going from Moline to {hub city here} with high buisiness class fares. Now he pays significantly less.

And, unlike the mainline, someone who purchases a first class ticket gets the same service on an RJ (with the exception of XJs Avros) as everyone else does, so the parent pocketed the difference.

Now, with fares in the tank, there isn't the revenue that can support the "luxury" of jet service to Smallville USA.

AirTran isn't stupid, and in fact, have a very shrewd group of operators there. They know that RJs costs too much, and refused to pay the hidden subsidy that other airlines pay their regional partners. AirTran was going to force Air Willy to pay the frieght on providing their service, and in the end, it was more expensive than a 717, so they bagged it.

Best,
Nu

Actually, Comair has always been charged for these services Delta provides. This is a fact. I do not understand where you guys get all this info. about "subsidies". As I have posted here before, my info comes from the President of Comair. They talk about it every year at the Employee meetings. Delta does not now, or ever has "given" services to Comair. And in stations where we provide ground services for Delta, like SDF, Comair charges Delta.

All this arm chair quarterbacking is fun to read, but the BS flag had to be waved on this one.

 

[General Lee]

Our EX-CFO Michele Burns stated the contrary in a CVG meeting with some of our pilots. She was incharge of the money.

Bye Bye--General Lee

 

[bvt1151]

Then why are they checking signing the "this information is accurate" line on the DOT reports? Especially under the penalties and fines incurred if the numbers are incorrect.

 

[fam62c]

Delta 100 Seaters

I don't see any way that Delta mainline will be able to operate 100 seat airplanes at a profit except in markets where they are not competing with LCC's. Delta (and the other legacy carriers) has real cost troubles that make it difficult for it to compete, and it goes way beyond pilot pay alone. Most of the majors have lots of emplyees at the senior (high paid) end of the pay scale because they have been around a long time and they haven't grown lately so they are not adding new-hires at the lower end of the pay scale, this greatly increases average cost per employee. The majors have too many fleet types and this is expensive. The majors are paying finance charges on massive amounts of debt. The majors have defined benefit pension plans that need huge cash infusions. For an airline like Delta to make a go of it with 100 seaters against competitors they would need to be like a regional or LCC: traditional pension plans......gone forever and replaced with 401K's, wages for ALL employees who even look at a 100 seater comparable to the regionals and LCC's, 60+ years of accumulated, highly restrictive work rules, gone, $100,000 senior FO and junior CA pay and $200,000 senior Captains, forget about it, Delta and others will NEVER be able to compete with LCC's this way. I'm not even sure the Delta pilots would want 100 seaters when they figure out what their contract would really have to look like to make it possible for them to fly the planes competitively against carriers like JetBlue. They might decide that it's better to keep as many goodies as possible for the big plane drivers and trade away the 100 seat flying via some jets-for-jobs or seperate division type scheme rather than diluting their entire contract to get costs in the range necessary to compete in the 100 seat markets.

Here's what I see at Delta. Barring some economic miracle the company is on the road to failure like USAir and UAL and the cash won't last forever if it keeps getting burned up everyday. DAL will need to seriously reoganize the whole operation and there's only 2 ways to do this: in or out of bankrutcy court. The DAL pilots will eventually be faced with a choice: do what the company wants voluntarily or have a bankruptcy court judge shove it up their $sses, i.e NO SCOPE clause at all, conversion to defined conribution retirement, slashed pay of MORE than 30% and work rules gutted for 6-10 years. Bankrutcy judges will do almost anything the management asks them to in the name of "protecting the enterprise." Also, management teams have learned a valuable lesson from USAirways (and AMR where the out-of-court restructuring doesn't appear to have worked), they need to be DRACONIAN in bankruptcy reorganization because if you don't go far enough you lose all your leverage once you emerge from CH 11.

I hate to say it as a union member and pilot but if I ran Delta and things got bad enough I would do whatever is necessary to preserve the company for the future including a CH. 11 filing if necessary. During the reorganization I would make sure the company emerged with pay/benefits/workrules in line with the LCC's. Operation of aircraft types of any size on any route by any subsidiary or outside vendor would be at sole control of the company, the scope clause would be GONE either voluntarily or by 11-13 if necessary. The Delta contract was signed at the pinacle of a bygone era. The industry has become competitive to a degree never seen before. Delta (and the other "scoped" majors) won't even think about buying 100 seaters for the mainline without a total corporate overhaul. All the major airline scope clauses will insure is that the majors will have to concede the new 100 seat Embraers, and the efficiencies that go with them, to LCC's that will use them to put the majors out of the shorthaul/high density business. You think that if the regionals can't have the planes then the majors are going to get them? Forget it, nobody will get them but your competitors who are free to do what is necessary to make money in a cutthroat industry. Sell those mansions, sailboats and vacation condos in the Rockies. Take the kids out of the private schools and trade in the BMW's and Mercedes Benzs boys, get some Chevy's and Huyndis because the Grim Reaper is coming to show you how the other half lives. As much as it sucks let's face it: it's a WalMart world out there and no scope clause will change that.

 

[AFELLOWAVIATOR]

Our EX-CFO Michele Burns stated the contrary in a CVG meeting with some of our pilots. She was incharge of the money.

Bye Bye--General Lee

No she did not. My best friend was at that meeting , a Delta pilot, and he confirmed you are full of it. As I stated, Delta does NOT "give" away services to any one. That is just plane dumb to think they would.

I swear gen, it is amazing some of the things you say on this board. You are so full of it, it is scary.