The RJ Revolution – June 7, 2013

“Robert Novell’s Third Dimension Blog”

Good Morning and Happy Friday. Welcome back to the 3DB and thanks for letting us be a part of your week. This week we are going to talk about the RJ issue, regional airlines, and the facts – Nothing but the facts.

So what brought on the “RJ Revolution?” Was it demand in the market place, was it a need to replace an aging fleet, or was it cost cutting by the main line carriers? Probably a little bit of everything but mostly it was the pilot unions, who approved a “Scope Clause” in their contract, that allowed the carriers to begin this new venture that was going to reduce their costs, save union jobs, and increase profits. But did it accomplish what it was designed to do? The answer is still being debated.

My question to you is did the main line carriers create real value in the market place? Did the airline create real value for Aviators? Let’s look first at what a regional airline is – they are ACMI operators who operate under contract to fill a short term need.

ACMI operators work under short term, fixed fee, contracts called Capacity Purchase Agreements  where the regional has no revenue risk, and this allows them to concentrate on keeping costs to a minimum for the main line carrier. The costs that they are concerned with are: Aircraft, Crew, Maintenance and Insurance. The ACMI carriers do not fly under their name, or flight code, but that of the legacy carrier with whom they are under contract to. They are told where to fly, how frequently to fly by the main line carrier, and they do no sales and marketing. In some cases the aircraft ownership, fuel and ground handling are also paid for by the main line carrier. So, what does the future hold for these ACMI carriers when they want to strike out on their own?

I found an interesting article on the web about Independence Air, a United ACMI carrier that broke away and became a low-cost carrier, that I would like you to read before we move on.

Click Here

So, why did Independence Air fail? They had the assets, highly motivated and well trained people, and a track record that should have guaranteed success? The answer is simple. If you are not part of an airline reservation system that promotes your product, protects your routes, and controls the passenger, from start to finish, you will lose.

The main line carriers have a nationwide sales force, and a marketing program, that reaches out and touches almost every household in the U.S. and beyond.  They ensure that their pricing and service levels give them the advantage necessary to control their market, and put any new kid on the block out of business. This is why the ACMI contract carriers must fly the colors of their main line carrier, and fly under their airline code.

It is all about branding and the reservation system controls that component from start to finish.

One other item that should be introduced in to the discussion at this time is the impact that the reservation system had in the years following deregulation. There were a number of legacy carriers who failed as a result of a competitor’s reservation system. A number of people in the industry, including the government oversight agencies, were aware of how certain carriers were being put at a disadvantage in the reservation system of others but everyone turned their heads and looked the other way. I know of six carriers that were victims of such practices but I am sure there were more.

Next week we will talk more about the number of aircraft that will be replaced or upgraded, but I would like to close out with two final items for you to consider.

The first is the price of fuel. Take a look at the sampling below for the year 2000, 2005, 2010, and 2012. The numbers are very telling and I think it is fair to say that pricing of this commodity by the middle-east producers will not decline.

2000

2005

2010

2012

So as you can see, from the historical data above, the RJ’s came into being when fuel was at eighty cent a gallon and the pricing now is at three dollars a gallon. Fuel efficiency is an issue for everyone but the smaller airframes are especially vulnerable.

The final point is seat cost. I know that everyone is probably familiar with how this is done but just in case there is someone out there who is not then please consider the following: An airline carries one hundred passengers one hundred miles which means that the airline had ten thousand available seat miles on that segment. If the airlines cost for providing that service was ten thousand dollars then the cost per seat mile would be one dollar per available seat mile. However, if the airline can increase capacity to carry one hundred and fifty passengers over the same segment then the cost per available seat mile is now reduced and therein lies the reason for the CRJ-700, 900, and 1000; however, the cost of the equipment leasing rate will go up so, if that is so, then will the main line carrier save money?

Short term – No. Over five years – Probably. Over ten years – Yes. Now, the question is will the regionals have job security for the next 10 years – depends on the “Scope Clause.”

Click here and you will find a good explanation, and examples, of the data used to compute these cost.

Next week we will continue our discussion on the RJ revolution but until then it is my hope that everyone has a good weekend and remember to keep family and friends close – Life is short. Take care, fly safe, and protect your profession, your future, and the future of those who will follow in your footsteps.

Robert Novell

June 7, 2013