RJ's declining importance

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The latest Boyd report addresses issues of interest....

http://www.aviationplanning.com/

Regional Airlines - The Declining Importance

Continental is now going forward with its IPO for Continental Express. Nothing short of brilliant. But not for the reasons most Wall Street types think.

As we noted right after the Comair strike last year, (Go There) over the next decade the future value and role of small (<51 seat) jets will decline within the US air transportation system. ("Heresy! Anathema! Falsehoods!" - the inbred aviation analyst community will shriek. "We all know that regional jets and regional airlines are the wave of the future.") Regardless of the opinions of these dwellers of aviation's intellectual mushroom gardens, the fact is that this trend is already working. Orders for micro jets (under 50 seats) are done. Big orders for 50-seaters are just about done, give or take a buy from US Airways and United. These rosy forecasts for hundreds of 50-seat jets being sold annually into the next two decades are based on faulty understanding of airline industry dynamics. (Remember, as recently as three or four years ago, some of the same forecasts confidently predicted sales of turboprops well into the next decade, too.)

Spinning off wholly-owned regional partners is a smart move with no real downside. In the case of Continental Express, its real value is as part of the Continental system, so there's little chance it could branch off into other airline ventures - there just isn't room. On the other hand, these entities have enormous value right now and for the immediate future, so the buyers of the IPO can make out well. The real challenge will come in the last years of this decade when commuter-cabin aircraft (which is what 50 seat and small jets are) start to have less marketing appeal. In the meantime, it's gangbuster time.

Two entities to watch are Mesa and Skywest, which are essentially independent small-jet service vendors to larger airlines. Since there will always be a role of some kind for <51 seat jets within mega-carrier systems, and since major carries will likely become increasingly less willing to take the risk of owning them in-house, both Mesa and Skywest - with a diverse base of client major airlines - will be big players in the years to come. Skywest, to be blunt, is not just one of the nation's best run airlines, but one of the nation's best-run companies. They will be long-term players.

But aside from that, one thing will become clear as soon as it appears in Wall Street's rearview mirror: the days of "growth" for what we call "regional airlines" are coming to a close. Not now, and not in the next year or so. But by roughly 2005 - 2006, the situation will be different.
 

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Another article reflecting similar information:

Shift To Spinning Off Regional Carriers Seen In IPOs

http://aviationnow.com/avnow/news/channel_comm.jsp?view=story&id=news/cipos0226.xml

By Jim Ott/Special to AviationNow.com
26-Feb-2002 5:41 PM U.S. EST

Continental Airlines has resumed its plans for a $300 million Initial Public Offering and Northwest Airlines has begun the same process for Express Airlines I, its wholly owned subsidiary that is being renamed Pinnacle Airlines.

Both regional airlines are expected to be spun off as separate corporations, following up a trend that began prior to Sept. 11 last year.

Management at several other carriers, which own regional operations, are reviewing their options. According to Susan Donofrio, analyst with Deutsche Bank Alex Brown, these include American and its subsidiary, American Eagle, and Delta Air Lines, with its extensive Delta Connection operation.

The idea for a shift from mainline ownership to independent regional corporations emerged last year on Wall Street after the pilots' strike over pay and work rules at Delta's Comair subsidiary crippled the Delta at its Cincinnati-based hub operation for nearly three months.

Ray Neidl of ABN-AMRO was one analyst who expected spin offs to be on the table as a result of that strike. The mainline carriers saw the formation of separate corporations as a way of avoiding regional labor issues that could affect the entire carrier.

More to the point of investment, IPOs and spin offs would "unlock hidden value" of the regional carriers now part of the mainlines, said Neidl.

Continental's ExpressJet subsidiary, an Embraer customer, operates 140 regional jets and provides feed at Continental hubs at Newark, Cleveland and Houston. The Express subsidiary is expected to sell 10 million shares while Continental plans to sell an addition 10 million shares of its ExpressJet holdings. The IPO would represent a 31.2% stake in the company. Continental is expected to sell its remaining ExpressJet shares.

Northwest's began the process toward an IPO on Feb. 25 with the registration statement filing. All shares are being offered by the Northwest subsidiary. No securities can be sold or offers accepted prior to the time the registration statement becomes effective.

The renamed carrier, Pinnacle Airlines, serves Northwest at Detroit, Minneapolis/St. Paul and Memphis. It operates 34 Bombardier Canadair Regional Jets and 23 Saab 340 turboprops.
 

RJFlyer

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The first article predicts doom and gloom for the RJs and their operators, but gives no reasons why this might be the case.

These rosy forecasts for hundreds of 50-seat jets being sold annually into the next two decades are based on faulty understanding of airline industry dynamics.
Ok, if this is true, then what are the 'true' dynamics and how will they result in the death of the RJ?

...the days of "growth" for what we call "regional airlines" are coming to a close. Not now, and not in the next year or so. But by roughly 2005 - 2006, the situation will be different.
Ok, but why? What reasoning/data/facts support this, other than the obvious downturn in the economy and its effect on all airlines?

Anybody agree with this guy?
 

Andy Neill

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I want to put this article in a box and open it up in the 2005-6 time frame to see how good he is. If he is right, he apparently will be the ONLY one.
 

Cardinal

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Boyd never said the RJ was dead. He justs disputes the general consensus that small jets will darken the skies within a decade. That sounds reasonable to me. The industry dynamics that he refers to could be merely common sense. If 300 people need to get from A to B, it is still favorable to put them on one larger aircraft for many reasons. This is hardly news.
 

Marko Ramius

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It is news to those analysts who think that RJ's are the answer for everything and believe that 420 SJ's will cure all that ails UsAirways. DAL, JetBlue, and WN are probably hoping Wolf really gets his 420 SJ's, so that they can attempt to finish the job. If mainline pilots are the ones to operate the majority of 70 and 90 seat aircraft which seems likely with the number of current furloughees, this will exert a lot of pressure on many current SJ flights. The sad part is that by then management will have washed their hands clean by selling their WO carriers off, and the regional CEO's will have probably have sold their stock. How much ACA stock does Fast Eddie still have now anyway?;) Of course we pilots will still be arguing about permutations of the same issues we are today.
 

Caveman

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Cardinal,

The question isn't whether or not 300 people want to get from point A to point B but what time do they want to go? Consumers want choice. If you cover a market with one widebody, then everybody must go at one particular time of the day. If you have six flights a day on an RJ from that same market everybody still gets there but at a time thats more favorable for conducting their business or making connections.
 

RJFlyer

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Not to mention, those 6 RJs keep an extra 10 of us employed.
 

dualrated

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I've been reading Boyd for about a year now. I think one of the reasons he gives for the RJ plateau is the finite amount airspace and airport space. If air travel grows as it is predicted to grow, airlines will be hesitant to waste a "slot" out of a hub on 50 seats. Also, Boyd believes that the flying public will tire of the RJ's once they've forgotten the turboprops. The lack of carry-on space will become more of a factor as memories of the Saab grow faint.

Boyd may have this all wrong, but he's bucked thetrends in the past and been dead-on. He's a pretty savvy guy; just ask him! ;)
 

EMcx2

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While I don't know the thought process behinds Boyd's conclusions, I believe correct. As the last poster mentioned, the limiting factor of RJ's in the US will be the finite number or runways available. Until September, the trend has been towards larger aircraft to accomodate the ever growing number of passengers. When the industry picks up, we'll be right back to not having enough runways to handle the traffic. And it's more likely for pigs to fly from my arse than this country building new runways or airports. I live in Southern California and the voters are about to say we need a park instead of an airport on the sight of El Torro.
 
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