Michael Boyd on RJ's Future
05-20-2012, 03:50 PM
#1
Gets Weekends Off
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Joined APC: Apr 2012
Posts: 108
Michael Boyd on RJ's Future
Aviation Data And Insights From Boyd Group International
Okay, 50-Seaters Are Going Away...
What About The "Regional Airline" Segment Itself?
Will Players Morph, or Go Morti?
Product obsolescence.
It's happened in other industries. The real issue is how incumbents evolve.
The copier business shifted out from under Xerox. The film business evaporated out from under Kodak. Xerox morphed and evolved into other, wider service lines. Kodak, on the other hand, did not. It lived on revenues from patent-infringement lawsuits, and later, sale of patents themselves. Today, it's in bankruptcy.
It's Not "Regional" & The Business Is Tougher Than Being An "Airline." The "regional airline" industry - which in the 1980s mostly left behind both the "regional" and the "airline" parts as they evolved into the then-lucrative business of leasing airplanes and crews to major airline brands - now faces a situation similar to that faced by Xerox and Kodak. Much of its core product - small jet lift - is becoming more and more economically obsolete. Worse, the options for growing into larger aircraft are exceedingly limited.
Now that it's about as obvious as a full moon, the usual suspects on Wall Street and in the aviation analysis world are "predicting" a decline in 50-seat RJ fleets. Aside from having incredible insight into the already-occurred, these gurus haven't passed - yet -on how this will affect the companies that operate these airplanes.
In about 6 months to a year, they'll be out with dire "forecasts" on the future of regional airlines. As usual. they will be several zip codes from reality.
Cancel The Funerals. Most of Them. Here's the bottom line: the small lift leasing business is a non-growth sector. Players in this part of the aviation industry will need to decide if they're going to be Xerox or Kodak - because the current business base is eroding fast.
Two events over the past week point to the imperative: find another set of revenue streams. The cost dragon is fixin' to come knocking. But regardless, it's a near certainty that we will see a number of today's "regional airlines" evolve successfully and profitably into other areas of aviation - and maybe non-aviation, too.
The DC-3 Was A Profitable Machine Once, Too. The 50-seat jet segment is, regardless of some prognostications to the contrary, going the way of 400 ASA color film. The existing fleets are aging and becoming maintenance-expensive, and $3+ jet-A isn't helping. It's now beyond debate: huge percentages of these 50-seat airliners are going to be phased out of fleets in the next five years, far faster than a lot of people expect. Some of these aircraft will almost certainly remain, but the majority of mission applications they operated just five years ago will be out of economic reach.
On the other hand, jets in the 80 - 110 seat range do have a future. But that does not necessarily translate into continued opportunities for what are today still mis-labeled "regional airlines."
Here's the deal: major airlines - with a couple of exceptions - are now planning to operate these jets in-house. The need and economic imperative to outsource this flying just isn't as much in the cards as some may think.
Now, put this in context. The majority of 50-seaters will - will - be retired due to escalating costs. The next step up - 66/70 seat CRJs are a potential, but it's more likely that carrier systems will seek 80-110 seat airliners such as the CRJ-900/1000 and the E-190 platforms as fleet additions. (Remember, it's NOT seat capacity that drives airline fleet decisions - it's sector costs. As the expense of hurling 50-seaters through the sky goes up, the sector cost variance between these aircraft and larger versions shrinks markedly.)
That brings us to a new reality: It's becoming more and more obvious that it will be mainline airlines that fly these new aircraft fleets. There are two clear indications. The first is what US Airways has reportedly discussed with American's pilot's union. The second - and more immediately concrete - is the tentative agreement between Delta and ALPA. Both include aircraft in the E-190 size category, and in the case of Delta, it even mentions the CRJ-900.
That "Lost" Feed Traffic: Not Always All That Valuable. There's the argument that major airlines won't dare give up the capacity and the hub feed now carried by 50-seat jets. Unfortunately, that doesn't hold water. Airlines only offer capacity where they can make money, and if they don't have fleet types that can do so, they are out of the route. Gone. History. Good-bye. No more. Tsai-jian. Adios.
Also, it's not much capacity that will be lost, anyway. In fact, Boyd Group International recently analyzed "regional" feed markets at one of the nation's largest hubsites, With a retirement of 50-seaters. 33 of 40 "regional" spokes would be deleted. Wow! Almost three dozen nonstop destinations lost! Catastrophe!
Nope - at least not for the hub or the hubbing airline. The total traffic lost would be around 4% of the airport's traffic. If recapture of "spill" at the hub is factored back in, it would be well under 3% - and, again, it's still lost traffic that doesn't pay the bills, anyway.
Then there's the nonsense that majors will have no choice but to rely on "regional" entities to get "cheap" labor costs. Wrong. The fact is that pay rates are negotiated by airplane type - as the tentative Delta ALPA contract demonstrates.
Send In The Clowns. This isn't good news for a few small airports in some regions of the nation, particularly those where the location does not allow access to an alternative omni-directional airline connecting hub, or where the traffic generation cannot support 75-100 seat airliners.
Not to worry. For some, there will be - at least for a few months - what can be called "consultant hospice" - where a wizard is hired to "lure" another airline with all sorts of promised magic potions, when in point of truth, "luring" a visit from Elvis would be more likely. There are no other airlines out there.
But it makes the community believe that there's hope - that the air service cavalry is coming to save the day. They're right. Unfortunately, it's General Custer, and he's planning to stop by the Little Big Horn on the way.
After the hand-holding at lost-cause air service speed-dating events is over, after the silly internet surveys are accomplished, and after tens of thousands of long green are splattered on "studies" that don't say anything that a partially-intoxicated gibbon wouldn't know, the communities will find themselves back at square one. Or, behind square one - having wasted time and money, instead of looking for communication alternatives. Air service is no longer an economically-viable mode of transportation for many small airports.
Point: like "regional airlines," the longer communities ignore reality, the more damaging this new dynamic will be. If air service can't work at the local airport, it's time to seek other options.
Bottom Line: It's Crunch Time. Today, right now, the "regional airline industry" is at a crisis point.
There's nothing to be gained by more silly press releases about how many passengers are carried on "regional airlines" - particularly when such data is a total non-sequitur - those passengers are on airplanes leased, booked and directed by major airlines, not the actual operator of the RJ. It has about as much meaning as if ILFC or Jackson Square or GECAS or another leasing company press-released how many passengers were on the planes they lease to airlines across the globe. Passengers on board "regional" aircraft are a function of how much outsourcing a major carrier wishes to do.
So, the real story in the next 18 months will be how current players in this sector will evolve into revenue streams other than leasing 50-seat and 70-seat jets.
Ground handling? Maybe - but some are in it already, and it's really low-margin. Aircraft leasing - maybe, depending on the company's cash and ability to get into the game, with new-generation aircraft, in an already crowded sector. Buying into a major carrier? It's been done in the past - Mesa was involved in a deal with America West, Continental, etc., in the 1990s. Investing in airlines in emerging nations? Big potential in China, but the Kunpeng/Mesa experience isn't a lot of encouragement. Taking the cash hoard (which some have) and getting completely out of the business? Maybe, too.
There are opportunities for aggressive, forward-thinking "regional airlines." But those that insist on remaining primarily as a small lift provider are relegating themselves to a no-growth sector, and perhaps a front-row seat to the Titanic's open-air orchestra.
Not An "If" - Just A "When" & A "How" - All this is clear, King's-English writing on the economic wall. Boyd Group International pointed out this industry trajectory as far back as 2003 - on this site. As for RJ demand, back in 1999 we pointed out to our clients in the airframe and supply sectors that there was no way that the skies would ever see the number of RJs then in operation, on order, and on option. Not popular, but we're not in the business of being popular.
But one thing is absolutely 100% certain: The "regional airline industry" as we know it today is going to evolve in several directions.
Xerox? Kodak? Or something in between. But it will be different.
Okay, 50-Seaters Are Going Away...
What About The "Regional Airline" Segment Itself?
Will Players Morph, or Go Morti?
Product obsolescence.
It's happened in other industries. The real issue is how incumbents evolve.
The copier business shifted out from under Xerox. The film business evaporated out from under Kodak. Xerox morphed and evolved into other, wider service lines. Kodak, on the other hand, did not. It lived on revenues from patent-infringement lawsuits, and later, sale of patents themselves. Today, it's in bankruptcy.
It's Not "Regional" & The Business Is Tougher Than Being An "Airline." The "regional airline" industry - which in the 1980s mostly left behind both the "regional" and the "airline" parts as they evolved into the then-lucrative business of leasing airplanes and crews to major airline brands - now faces a situation similar to that faced by Xerox and Kodak. Much of its core product - small jet lift - is becoming more and more economically obsolete. Worse, the options for growing into larger aircraft are exceedingly limited.
Now that it's about as obvious as a full moon, the usual suspects on Wall Street and in the aviation analysis world are "predicting" a decline in 50-seat RJ fleets. Aside from having incredible insight into the already-occurred, these gurus haven't passed - yet -on how this will affect the companies that operate these airplanes.
In about 6 months to a year, they'll be out with dire "forecasts" on the future of regional airlines. As usual. they will be several zip codes from reality.
Cancel The Funerals. Most of Them. Here's the bottom line: the small lift leasing business is a non-growth sector. Players in this part of the aviation industry will need to decide if they're going to be Xerox or Kodak - because the current business base is eroding fast.
Two events over the past week point to the imperative: find another set of revenue streams. The cost dragon is fixin' to come knocking. But regardless, it's a near certainty that we will see a number of today's "regional airlines" evolve successfully and profitably into other areas of aviation - and maybe non-aviation, too.
The DC-3 Was A Profitable Machine Once, Too. The 50-seat jet segment is, regardless of some prognostications to the contrary, going the way of 400 ASA color film. The existing fleets are aging and becoming maintenance-expensive, and $3+ jet-A isn't helping. It's now beyond debate: huge percentages of these 50-seat airliners are going to be phased out of fleets in the next five years, far faster than a lot of people expect. Some of these aircraft will almost certainly remain, but the majority of mission applications they operated just five years ago will be out of economic reach.
On the other hand, jets in the 80 - 110 seat range do have a future. But that does not necessarily translate into continued opportunities for what are today still mis-labeled "regional airlines."
Here's the deal: major airlines - with a couple of exceptions - are now planning to operate these jets in-house. The need and economic imperative to outsource this flying just isn't as much in the cards as some may think.
Now, put this in context. The majority of 50-seaters will - will - be retired due to escalating costs. The next step up - 66/70 seat CRJs are a potential, but it's more likely that carrier systems will seek 80-110 seat airliners such as the CRJ-900/1000 and the E-190 platforms as fleet additions. (Remember, it's NOT seat capacity that drives airline fleet decisions - it's sector costs. As the expense of hurling 50-seaters through the sky goes up, the sector cost variance between these aircraft and larger versions shrinks markedly.)
That brings us to a new reality: It's becoming more and more obvious that it will be mainline airlines that fly these new aircraft fleets. There are two clear indications. The first is what US Airways has reportedly discussed with American's pilot's union. The second - and more immediately concrete - is the tentative agreement between Delta and ALPA. Both include aircraft in the E-190 size category, and in the case of Delta, it even mentions the CRJ-900.
That "Lost" Feed Traffic: Not Always All That Valuable. There's the argument that major airlines won't dare give up the capacity and the hub feed now carried by 50-seat jets. Unfortunately, that doesn't hold water. Airlines only offer capacity where they can make money, and if they don't have fleet types that can do so, they are out of the route. Gone. History. Good-bye. No more. Tsai-jian. Adios.
Also, it's not much capacity that will be lost, anyway. In fact, Boyd Group International recently analyzed "regional" feed markets at one of the nation's largest hubsites, With a retirement of 50-seaters. 33 of 40 "regional" spokes would be deleted. Wow! Almost three dozen nonstop destinations lost! Catastrophe!
Nope - at least not for the hub or the hubbing airline. The total traffic lost would be around 4% of the airport's traffic. If recapture of "spill" at the hub is factored back in, it would be well under 3% - and, again, it's still lost traffic that doesn't pay the bills, anyway.
Then there's the nonsense that majors will have no choice but to rely on "regional" entities to get "cheap" labor costs. Wrong. The fact is that pay rates are negotiated by airplane type - as the tentative Delta ALPA contract demonstrates.
Send In The Clowns. This isn't good news for a few small airports in some regions of the nation, particularly those where the location does not allow access to an alternative omni-directional airline connecting hub, or where the traffic generation cannot support 75-100 seat airliners.
Not to worry. For some, there will be - at least for a few months - what can be called "consultant hospice" - where a wizard is hired to "lure" another airline with all sorts of promised magic potions, when in point of truth, "luring" a visit from Elvis would be more likely. There are no other airlines out there.
But it makes the community believe that there's hope - that the air service cavalry is coming to save the day. They're right. Unfortunately, it's General Custer, and he's planning to stop by the Little Big Horn on the way.
After the hand-holding at lost-cause air service speed-dating events is over, after the silly internet surveys are accomplished, and after tens of thousands of long green are splattered on "studies" that don't say anything that a partially-intoxicated gibbon wouldn't know, the communities will find themselves back at square one. Or, behind square one - having wasted time and money, instead of looking for communication alternatives. Air service is no longer an economically-viable mode of transportation for many small airports.
Point: like "regional airlines," the longer communities ignore reality, the more damaging this new dynamic will be. If air service can't work at the local airport, it's time to seek other options.
Bottom Line: It's Crunch Time. Today, right now, the "regional airline industry" is at a crisis point.
There's nothing to be gained by more silly press releases about how many passengers are carried on "regional airlines" - particularly when such data is a total non-sequitur - those passengers are on airplanes leased, booked and directed by major airlines, not the actual operator of the RJ. It has about as much meaning as if ILFC or Jackson Square or GECAS or another leasing company press-released how many passengers were on the planes they lease to airlines across the globe. Passengers on board "regional" aircraft are a function of how much outsourcing a major carrier wishes to do.
So, the real story in the next 18 months will be how current players in this sector will evolve into revenue streams other than leasing 50-seat and 70-seat jets.
Ground handling? Maybe - but some are in it already, and it's really low-margin. Aircraft leasing - maybe, depending on the company's cash and ability to get into the game, with new-generation aircraft, in an already crowded sector. Buying into a major carrier? It's been done in the past - Mesa was involved in a deal with America West, Continental, etc., in the 1990s. Investing in airlines in emerging nations? Big potential in China, but the Kunpeng/Mesa experience isn't a lot of encouragement. Taking the cash hoard (which some have) and getting completely out of the business? Maybe, too.
There are opportunities for aggressive, forward-thinking "regional airlines." But those that insist on remaining primarily as a small lift provider are relegating themselves to a no-growth sector, and perhaps a front-row seat to the Titanic's open-air orchestra.
Not An "If" - Just A "When" & A "How" - All this is clear, King's-English writing on the economic wall. Boyd Group International pointed out this industry trajectory as far back as 2003 - on this site. As for RJ demand, back in 1999 we pointed out to our clients in the airframe and supply sectors that there was no way that the skies would ever see the number of RJs then in operation, on order, and on option. Not popular, but we're not in the business of being popular.
But one thing is absolutely 100% certain: The "regional airline industry" as we know it today is going to evolve in several directions.
Xerox? Kodak? Or something in between. But it will be different.
05-20-2012, 06:02 PM
#5
Gets Weekends Off
Joined APC: Jul 2010
Position: window seat
Posts: 12,522
Originally Posted by MoarAlpha
That article left me with a nice warm fuzzy feeling.
05-20-2012, 06:11 PM
#6
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Joined APC: Mar 2012
Position: Gear Slinger
Posts: 708
Originally Posted by gloopy
Can't wait for the next one in 5-10 years about all the delusional foreign airlines that are choking on their fleets of world conquering 380's and 777's. China is a bigger bubble now than the US ever was, India is already facing a very hard time with their airlines and 3 gulf carriers with a zillion super jumbos on order? GMAMFB.
05-20-2012, 07:07 PM
#9
Gets Weekends Off
Joined APC: Jan 2008
Position: blueJet
Posts: 4,511
Boyd usually writes like a drama queen pulling random cliches out of the air, but this article was especially hard to read. Too many disjointed topics; Too many thoughts were started and never returned to.
Reading this article was like listening to half a phone conversation - like if the teenager sitting next to you in the airport is chatting with someone far away...
Reading this article was like listening to half a phone conversation - like if the teenager sitting next to you in the airport is chatting with someone far away...
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