From the Boyd Group
 

This was posted over on the Majors section, but it's got a lot more relevance here.

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More Airline Consolidation On The Way
But It’s Not Brand Mergers


Let’s grab another third rail forecast.

Forecast Prediction: In the next 18 months, the airline industry will see more consolidation.
But it won’t be mergers.

It will be a reduction in major airlines outsourcing flying to small lift providers, a.k.a. “regional airlines.” Majors will be re-thinking their fleet plans and their route systems, and consolidating more flying back in-house from “regional airline” vendors.

There will be enormous fallout on airports, suppliers, and consumers. In some cases, more than what was seen with actual corporate airline mergers.

Tough Times Ahead For “Regional Airlines.” Despite the rosy appearances of future growth, the long-term horizon for small lift providers – typically still mislabeled as “regional airlines,” is getting increasingly cloudy.

We’re seeing a situation where outsourcing of flying will have a declining value to US major airlines. That decline may be a lot closer than a lot of folks might think.

The air transportation system evolves based on economic determinants. Unfortunately, most aviation and financial analysts tend to miss these trends, even though they are sometimes as obvious as a blemish on prom night. The fact is that most of these folks don’t want to look beyond consensus thinking. It’s too risky – they might be wrong.

Here’s a futurist indicator that’s been missed: Take note of the deafening silence from the Delta system in regard to additions & shifts in “regional” fleets.

AA and UA are actively bringing in more 76-seat units to lease to their outsourced lift providers. On the other side, there is a very strong indication that Delta is not following the fleet and operator strategies seen at AA and United. Delta may see the future more clearly than the competition.

Point: The Delta Air Lines 717 program may be the start of an industry trend toward reduction in dependence on outsourced flying. Now, the 717 isn’t anything vaguely related to what are commonly and inaccurately still described as “regional jets,” such as the CRJ and ERJ platforms – but neither is the Embraer 175, which American and United are buying and lease to their outsourced partners.
But that’s just the point: small capacity aircraft are on the way out.

With emerging and evolving airline economics, larger units of capacity are the future of air access across the USA. That erodes the cost-advantage of outsourcing the flying.

Consider some of the factors:

Cost per seat v revenue per seat. As BGI first predicted, the 50-seat jet is economic toast within major airline systems. Costs of operation are a factor, but more importantly – and missed in the miasma of consensus analyst thinking – they increasingly are less and less revenue-effective. What they can deliver to the major airline system is being eclipsed by expense factors beyond just flying the plane from A to B.

End of the incremental feed era. The cost of revenue-capture will be an increasing determinant factor in major airline route decisions, both in-house and with outsourced lift. The once-accurate belief that major airlines need the feed from smaller airports is now myth. In fact, in some cases such feed is just too costly to go after, and too costly to gum up scarce hub resources.
Major airlines today are at over 80% load factors. That means at a connecting hub, with limited gates, the feed from a small community has declining value, particularly when the cost of getting that feed entails spilling traffic from more lucrative destinations.
In regard to the spill-and-recapture issue, we’re actually seeing a distant variant of this dynamic at DFW International. Whatever traffic that’s being diverted to Dallas/Love due to Southwest expansion, it’s being immediately replaced by connecting passengers that were previously spilled due to high load factors at DFW.

In the same way, the “loss” of high-cost feed at a connecting hub from a small airport can easily be replaced with traffic that’s being choked off from another point on the route system.

Outsourced flying will be brought back in-house. Today, with over 50% of United and American flights operated by small lift providers, it’s no longer just a matter of “regional” flying. It’s simply use of smaller units of capacity where they make economic sense.

Despite the lightweights who still cling to the concept that “regional airlines” are just flying to small markets, the hard fact is that an increasing amount of this flying simply is major airlines outsourcing a lot of core-market flying to entities that can do it cheaper than in-house. Or more directly, could in the past do it cheaper.

The initial cost advantage of outsourcing to a “regional airline” is declining. So, the core reason for outsourcing is going away.
This is particularly true in light of the fact that a lot of the flying will be in mainline-cabin aircraft such as the E-175 – which isn’t a “regional jet” in configuration or mission application, and since many of them are actually owned by the major partner, they can be taken back.

This is not to imply that all current small lift providers are heading to the happy hunting ground. But the US airline industry by 2020 will be able to support probably less than half the number of outsourced aircraft they lease in today.

Forecast Conclusion: as economics of smaller airliners continue to deteriorate, there will be consolidation of now-outsourced flying back to the major carrier. That’s not going to be pleasant for some “regional airlines.”

Fallout For Airports: Let’s recap the realities: the value of smaller community feed is declining. Major airline systems have less need for it, particularly when the costs of flying small units of capacity are increasing. Fleets will gravitate along these dynamics.

So, for some smaller communities, it may mean loss of service at the local airport. Advice: don’t get scammed by proposals to do jive studies or surveys to “find more airlines.” Taking a hard realistic look at keeping the region connected to the global air transportation system will be far more valuable that chasing off to speed-date meetings to “lure more service” – which is like forming a lifeboat-selection committee on the Titanic. There aren’t any hidden airlines out there. So deal with it and start thinking of air access as regional, not local.

But for many airports, these changes will open new capacity, seats, and access. There are a lot of airports where the current lift is insufficient to meet demand, and a shift from 50-seat flights to 76, 100 and larger seats per flight will be an economic bonanza.
One thing is certain: the structure of the US airline industry as we know it today will be very different in five years. The brands will likely be the same, but the operators will be fewer. It’s consolidation that consumers won’t see in terms of brand-choice, but they will see it in the structure and reach of airline route systems.

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The US Airline Industry -2020. A Futurist Glance –
Get With The Trends, Or Get Left Behind

Since 1984, Boyd Group International has set itself apart as the leading source of aviation trend and data forecasts.

Our projections have sometimes been counter to at-the-time consensus, and that occasionally tended to draw fire from various corners of the industry – which is always welcome, it tends to bring discussion and further illumination to the subject. A couple examples:

In 1986, in one of our first industry White Papers, we correctly pointed out that code-sharing would be the end of the line for what was then a robustly-growing independent regional airline sector.

Now, that wasn’t real popular with some regional airline presidents who were at the time all enamored with the A-1 or C1R first-class, positive space pass cards they just got from their new major airline partner. But not to worry, most of them were gone in a couple of years. Some just went away, Some sold out to the major. Others, like Trans-Colorado and Rio, simply got kicked out the door, pass cards and all, when the major decided to replace them with another lift-provider.

A few very successfully transitioned into being contract lift providers. But code-sharing eliminated what was once an entire independent airline industry. BGI was the only consulting firm to forecast this outcome from the start.

In 1989, we alone published a White Paper that indicated the value of the then-planned “regional jet.” Although the “regional airlines,” which were the initial customer targets for the airplane, were by then gone, subsumed into major airline systems, our analyses went counter to then-ambient thinking that similar-size turboprops has much better economics.

True, but we noted that an RJ could cover twice the ground in a two-hour segment, opening a new hub-feed opportunities for major airlines. After a slow sales start, the rest is history.

Ten years later, when “everybody” was predicting near=]-unending demand for these machines, our fleet projections showed that the market demand for 50-seat jets was essentially fully met, and in fact the current orders and options far exceeded what the market could absorb. (The Delta system carriers at the time had something like 1,000 of these machines in service, on order, or on option. Never happened.)

Our OEM clients weren’t too excited at the time. But here we are, with he desert filling with run-out small jets.

The 20th International Aviation Forecast Summit – More Insight

At this year’s IAFS™ we again covered a wide range of issues and explored areas that no other event even gets near. We thought we might boil down a few of the issues we covered, and how they will manifest in the next few years.

US Air Transportation Route Structure: More – much more – regionalization of air service access into fewer commercially-served airports.

As we’ll point out, there are three main drivers of this trend: fleet changes, economics of hub feed, and highest and best use of connecting hub real estate.

Besides, despite voodoo-like studies and mystical programs to “lure” scheduled flights to small airports, there simply are no longer the airline economics in existence – or the airlines themselves – to make that happen. Gone.

That means a lot of smaller local airports will lose service in the next five years. It doesn’t mean the community will be cut off, just that consumers will be driving longer distances to access the system. Actually, in many regions, that’s already the case.

Airline Fleets: Write this down: by 2020, virtually all 50-seat jets, all current-generation turboprops in major airline service, and a goodly portion of today’s 70-seat jets will be retired. Gone. Not there. Vamoosed.

For communities that can’t support larger units of capacity, the writing is in the sky, and regional planning approaches are in order.

No, it cannot be reversed. That’s because , as we noted above, it will be the local consumer that’s part of the driving force. When there’s an airport 90 minutes away (more, even) with dozens of flight options, the two or three branded flights at the local airport are non-competitive. Frequency and alternative options in the event of off-schedule operations are foundational consumer requirements.

And if the local flights are with a non-major brand airline with a single-seat airplane, it’s just placebo service – almost nobody will use it, because it typically is non-connective, and non-attractive to consumers.

Again, the only way this dynamic can be ignored is in the fantasy that there are lots of airlines “out there” that can be brought into town, if only the right mystical data can be ginned up to convince the assumedly-nebbish airline planner to see the light. Long before 2020, this fantasy will be replaced with reality.

Yes, there is a global market for new-technology turboprops, but in any case they won’t be in production by 2020.

Airline Strategies. The focus will be on system revenues v cost. Period.

Passenger volume and market share will be secondary to maximizing return on investment. Feed-contribution at connecting hubs will be analyzed more closely. The revenue-value of every gate will be a metric – which means less focus on route-spokes to smaller airports. Point: airlines won’t need that incremental feed if it spills traffic at the hub from larger commercial points.

Alliances: The aggressive independent strategies of carriers such as Delta and Korean indicate that the expected consolidation into three global alliances isn’t in the cards anymore. That would also point to continued and robust global competition.
Domestically, however, as noted, air transportation will continue to be focused at fewer de facto regional points.

Perks: Consumer incentives have value only when an airline has incremental extra product it cannot sell otherwise. That was the case in the 1980s, but with 85%+ load factors and much-reduced competition, the need to give things away free has long since vaporized.

There is no longer a system-wide pool of non-sold seats at any airline. Based on fleet strategies forecast in the 2015 – 2024 Boyd Group International Fleet Trend & Demand Forecast, there are no areas of the globe that are in much danger of getting into an over-capacity situation. That means the need to offer perks will be focused on recruiting specific high-yield consumer segments.

There is no longer the need for frequent flyer programs to ensure brand-loyalty, particularly among any but the highest-yield traffic sectors. Therefore, it makes no sense for airlines to give seats away under FF programs, when they can sell them outright.

We’re seeing it today, with first class upgrades. Major carriers are offering these seats for sale to just about any passenger, for an up-charge. The platinum-diamond-iridium level frequent flyer can just board with their economy seat, because a free upgrade is not in the cards.

International Access. As we’ve predicted, the need for EU carriers to access large non-hubsite airports to feed their own hubs will be a major dynamic. The recent move by Delta to operate RDU-CDG is part of this dynamic – substantial traffic will be flowed to other SkyTeam partners at Paris.

Targets to watch: CVG, MEM, IND, MSY. The particular criteria are strong local traffic and strong road-hub access from industrial regions.

Distribution Channels, The recent move by Lufthansa to add an $18 surcharge on booking from independent OTAs (On-line travel agents) has been misunderstood. It’s not a fee, per se, but is a cost-recovery charge. (We covered this in a session with Larry Ryan of Lufthansa at the IAFS™, by the way.)

This is just the harbinger of a move toward direct airline retailing, as the OTA channel will increasingly be less cost-effective. Just as the need and utility for travel agencies as main retail outlets evaporated 20 years ago, the time may be coming for OTAs as well.
Final Point: the basics of air transportation economics are fundamentally changing. Airports and communities need to identify new trends and plan accordingly. In a future update, we’ll cover the non-airline opportunities that airports will see in the coming decade.

In the meantime, trying to reconstruct the past will successfully got one there.

Also, thanks to the 1,500 rule regionals are having a hard time getting pilots to work for $22/hr. The unintended consequences of the new law are coming home to roost. I recall that the two pilots on the BUF crash had > 2,000TT.

Ive been reading the boyd group scence the mid 90's. Never been impressed with there "predictions"....

I've always felt like he's stating the obvious. Nothing earth shattering that most people with experience in this industry don't see already

I hate to go all "spelling Nazi" on you,........ but it's "their" predictions. Not "there" predictions.

Just trying to help.

Since*

*shakes head*

So you'd rather have more regional jobs and fewer mainline jobs? And you'd rather have people with less experience flying your mom/wife/children around in an 85,000 pound E-Jet?

You're totally clueless!

I'd rather have more mainline jobs and fewer regional jobs. As for the second question, depends on the type of training and experience. Not all training and experience is equal.

Why are you so sure that those "consequences" were unintended?

I stopped reading when it was said that United is buying 175s and leasing to regionals. At Skywest at least there's a placard in the cockpit that says owned by Skywest. It will always make more financial sense to outsource certain routes to regionals, there will be consolidation at regional level and larger regional aircraft flying small regional aircraft routes now less frequently. Any business that can get labor cheaper and mitigate risk by contracting to a third party will take that unless there's risk that that feed won't be reliable. There's a shortage at the regional level, but one regional will take another's business, that business will do a bankruptcy and Come out on top and so the cycle continues. Anyone that wants to move on to mainline wants them to take back their flying (even though I think most people don't realize that that doesn't mean everyone at a regional will get a job at mainline, half would at best due to larger capacity aircraft.) but realistically no mainline pilot will fly a 175 at anywhere near regional rates

In the next 15 years, there are 30,000 retirements at just the three Legacy carriers alone, a number nearly double the current number of regional pilots. There's no way they're going to up gauge that much.

I'm not saying that every single regional pilot is going to have a seat at mainline, but I'd wager it's going to be a very high percentage.

No current mainline pilot yes, but it wasn't too long ago that Continental first year pay was $33 or something like that.

If the big shots decide they want to fly 76 seat jets and not worry about staffing them they'll soon figure out that they'd staff them forever at $35-40 for the first year, on a mainline list.

To your first point I think mainline will try get relaxed scope to compensate for retirements, which will help their staffing to a large extent, not completely but help.

I agree with your second point except they have to give a huge carrot to current mainline pilots to sign that TA off, I'm not saying it won't happen, it's because of that that we have a regional industry to begin with,

No way in God's great earth is that going to happen, for two reasons:
1. The mainline ranks are quickly filling with guys who spent the better part of the "Lost Decade" in an RJ, and will quickly vote no on anything that includes any scope giveaways. Yes, management could offer a much larger carrot and maybe get them to consider it, but they've also shown a strong reluctance in offering carrots as of late.
2. Even if I'm wrong and management can get scope relief, where are they going to find the bodies? Even at $35+ an hour? That amount of money, even on a wholly own certificate with a flow, as uncertain as they are, isn't going to be enough to get hordes of new prospective pilots to start working on their ratings.

I'm not so sure about that either. The airplanes already exist, and in many cases are already owned by the mainline carrier. The pilots already exist, they're sitting in the seats already. The raises are already coming, as evidenced by new rates at TSA, offers at RAH (flawed as it was, it was still $40 first year pay). The only piece really missing is what list they're on.

Article mentions it a lot but never explains it. Why exactly will it be cheaper for the majors to run their ops vs a regional feed?

That's true, but he's saying the need to utilize spoke feed is diminishing, not that it is cheaper to use mainline on an RJ route. He's somewhat staying that the legacys are going to have a larger point to point system, and that model will require less RJ's.

Point to point takes away from the hub, they have billions invested in the hub operation. They are not going to change the main operation which is hubbing.

Same reason Southwest doesn't have RJ feed. Filling larger planes is way more profitable than smaller ones.

If 150 people are going from AtoB through a Hub, is 6 RJ flights cheaper or one direct 737?
He's saying their going to cherry pick more city's parings requiring less hub traffic, combined with the fact that some of the spoke traffic was solely created to fill a hub departure which is no longer needed. That was what he meant by revenue potential.

Umm yes they are. The 4 towns he listed are already doing that. I.e. MSY-LAX on United Delta and SW. Passed up just about every hub in the country.

Airlines will replace the F.O. with a ground operator monitoring many flights. CA will have bio sensors. Airlines will move to a single pilot operation. Boeing is already working on it, as is Google and everyone else.

CRJ 900 is 76-79 seats, 737 is around 140? Where do you get 6 or 7 RJ's? Also, frequency is important, more daily flights means more flying passengers. People complain about Spirit, but it's not their seating, it's the number of available flights and getting stuck if a flight cancels. Also that article completely fails to account for how a 50 seat airplane actually will raise the cost of a seat for certain markets simply because there's fewer available seats.

Not a good time to be a pilot if this is true.

Incidents like the AA captain that passed away last week are the only things keeping this from happening. As soon as the public trusts technology more than they care about warm bodies up front this will be a reality. The technology is there for this single pilot type of operation. And the technology for fully remote - piloted and even fully autonomous planes isn't far fetched.

In Europe they have what they call a FROZEN ATPL. It's basically a 250 hr pilot that has a Comm Inst Me and passed 14 written exams that takes about 6 months of full time study. Has been working for years. Oh, they are on the right seat of A320, B737.

737-8 is over 150 pax. That's 3 RJ's into a hub and 3 leaving the hub. 6 departures to carry the same amount of people as a direct flight. Upgageing will also cut jobs and regional size. The article didn't say they were getting rid of hubs, so it won't be like Spirit. He's basically saying there going to consolidate the current inventory of seats like I mentioned above. The goal is to increase revenue without adding seats. But you are right, this didn't happen when there were 8 airlines where now only 4 exist. The networks are so large that you wouldn't be stranded like Sprit. It makes sense that any town large enough to have service to more than one hub on the same network, could have point to point flights on the most popular parings. Rual towns with only service to 1 hub from each network will still be the same hub system.

Are you sure? Their multi-crew rating has been around for a while but isn't very common anymore.

Why aren't trains automated? The technology being aviable is irrelevant, single pilot jets aren't new. There is zero pressure for this to happen. The remote systems like on the Predator aren't cheaper.

Trains actually are automated, at least the light rails, and rapid transits. I spent a great deal of time in the Bay Area, using metro and BART. I would always watch the conductor. The BART conductor would just sit there monitoring, once in a while would press a button to re-open the doors, etc. Braking, accelerating, cruising, stopping was all automatic. Same thing for Metro up until they would be street level.
The major railroads can control trains through radio control, and often do in the switching yards.
As far as the public accepting the technology, once your car drives itself, the show is over. Just watch the progress of the Google car. Google themselves have stated they want to bring the technology to the cockpit, and they will.

I guess the Philly train that straitened out a turn just forgot to activate his Google auto throttles. Ships have all over what your talking about, still a captain and still a first officer. Having the software and cutting the job aren't the same thing.

You guys paint this as a bad thing. Think about the bennies of working from a ground station. Home every night, no more crappy food, no more hotels with bedbugs, no more radiation, and best of all, no skin in the game if the technology craps the bed. My last point is why it will never happen. Some group will figure out how to hack the controls and that will be the end of pilotless aircraft. Next.

Just because technology exists doesn't mean the jobs are going away. Good lord.

Read about how many problems they have had with drones and adjustment for weather etc. its not the same thing and the moment a drone messes up and gets 150 people killed then what?

Would explain why AAG is now focusing on CVG and PSA is opening a base there. Sounds like it will only continue to grow.

We all know that regional's are going to shrink. There simply is no other option if mainline starts taking pilots at the rate they are predicted to. Potentially painful times ahead for some. I expect we'll see the airlines that exclusively fly props and 50 seat jets to either fold up shop or be bought for their pilots by other airlines. Perhaps it will be a good thing to work for a wholly-owned airline in the coming 5 years? Who knows...

Delta does some of that stuff too. Some airlines are linking cities with business to other cities like Delta doing CMH-RDU etc. Makes sense.

I think wholly owned will have a little bit of an advantage. But generally speaking i think most of us are in a good position. There is going to be a lot of mainline jobs coming up. Better QOL at regionals due to upgrading etc as well. The lost decade is just something that is impossible to forget.

Well what it DOES spell out is FEWER pilot jobs.

You guys are talking about two different things.

In Europe they have the frozen ATPL, which is not an official term. It is slang for someone who has done their 14 ATPL exams and have their commercial and instrument ratings.

The MPL is the same theory and 14 exams, but their license allows them to only fly a specific type for a specific company, and half of their training has been in level C or D sims (or the equivalent), and these guys can't even legally go out and fly a C172 without additional training and practical tests.

I have taught guys in Europe and believe me, their system doesn't make them a better pilot than the FAA product, and guys with 170 hours total time are getting into the right hand seat of A320s and B737s over there. One low cost carrier that I know of thought they could save money by hiring low time guys and have them pay for type ratings. After a few dings and prangs with newbie FOs, they raised their hiring standards quite a bit in subsequent hiring.

Under the MPL program, guys are getting into the right hand seat with 70-90 hours of total time in airplanes, and another 100 in sims or so.

It doesn't matter who you are, where you are from, what you have learned, or even what you know- 170 hours is still 170 hours. Captains are largely on their own.

I think that was his point.


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Which is good because there are fewer pilots to fill those jobs. Kids now just want money. They don't care what they have to do to get it. The passion for flying jets is gone with you and me.

Mabye, it's hard to call. The actual ticket price wouldn't be reduced much. There's no big push to cut dipatchers out and hand the crew an iPad with an app and data plan.

The CA of the BUF crash was hired with 600 hours. He would not have been CA of that flight if the new rules were in place.

They both slept in the crew room all day because they lacked the money to live in EWR and afford a hotel/crashpad to go to. If they were paid more, I don't think they would have made the decision to sleep in the crashpad as easily as they did.

That word "jobs" is thrown around too much. There will be less low paying pilot jobs and more high paying pilot jobs. That's a good thing.