Industry

Contributor: Pierre Gagnon, Director, Business Development, Aftermarket Commercial Services

The COVID-19 pandemic changed the landscape of the aviation industry and tested the mettle of the airlines everywhere. While many carriers were forced to cease all passenger operations during 2020, SkyWest stayed proactive, maintained its focus, and learned invaluable lessons to adapt to the environment and keep its people, passengers, and business safe.

Based in St. George, Utah, SkyWest Airlines operates through partnerships with United Airlines, Delta Air Lines, American Airlines and Alaska Airlines. A regional carrier, SkyWest connects passengers to 230 destinations throughout North America and has some 13,000 employees. By number of aircraft, it is one of the largest airlines in the world: they own or lease a total of 600 aircraft (roughly two-third CRJs), with 468 in service. In addition to these, SkyWest has 149 aircraft that are either leased or parked temporarily, including two CRJ200s, 34 CRJ550s and five CRJ900s that are leased to other carriers by SkyWest Leasing.

STAYING AHEAD OF THE CURVE

Against the challenging backdrop of 2020, SkyWest made several strategic moves that enabled it to weather the storm and ultimately, be well-positioned for the industry recovery. Focusing on assets within their operating footprint, SkyWest rightsized their fleet, acquiring additional aircraft while removing others. It was also one of the first regional airlines to successfully resume continued qualification training with expanded COVID testing across the operation. In anticipation of the eventual return to flight, SkyWest maintained its robust pilot-hiring pipeline with more than 300 flight-training schools and universities. One year later, SkyWest is poised for takeoff.

SkyWest’s strategic partnership with the MHIRJ Aftermarket group has also paid off: for years it has performed all its heavy maintenance work with MHIRJ US Service Centers in Bridgeport, West Virginia and Tucson, Arizona and SkyWest’s Operations team used the reduced utilization flying period to further prepare its CRJ fleet for the majors’ return to full schedule later this summer. At the same time, its delivery acceptance team travelled to MHIRJ’s Mirabel facility in Canada to intake incremental CRJ900 ATMOSPHÈRE aircraft ordered by Delta Air Lines.

LOOKING AT BLUE SKIES

Blue skies are on the horizon for SkyWest. As a domestic regional airline, SkyWest flies to and from smaller cities and routes that can’t fill the seats of larger airliners. Also, during the pandemic the regional sector has been more resilient and faster to recover as major airlines can maintain a competitive market share by using regional aircraft, particularly with SkyWest who was ready to develop flexible solutions with their partners. Leisure travellers are also taking to the skies again as vaccinations roll out nationwide and pandemic cases decline. To meet this growing need, SkyWest has resumed hiring flight attendants and maintenance technicians. The airline has also resumed hiring pilots to be fully ready for what is expected to be an active summer. Looking ahead, SkyWest expects to be back to 2019 flying levels by the end of 2021.

THE EPITOME OF REGIONAL GRIT AND DETERMINATION

In many ways, SkyWest epitomizes the resiliency of the aviation industry. Even during the most difficult year in our industry’s history, SkyWest showed it has what it takes to succeed, and was recognized for it. For the second year in a row, SkyWest received the Glassdoor Employees’ Choice Award – the only regional airline company on the list. In addition, SkyWest was named to Forbes’ America’s Best Employers list for 2021. Once again, it was the only regional airline to receive that honor.

At the end of the day, emerging out of the pandemic strong and confident took people working together to rise to the challenge. “The past year has challenged our industry, our business, and our people beyond what anyone could have anticipated,” said Chip Childs, Chief Executive Officer of SkyWest. “We responded quickly and aggressively to protect our people, our partners, and our business. I’m incredibly proud of the SkyWest team’s great work and the flexibility they continue to demonstrate. We believe we’re in a strong position to play a key role in the industry’s recovery and we remain committed to positioning SkyWest for future success.”

By being proactive and setting its key priorities early last year, SkyWest ensured it would successfully emerge from the crisis and play a key role in the recovery. At MHIRJ, we are proud to partner with industry leaders like SkyWest and come through the clouds together to brighter skies.

SkyWest operates the CRJ200, CRJ700 and CRJ900 for United Airlines, Delta Air Lines and American Airlines plus more.

AIR NOSTRUM

FOUNDED IN 1994 IN VALENCIA, SPAIN.

SETTING THE GROUNDWORK FOR GROWTH

Air Nostrum’s journey with regional jets began a few months after signing the 1997 franchise agreement with Iberia that allowed it to market its flights under the brand “Iberia Regional Air Nostrum.” That year, the Air Nostrum received its first jet—a fifty-seat CRJ200. The CRJ200 jet perfectly matched the company’s business model allowing the airline to increase the frequency of regional flights that were aimed at business travellers. They helped the airline expand profitably, by allowing it to compete with low-cost European carriers due to their lowest cost-per-seat advantage. “CRJ regional jets have been a very valuable tool for the development of Air Nostrum,” said Carlos Bertomeu, Executive President at Air Nostrum. “The introduction of the CRJ200 resulted in a qualitative leap forward in Spanish regional aviation thanks to its outstanding customer service for passengers and the aircraft’s excellent performance.” 

OVER 75,000 ANNUAL FLIGHTS. 5.2 MILLION ANNUAL PASSENGERS. 200 DAILY FLIGHT OPERATIONS TO AND FROM SOME 50 AIRPORTS LOCATED IN 7 EUROPEAN AND NORTH AFRICAN COUNTRIES.

Over the past 25 years, CRJ Series regional jets have transformed the airline industry, becoming synonymous with growth. These innovative aircraft rose to popularity due to their distinct operational advantages, including optimized seating capacity, cost and fuel-efficiency, and flexibility of route development. For Air Nostrum, CRJ aircraft was, and is, the path to the future.

EXPANDING PASSENGER CAPACITY

The strategy for the airline’s next phase in growth was to increase passenger capacity. And so, in 2005 Air Nostrum purchased its first 90-seat jet, the CRJ900 and followed in 2009 by another important order of its larger version, the CRJ1000, seating up to 100 passengers.

In 2010, Air Nostrum welcomed the first 100-seat jet, the CRJ1000, which was the most modern and advanced regional aircraft on the market.

Air Nostrum became a launch carrier for the CRJ1000, enabling it to establish itself as the leading regional airline in Spain and one of the first regional players in Europe.

STRATEGICALLY EXPANDING ITS CRJ FLEET

Experience with CRJ aircraft continued to confirm Air Nostrum’s expectations, and in 2012 the airline signed an agreement for the total renewal of its fleet - an investment of more than 800 million euros. The project involved the gradual incorporation of 44 CRJ jets, making Air Nostrum the regional airline with the most modern fleet in Europe. Made amid a global crisis, these acquisitions were a bold move that worked to the airline’s advantage.

CRJ 1000 aircraft offer impressive performance and high profit per seat.

The CRJs were intended to fly on higher density routes and routes connecting French airports with the T4 hub at Adolfo Suárez Madrid-Barajas. Air Nostrum had anticipated the demands of a new market in the European aviation sector and stayed competitive. More recently, Air Nostrum has looked to CRJ aircraft to meet the company’s sustainability challenge. Their lower maximum take-off weight per seat has resulted in savings in airport charges, less fuel consumption, and lower CO2 emissions. The CRJ family of aircraft has also played an important role in the company’s standards of timeliness and regularity. In total, Air Nostrum has won nine inservice reliability awards. throughout its history. This record consolidates its leadership in European regional aviation as the company with the highest level of reliability in these aircraft models.

REBOUNDING WITH STRENGTH

The Air Nostrum fleet was at times either fully or at least partially idle due to COVID-19. The activity levels have steadily rebounded since and are now exceeding 80% of those noted in the summer months of 2019. From January to March 2021, Air Nostrum topped the list of companies with the most operations in the AENA network. The world’s leading airport management company, AENA manages 46 airports and 2 heliports in Spain and participates directly and indirectly in the management of a further 16 airports in Europe and the Americas, including Brazil, Mexico, Columbia, and Jamaica.

The airline that began by offering regional flights has also developed opportunities for international growth thanks to CRJ aircraft. “We believe that there will be even more opportunities in the coming years for a strong regional carrier, as it has been noted that many regional routes are becoming undersupplied by their current carriers,” said Carlos Bertomeu. “Our commitment to the CRJ family has also led us to introduce these jets into the business initiatives that Air Nostrum partners have undertaken in Europe and South America.”

As the world’s most successful family of regional jets, CRJ Series aircraft will continue to lead the regional jet market in the coming decades and help ensure a bright future for operators like Air Nostrum competing in a dynamic marketplace.

Air Nostrum has dedicated one of its planes to the charitable organization Aviación Sin Fronteras. ASF volunteers accompanied several children on a surprise trip to Strasbourg where they got to spend a weekend with their parents at the city’s famous Christmas market

A snapshot of today’s situation clearly shows that the US 50-seater fleet is aging and is facing immediate risk of retirement. The COVID crisis might just precipitate things and accelerate the retirement rate. This raises the question of can we replace these aircraft, and how?

What is the future of the 50-seater market in the US post-COVID and can the Big 3 afford to lose $1B in annual revenue?

- Produced by MHIRJ Aero Advisory Services

Pre-COVID-19, the Big 3 (Delta, American, and United) flew a fleet of over 650 50-seater regional jets. This massive fleet has played the critical role of feeding hubs in their respective networks. During the current crisis, many of these aircraft have been parked and the question of their return to service is top of mind for many people in the industry. So, what does the future of the 50-seater market look like in the US post-COVID?

AN AGING FLEET

Bombardier and Embraer both have stopped production of their 50-seater regional jets a long time ago and no new program has been launched since then. The only aircraft still currently manufactured that would match the cabin size of these aircraft is the ATR42. But turboprop aircraft do not seem to be a desired solution for any of the Big 3. There is practically no appetite in the US market for turbo-propellers

Because of this lack of solution to replace the aging the 50-seater fleet, couldn’t the Big 3 simply drop these markets? The short answer is no.

FIGURE 1 - Status of the US 50-seaters fleet as of September 2020 (Source: CIRIUM Diio)

THE COSTS OF REMOVING THE 50-SEATER MARKET

Regional aviation and the 50-seater segment in particular is often misjudged when it comes to its revenue generation potential. The revenue allocated to the leg flown by regional aircraft is just the tip of an iceberg made of a substantial feed which supports the entire airline network. When considering the upstream revenue enabled by the feed, no less than 30% of the Big 3 revenue is dependent on regional aircraft operations (see figure 2). Simply pulling the plug of regional aviation is unrealistic. The exact same principles apply to the 50-seater market, removing them from the picture would mean ~$1B loss of revenue per year for Delta, American and United together.

FIGURE 2 - Big 3 Fleet composition, revenue, and dependent revenue (Source: CIRIUM Diio, September 2019 data)

TAKING BACK THE SKIES

Not all three Majors are impacted in the same way, but a more in-depth analysis of their networks and bases again emphasize the contribution 50-seaters bring at a network level (See figure 3 for examples). Removing them would lead to a snowball effect where other parts of the network (long-haul for instance) will suddenly not look as profitable as before.

FIGURE 3 - Network Contribution of 50-Seaters aircraft by base (Source: CIRIUM Diio, year 2018)

FIGURE 4 - 50-Seaters route sorted by frequency of operation (left = current status, right = realistic view if replaced by 76-seaters at iso-capacity)

50-seat CRJ200 in flight

REPLACING 50-SEATERS WITH 76-SEATERS

For all the reasons explained above, and because no imminent replacement solution exists, it is very likely that the Big 3 will try to operate their 50-seater as long as possible. Eventually they will try to address this denser part of the network by replacing retired aircraft with available 76-seats regional jets.

The new question which arises is, can the entire 50-seater market be taken over by 76-seater aircraft? To answer this question, we must look to the current frequency offering on the 50-seater network (see figure 4 on the left). As explained above, the feed is a huge component (70% or more) of the traffic carried by 50-seater aircraft (see figure 5). It comes as no surprise that the average frequency on routes operated by small regional jets is high, which is done to optimize connections at the hubs. In order to preserve load factors, replacing 50-seater aircraft by 76-seater aircraft maintaining overall capacity will logically lead to frequency reductions

We can realistically assess that the routes maintaining at least a daily frequency after switching to large RJ operation will remain viable and as a result fall in the “Can besaved” bucket. On the other hand, a route that will fall below the critical threshold of a daily service can be considered lost (red column). Not only will the point-to-point traffic from these routes be lost, but the revenue generated on other legs thanks to the feed they bring to the network will be lost as well.

This is the first effect of the transfer of the 50-seater market to large RJ, but it is not the only one. Indeed, the average drop of frequency will also impact the quality and quantity of passenger connections and negatively impact the feeding traffic.

THE VALUE OF FEEDING THE NETWORK

If we look at the ratio of feed versus pointto-point traffic, we see that the higher the frequency, the more feed. This makes sense as more frequencies mean more possibilities to connect with more flights at the airline hub. Note the extremely high ratio of feed, beyond 80% on triple daily routes for Delta, hence the concept of iceberg we were referring to earlier: the value of the 50-seaters network resides in the feed they bring to the network.

Sadly, switching from a 50-seater operation to a 76-seater will lead to a reduction of frequencies, as we saw in figure 4. Consequently, we can also expect a degradation of the feed. Our estimates are losses of ~2% of the feed revenue for Delta, and 4% to 5% for American and United. Those estimates are calculated combining the loss of frequency detailed in figure 4 with the degradation of connection quality as seen in figure 5.

TOO IMPORTANT TO LET GO NOW

In conclusion, the 50-seater market is just too big for Delta, American, and United to simply pull the plug. It is too big, especially because of the importance of the feed it brings to the respective airline networks. As no replacement solution is currently to be found from the OEM side, and because a switch to larger RJ will have a negative impact on the revenue generation, the Big 3 will have no other choice than to fly the current 50-seater fleet as long as possible. Eventually they will try to switch this part of their network to 76-seater operations. While for most of the routes this seems feasible (see figure 4), many markets will have to be dropped. All-in-all, three streams of income loss have to be expected when this switch happens: loss of point-to-point traffic on dropped routes, loss of the feed originally generated by these dropped routes, and loss of feed because of degraded frequencies on remaining routes. The estimated loss of revenue due to these 3 factors were evaluated at respectively 5%, 10% and 6% of the 50-seater dependent revenue for Delta, American and United. Considering 2019 results, that would represent ~$130M per year for Delta, $380M for American, and $350M for United: a near billion US dollars of lost revenue per year!

Most likely the only way to preserve this revenue opportunity would be to replace the current 50-seaters with aircraft of similar or smaller cabin size. Could there be an electric solution? That’s a discussion for another day.

FIGURE 5 - Ratio of Feed versus Point-to-Point passenger - 50-Seater Network (Source: CIRUIM Diio, September 2019

In conclusion, the 50-seater market is just too big for Delta, American, and United to simply pull the plug. It is too big, especially because of the importance of the feed it brings to the respective airline networks.