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The regional jet business and the impact of US scope clauses »
A Commercial Aviation Consultancy
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The US scope clauses are seen by many as a market aberration.  After all, commercial logic demands that new technologies are quickly deployed. It happens like that in every industry, right?

Not in the airline business, and especially not in the US airline business.  In the US, pilots have seen their jobs degraded with every business cycle.  This is not a new thing – Bloomberg had this story in 2014, and this 2016 follow up. Being a US commercial pilot is, for many young people, an oddly risky career choice.  In 1980 there were 827,000 pilots in the US and by 2015 that number had shrunk to 590,000.  Despite average salaries well over $100,000 becoming a commercial pilot in the US is not an attractive career choice.  With a starting salary that does not allow for education debt repayment and ensure board and lodging strikes young people as other worldly.

Pilots have, rationally, tried to protect their profession and job security against the vicissitudes of airline business cycles and management.  The need for scope clauses in the US are therefore, from the pilot professional viewpoint, necessary.  Indeed, we should be expecting to hear more about this from pilots. Specifically expect to hear this: “Not a seat, not a pound”.

US pilots will not agree to move the current scope at all.  The next round of scope negotiations is coming in about 2018.  It’s hard to see how the pilots might agree to move scope up a pound or seat.  Especially if the expected pilot shortage grows.  The negotiating power seems to be on their side.

With this backdrop, consider what this means for the regional jet business as a whole.  As the chart illustrates, the US is the dominant market in regional jets.  It is true the dominance has declined.  But it remains around half the entire market.  If you make a regional jet and want to sell it, you might want to ensure it can be sold to US regional airlines.

There are a few OEMs that face difficulties here.  SuperJet is too large and heavy, even though the price is right.  The Mitsubishi MRJ faces the same issue despite attractive financing and state of art technology.  Embraer’s E175-E2 has been pushed back in the hope scope rises to allow its deployment.  Fortunately for Embraer they have the E175 which not only meets current scope limits but has also proven to be attractive and is the market leader.  Bombardier’s CRJ900 easily fits within current scope limits and, if and when they rise, can offer the CRJ1000.

For US-based regional airlines, their choice is limited to Embraer and Bombardier.  SuperJet and Mitsubishi have to look outside the US, which while a big market, is highly fractured.  This makes these markets expensive to trade in.  Success requires creativity.  An example of this is the news that Russia’s S7 Airlines is leasing 17 pre-owned E170s from GECAS.  Embraer must be hoping that good experience from the E170 translates into interest in the E175-E2 when these become available.

Understanding the US scope clause is therefore an important data-point to understanding how the regional jet business evolves.  It might be an aberration.  But it is a critical influence on the entire industry.

© 2016, Addison Schonland. All rights reserved.

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