Premium #314 – US regional fleet options with 2016 scope in force

The influence of the US scope clause on the regional jet OEMs is significant. The following chart illustrates how the sheer size of the US regional market dominates. Any regional jet OEM seeking high production volumes must ensure the aircraft offered can operate within the US market. Even if an OEM decided to ignore the US market, and say decide to focus on the Asia/Pacific instead, it would mean trying to earn a return from a 500 aircraft segment. The risks are too great and an OEM could not replace every aircraft in that market in a competitive environment. The issue that drives the regional jet OEMs then is the scope clause hurdle that exists in the US. This rule, designed to protect mainline airline pilots, ensures that regional jets are limited in capacity. The rule in 2016 calls for a seat limit of 76 and MTOW no greater than 86,000 pounds. Why would mainline pilots need this protective clause? The answer is because regional pilots are paid a lot less, and their aircraft can serve most city pairs. About 70% of the US domestic traffic flies under 1,000 miles. Consequently, with aircraft easily capable of serving more than 70% of the market at lower costs than mainline operations, it is completely rational for the major airlines to deploy their regional partners. Underscoring the fear mainline pilots have is entirely reasonable, considering that just over 50% of the US domestic market is now served by regionals. Absent the scope clause it could be entirely possible that the there would be even more regional jet service. What are the choices fleet planners having to work with? The following table lays out the choices. We include some aircraft that are not yet in service such as the E175-E2 and the Mitsubishi MRJ. As the table shows, the major OEMs are already close to the margins. The E-175 and CRJ900 are right on the margin. The impact of scope is such that Embraer is pushing back its E175-E2 EIS to 2020 in the hope that scope is eased in the next round of contract discussions in 2019. Bombardier feels comfortable that if scope eases, it will see sales of its larger CRJ1000 pick up. Bombardier is confident because the CRJ1000 has 5% better economics than the CRJ900. Mitsubishi is also hoping for an easing in scope. Although its has now delayed its MRJ program gain, the projected scope discussions for 2020 suits them, as that matches the latest timing for the MRJ-90. If scope does ease, the later development of the MRJ70 is offered, the aircraft's weight per seat might make it a tough sell. Superjet has a capable aircraft that is EASA approved. Absent a US customer with an "N" registration, UAC has not applied for FAA certification. With EASA certification in hand, this should not be a big hurdle. Current scope means the SSJ is now seen as a mainline aircraft in US terms, even though it is doing regional work in Europe and Mexico. If we look out to 2020 what might happen? If oil prices rise again, the airlines are going to seek better fuel burn economics. Embraer is banking on this with its E2. We do not see oil prices spiking since US fracking capacity acts as a ceiling if prices rise much above $60/BBL. Easing scope therefore has to, in our view, be driven by another impetus. We think the pilot shortage could be that driver. The US regionals are the airlines suffering the most from the pilot shortage at present. As traffic continues to grow, regionals need to move the traffic using larger aircraft. Load factors are already over 70%. This means the current aircraft at 76 seats might run into capacity constraints soon. More seats can be added as a temporary solution, but it is not the optimal solution. So what does scope clause easing have to reach by 2020 to make sense for the industry? The next table lays out a potential set of scope numbers.If scope were to allow up to 90 seats (+18% from 2016) and 100,000 pounds MTOW, the table changes substantially. The only aircraft that are over the margin are the CRJ1000 and SSJ. The SSJ is about 1% heavier and could probably go on a diet to hit the limit. The CRJ1000 could see a seating change - adding more premium seating to stay at 90 seats, since the 100 seats is an all economy layout used by Air France. This would ensure the CRJ100 stays within the limit. In early 2017 it is speculative to guess what scope might do next. The US mainline pilots have not been in such a good negotiating position as they are now. The looming pilot shortage plus airlines making serious profits means airline managers do not want to upset anything. Our pilot union contacts describe their views on scope as "not a seat, not a pound". Maybe, for now. The OEMs should keep their options open. That means thinking about and having plans for larger aircraft ready.

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