The 50-seat “Problem”

The 50-seat regional jet problem is growing and it is pressing in the US. This was highlighted by United Airlines at the recent IATA AGM. While the problem is most pressing for United, the problem is system-wide. The "problem" is the apparent absence of an economically viable alternative to the aging regional jets. Take a look at this model - please press the play button at the bottom left of the model. For this example please stay on Page 1 of the model. When press the play button you can see how the US-based regional jets have fared in terms of flights and stage length from 1997 through the first half of 2021. The model shows stage lengths from 320 to 675 miles. Stage length becomes a crucial number. The 50-seaters all fall in the bottom right quadrant from 300 to under 500 miles. Even with the large US market, accounting for some 70% of global regional jet use, the future of air travel in this segment almost certainly means something new. That something almost certainly is not another jet. The economics of the segment is such that, especially for 50-seaters, regional jets no longer offer the attraction they once did. On Page2 of the model, you will note operating costs per seat hour compared to stage length. Note too that the CRJ550 (CRJ5) is the most expensive to operate. The CRJ550 is the most recent reincarnation of a regional jet and is exclusively used by United. If one takes a 64 seater and deploys 50 seats the seat costs are not coming down. For United, the CRJ550 is a solution to overcome its scope clause restrictions, which are the US most restrictive. As we can see, the solution must be offering United significant value somewhere because the economics are not attractive. Especially when considers the CRJ700 (CRJ7) is what United converted to the CRJ550. On Page 3 of the model, we lay out the supporting data in table form. Starting with fuel burn, notice that as the aircraft have aged, fuel burn has risen. Between 2010 and 2021 hourly fuel burn is up nearly 45%. Since close to 40% of an airline's costs are fuel-related, this is not a good thing. Fares have not risen by 45%. The consider operating costs per seat hour - over the same period, these have risen by about 10%. This is also a problem. As the Wall Street Journal noted, airfares have not risen much in 25 years. This is confirmed by Page 4 of the model - regional airlines are being squeezed. Even a very large regional airline like SkyWest is being squeezed. This is a business where economies of scale play out. Your operation has to be big and keep growing to drive costs down. This is why consolidation has been the play so far. So what is the way forward? Focusing on the 50-seater problem is the most important item because there is a market for the size of aircraft to serve communities that need connections to hubs. There could be two phases: Phase 1: This would be from now through, possibly, the mid-decade. Regional airlines are going to start dropping cities that don't offer enough traffic to justify a regional jet. These airlines cannot switch to SAF which costs too much compared to Jet-A. But since the majors that buy space on regionals buy the fuel, SAF may be deployed. In order to drive down, seat costs US regional airlines are going to have to start deploying turboprops. There is simply nothing else they can do to squeeze costs on the 50-seater regional jets. Fortunately, the two turboprop OEMs offer solutions that are substantially cheaper to operate while also offering performance that is close enough to a regional jet performance below 500 miles. Phase 2: By mid-decade, we should start to see newer technologies emerge. We might also see an easing of the scope clause. In terms of technologies, Embraer's new turboprop should be available. SAF production should be significantly greater than today and at lower costs. Plus the promising electrically powered regional aircraft could be available. We expect to see these new aircraft be tweaked a lot between now and then as battery technology improves (lighter and stronger). Easing scope clauses should allow for larger aircraft to enter regional service. This should help because bigger means, as a rule, lower seat costs. The key here is that time should allow for several of the current hurdles in technologies and industry restrictions to evolve.

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