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Exploring Regional Jet Investment Opportunities

What is a regional jet?

The commercial aviation fleet consists of large passenger jets with over 100-seating capacity and regional jet aircraft with up to 100-seats capacity. Regional jets fly routes that can’t be flown profitably with the larger aircraft. About 43% of all domestic major carrier U.S. flights use the smaller regional jets to bring passengers to their mainline hubs (travelers prefer the regional jet to turboprops, and American, Delta, and United are removing the last of their turboprops this year). From 2017 to 2032 it is expected the U.S. will account for 70% of the world’s regional jets.

The U.S. Regional Jet Market

Our domestic markets are competitive, and fares have fallen due to increasing capacity, the growth of domestic discount carriers and consolidation in the industry.

The major U.S. air carriers are focused on optimizing the profitability of both their mainline and regional networks. The current hub and spoke model of the major carriers allow larger aircraft to serve major population centers while the regional jets serve smaller communities that are too far for a turboprop, but not busy enough to make a larger aircraft profitable.

Profits are closely tied to carrier networks, their labor contracts, fuel cost, and the capital cost of aircraft. Mainline pilot union’s “scope” clauses limit the number and/or seating capacity of aircraft a major air carrier is allowed on a “regional” airline (to protect higher-priced union jobs from being outsourced to lower-priced regional pilots).

The Evolution of the Regional Jet

Bombardier stretched its Challenger business jet in 1989 into a small airliner seating 50, the CRJ100. They followed with the CRJ200 which also seated 50 but had more efficient engines. Brazil’s Embraer followed with its ERJ135 (37 seats) and ERJ145 (50 seats). Even as the OEMs move to larger regional jets this market is facing the same challenges as the larger aircraft markets. Increasing use of the latest materials and most efficient engines ensures the latest generation of regional jets will be as lightweight and efficient as the larger jets.

While larger jets will always beat out the smaller aircraft based on their economies of scale the reason the majors operate the smaller jet is to find the right size the aircraft to the mission. In markets that cannot exploit the larger aircraft, the regional jet flourishes. In these markets, the smaller jet offers better economics and flexibility. As an example, United is adding regional capacity to drive traffic to its hubs. And frequently the term “regional” is a misnomer when for example airlines will add smaller jets to beyond the “region” to enhance schedule availability. United’s 2018 fleet plan calls for an increase in its regional fleet by 36 aircraft, with 50-seat regional jets accounting for virtually the entire increase. The current availability of the 50-seat jets has made it a short to mid-term solution until United can reach a deal with its mainline pilot’s union.

Regional Jet Investment Opportunities

Regional jets have transformed the airline industry by facilitating much of its expansion. These jets allow increased profitability and flexibility in route planning. They’ve helped build the legacy carrier hubs and, as United is demonstrating, continue to do so. As oil drops, the 50 seaters offer immediate availability. The legacy network carrier and their pilot unions hold the key to weight and seat count restrictions on future deliveries of larger regional jets.

Exploring regional jet investment opportunities? Call RESIDCO.

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Rethinking Transportation Equipment Investment Planning

How Tax Law Changes Affect Investment Planning

Recent tax law changes provide an opportunity for rethinking investment planning. Consider how you might optimally structure investment in air and rail transportation equipment in today’s tax environment. Planning offers advantages when a solid understanding of the various ‘decision contexts’ that give rise to tax opportunities are understood. Efficiency is gained from integrating this strategy into the larger equipment investment, management, and residual remarketing picture.

The objective is to develop a ‘framework’ for thinking about how tax affects investment. Investment requires capital. Capital availability depends on the comparative profitability of financing alternatives. Financing alternatives are impacted by tax law. This upfront understanding is necessary since it oftentimes is costly to adjust investment structure and financing decisions once they are made.

Tax and Investment Planning for 2019

Effective planning requires consideration of the implications of investment on all parties. Everything being equal, and barring restrictions or limitations on income shifting, taxpayers would prefer to have income taxed at the lowest rate (or, not at all!). It is always desirable to defer paying tax as long as interest is not being charged on the tax liability. This approach requires a ‘global’ or ‘multilateral’ approach, rather than a ‘unilateral approach.

Consider both explicit and implicit taxes. Explicit taxes are the dollars paid directly to the taxing authority. Implicit taxes appear in the form of lower before tax rates of return on certain investments. In any planning effort, all cost should be considered. Tax represents only one of many. An example: the dollars you spend on tax planning are considered a tax-favored activity since for business that investment is generally tax deductible, while the payoffs (reductions in tax payable) are effectively tax-free. The higher your marginal tax rate, the higher the returns you will enjoy from your planning efforts.

Tax strategies involve the level of tax, relative rates across different activities, entity types, tax regimes, and structuring the use and economics of timing and payment of tax. Life would be simple if tax rules were unambiguous. But the tax rules are far from clear. Even if you could claim to have committed to memory the entire Internal Revenue Code, you would be able to resolve only a small degree of ambiguity in many of your investment structuring activities. Over the years taxpayers have displayed considerable ingenuity in attempts to manage this exposure.

Understanding The Impact of Tax

Understanding tax mechanics allows you to become a leader rather than a follower in business and investment activities. The rules of the game constantly change, and structuring alternatives have a real-world impact on investment returns. Are taxes ‘fair’? Of course, they are. They’re fair when someone else pays, and ‘not fair’ when you pay. That is why investment tax strategies have value!

Air and rail investment that combines efficient entity structuring with in-service equipment and experienced equipment management and remarketing have substantial value. Think ahead! Whether the Tax Cuts and Jobs Act remains in place will to a large extent be determined by the party in control of Congress. Taking advantage of opportunities now will ensure your investment is as protected as possible.

We’re rethinking air and rail investment. Contact RESIDCO.

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