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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