Hope on display at annual RAA convention

 - October 12, 2007, 6:25 AM

Forty-eight hours before the Regional Airline Association staged its annual convention at the Phoenix Civic Center from May 18 to 21, the season’s first 100-degree day marked the start of another long, oppressive summer in the Sonoran desert of the American Southwest. Unfortunately for the RAA and its membership, the business climate for the nation’s regional airlines rarely turns on such regular intervals, leaving the pundits asking the same old question: When will the airline industry begin to see a recovery and what will it mean to the regional sector?

As investor analysts and industry consultants do their level best to offer educated projections, the people most intimately involved in the industry almost uniformly offer little more than a shrug and an expression of hope. What does seem certain, however, is that the regional airlines will play a major role in any recovery, be it next year or half a decade from now.

US Airways entered a major phase of its own plans to effect such a recovery when it placed $4.3 billion worth of orders for 60 fifty-seat Bombardier CRJ200s, 25 seventy-five-seat versions of the CRJ900 and 85 Embraer 170/175s. The orders would prove the focal point of this year’s convention, due both to their size and, perhaps more significantly, their implications for the evolving relationships between major airlines and their regional partners, not to mention the introduction of Bombardier’s latest “paper” variant of the CRJ– the CRJ700 Series 705. At the convention, US Airways CEO David Siegel offered some further detail of the company’s strategy to revamp its network with regional jets.

Siegel, a perennial fixture at RAA meetings during his tenure as president of Continental Express in the late 1990s, called the Embraer 170 “the backbone of the [future] US Airways fleet,” while the 50-seat CRJ200s and 75-seat CRJ700 Series 705 form the core of wholly owned subsidiary PSA starting in October, and perhaps later, Piedmont and Allegheny Airlines. The Series 705, essentially a CRJ900 configured with nine first-class seats and 66 coach seats, offers some added range and payload benefits over the standard versions of either the CRJ700 or CRJ900. The airline expects delivery of the first example some time in January or February. Although Siegel referred to some “carve out” deals for 70-seat-class airplanes with the pilots of the regional affiliates, the Air Line Pilots Association has set the limit at 76 seats, effectively disqualifying the CRJ900 from their fleets.

Committing a mix of 70-seat Embraer 170s and 76-seat Embraer 175s for the newly established mainline-regional hybrid division of US Airways, Pittsburgh-based Mid-Atlantic Airways, Siegel talked of the need to attract “premium passengers” with the first-class seats in both the Embraer and Bombardier products. “In the worst case,” he said, referring to the economics of a dual-class regional jet, “they’ll be economically neutral, and hopefully P&L positive.” Raising the potential of the larger Embraer 190/195 series airplanes for the mainline, Siegel said he plans to retire US Airways’ fleet of 100 Boeing 737-300s, and -400s over the next five to 10 years.

Although he would not offer specific route deployment details, Siegel said MidAtlantic will remain in Pittsburgh for the time being, but that plans may change depending on the level of cooperation he encounters with the airport authority over landing-fee and lease concessions. While the Embraer 170s feed, supplement and replace mainline routes, the 175s would likely serve the Northeast corridor in shuttle roles, he added. Scheduled for FAA certification in September, the Embraer 170 has finished more than 95 percent of its flight-testing regimen, and remains on schedule for Brazilian CTA certification this month, JAA certification in July or August and FAA approval in September. US Airways plans first deliveries in November, roughly a month after the airplane gains FAA certification. Embraer plans to fly the 175 for the first time by the end of this month, in time to gain initial certification by the middle of next year.

As expected, Siegel declined to discuss financing details, saying only that the company had reached terms for 90 percent of the deliveries and that they involved a combination of capital elements. One of the parties involved in the financing–GE Capital Aviation Services–surrendered 30 of its own delivery positions to US Airways for the first batch of airplanes. Similarly, for the Bombardier deal, GECAS transferred its first 36 positions for CRJs.

The theme of regional jets and their place in US Airways’ reconstituted network continued with an announcement by Republic Airways that it converted 12 options on 50-seat Embraer 145s to firm orders. The company will assign nine of the airplanes to its new non-union subsidiary, Republic Airlines, based in Louisville, Ky. and the remaining three to its Chautauqua Airlines unit in Indianapolis. Republic plans to start taking delivery of the first four jets this August. Republic chairman Brian Bedford said he expected to close financing arrangements for the remaining eight by February.

Encouraged by Republic’s ability to obtain third-party financing for the first batch of airplanes, Bedford noted that “we’re finally starting to see some softening of the market and a willingness to accept some risk in airline investment.” He also confirmed the company’s plans to take six more used ERJ-145s from a European owner.

Under US Airways’ Jets for Jobs program, half of the pilot positions created by new aircraft deliveries must go to US Airways pilots. After narrowly rejecting the Jets for Jobs protocol last June, Chautauqua Airlines pilots in late April voted to accept the provision in hopes of convincing Bedford to cancel his plans for the nonunionized subsidiary. At RAA, Bedford characterized the pilots’ concession as “a day late and a dollar short.” Represented by the International Brotherhood of Teamsters, the Chautauqua pilots charge Republic Airways with violating the transfer-of-aircraft provision in their scope clause. The Teamsters has filed a grievance over the matter in hopes of derailing Republic’s plans.

Before the establishment of Republic Airlines, Bedford already ran one of the lowest-cost providers in the industry in Chautauqua Airlines. The new division appears likely to “lower the bar” even further, spelling good news for major airlines but trouble for regionals already squeezed by more “mature” labor costs.

While cost containment has always represented a top priority for regional airlines, progressively shrinking yields across sector lines have forced executives into a never-ending search for hidden fat. At the convention, Bombardier advertised its Q400 as a means to compete in the ever-growing low-yield environment, much as Horizon Air does against Southwest Airlines. A recent order for 17 of the 78-seat turboprops from Exeter, UK-based Flybe has emboldened Bombardier to market the airplane more aggressively for such applications.

“Low-cost carriers have penetrated only one-fifth of all low-density markets,” noted Bombardier Regional president Steve Ridolfi. “The Q400 will attack low-cost markets. It offers the same trip cost as a 50-seat RJ at a typical regional and its cost per available seat mile is 11.57 cents compared with 12.9 cents for a 737-700 at a low-cost carrier.”

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Saab Aircraft Leasing president Michael Magnusson acknowledged that new equipment requirements and regional jet activity, particularly in the U.S., have hindered his company’s ability to place Saab 340s, but that the phase-out of turboprops has slowed and that the market outside the U.S. has surpassed that within the States over the past two years. “When you can buy a Saab 340 for $1.5 million, that looks very attractive in this economic environment,” stressed Magnusson. He said that of the some 500 Saabs in the world market, 50 or 60 remain inactive or parked in the desert. Magnusson noted that the failure of the financial markets to provide equity for new aircraft transactions has helped Saab, which deals mainly in operating leases. He also suggested that the so-called microjet market will continue to wither due to the relaxation of scope clauses and that the “probability of a restart of the Fairchild Dornier 328JET line is very small,” despite the rather optimistic projections of a market for hundreds of units by AvCraft principal Ben Bartel.

St. George, Utah-based SkyWest Airlines has signed a new pro-rate code-share deal with Continental Airlines to fly some of its idle Embraer Brasilias out of Houston as a Continental Connection carrier. The service will involve “10 or 12” airplanes, said SkyWest CEO Jerry Atkin, some of which will come from the idle Brasilia fleet once flown by Continental Express. Atkin said that SkyWest has agreed to interview furloughed Continental Airlines pilots for the positions, but that the contract does not stipulate a given level of mainline pilot staffing. The SkyWest CEO also said that he expected to reach an agreement on new rates for the airline’s United Express service within a month. Still, he added, the company remains actively engaged in a code-share deal with a fourth airline to further spread its risk.

Phoenix-based avionics developer ACSS has begun work on the integration of its T2CAS terrain and traffic avoidance system on the ATR 42/72 series of turboprops. The company expects to develop an STC in conjunction with ATR, which plans to provide exclusive engineering data and support. Airlines that have already placed orders for the new system, certified in February, include Aero California, Federal Express, Mesaba Airlines, Northwest Airlines and Virgin Express. Installation of the system on Mesaba’s 26 Avro RJs will start this month. The company also announced at RAA that Airbus has signed a deal to provide T2CAS as standard equipment on all its airplanes except the A380.