Regional Jets: Emerging Weapons For Airline Arsenals

<B> Regional Jets: Emerging Weapons For Airline Arsenals</B>

By David Jonas

In the hub-and-spoke environment, major airlines for the most part have avoided their competitors' fortresses, opting instead to develop their own. But, an emerging tool--the regional jet--has changed the unwritten rules of conduct. Now, challengers are attacking both hubs and spokes, while incumbents are forced to scramble their own regional jets in defense. Meanwhile, the smaller players are buying their own RJs, finding cracks in the majors' armor and expanding their networks.

The major airlines, recognizing the importance of what one airline exec called "little missiles," have emphasized their regional components. Delta, for example, last month acquired Cincinnati-based Comair. Leo Mullin, Delta's president and CEO, said the move will help "integrate all elements of Delta's weaponry" and serve many small- and medium-size markets. "The crucial ingredient in this transaction is the opportunity for growth," Mullin said. "Markets served by regional jets are by far the fastest growing in the country." Comair expects to become the first all-jet U.S. regional carrier in two or three years.

Delta this year also bought Delta Connection Atlantic Southeast Airlines and struck a deal with Atlantic Coast Airlines--already a United Express carrier--to operate a new exclusive fleet of 45 regional jets up and down the East Coast. Combining those elements, Delta fields the largest RJ fleet in the industry.

"There literally are hundreds of markets out there that could not support regular jet service, but 30, 50 and 70 seaters can now bring jet comfort and economic service," said Doug Blissit, Delta's vice president of network analysis. "The RJs are a phenomenal economic transformation of the industry."

Meanwhile, Continental Express in September debuted one of the newer RJs, the 37-seat Embraer ERJ-135. As the launch customer, CO Express immediately deployed the jets on flights from its Cleveland hub to Chicago Midway, Knoxville, Tenn., and St. Louis. It will take delivery of at least 25 of the jets, with another 50 on option. Continental, through CO Express, currently has 55 RJs and 72 turboprops serving its three main hubs: Cleveland, Newark and Houston. By 2004, the carrier expects to have 162 RJs there and no turboprops.

American, too, is pushing hard to develop its regional feeder, American Eagle. Its first ERJ-135 went into service last month and will replace 34-seat Saab turboprops, the workhorses of the fleet. Eagle also operates 39 ERJ-145s and in 2001 also will be the launch customer for the new 70-seat CRJ-700 manufactured by Canadair. The carrier is using the planes to transform Chicago into an all-jet operation. Vice president of marketing Joel Chusid said the strategy is to create fleet commonality at each hub. "Aside from Chicago, we are moving to jets in New York and Dallas, and eventually Los Angeles and San Juan.

AMR chief Don Carty added that the regional market is growing quickly. "A number of these markets are probably markets where we dampened demand by creating an aviation environment where some people preferred not to go or drove instead," he said. "So, some of those markets will grow more quickly. But at that end of the market we have to be careful that we don't get carried away."

Meanwhile, armed with a new and more flexible labor agreement, TWA struck a deal with Chautauqua Airlines to begin regional jet service next summer. The regional carrier, replacing turboprop service, will fly at least 15 new ERJ-145 aircraft to feed TWA's operations in St. Louis and New York JFK.

Brent Garback, chairman and CEO of Total Travel Management in Troy, Mich., calls RJs "hub busters" as they move into alternative smaller airports. "Why go directly at the competition when you can attack their flanks?" he asked. "Most of the major airports are not necessarily located conveniently. RJs can take advantage of these traveler-friendly facilities." Indeed, RJ service now is offered by at least one carrier at alternate airports in and around Boston, Chicago, Dallas, Houston, New York and Washington.

While predicting that regional jets will not have a significant impact in the marketplace until they operate with high frequency, Rolfe Shellenberger of Runzheimer International said RJs are partly contributing to the demise of the hub. "It's the Southwest philosophy: Fly parallel with and not in direct competition," he said. "By going into alternate airports, you are sneaking into the market."

Also, the increased reach of the new planes enables carriers to bypass their traditional hubs and move more toward a point-to-point structure. American Eagle, for example, now flies Dallas-Grand Rapids, Mich., a route that previously had to connect through Chicago. The same is true of Greenville-Spartanburg, S.C., now served directly from Chicago.

"The regional jet capability allows this type of hub busting to happen everywhere," Chusid said. "Smaller markets increasingly are being linked with nontraditional hubs."

While RJs are not a new development in the industry, their presence is more apparent than ever, and all forecasts predict their numbers will rise drastically in the years ahead. The Regional Airline Association, for example, said there were 369 RJs in service at the end of September, compared with just 137 two years earlier. And about 800 more are on order.

Debbie McElroy, speaking earlier this month at the Commuter Regional News Executive Forum in Alexandria, Va., said that 12 percent of all aircraft in regional carrier fleets at the end of last year were jets, while projections put that share at 44 percent in four years. However, McElroy did note a few constraints to RJ growth, including airport and ATC capacity, regulatory costs, environmental issues and labor concerns, including scope clauses that limit the number of RJs a carrier can operate. "In some cases, orders by the carriers for RJs exceed the limitations of their scope clauses," she said, adding that US Airways has proposed to purchase 400 RJs, while its scope clause currently limits it to 35.

Nevertheless, the proliferation of RJs has resulted in an increase in competition. For example, the new fleet types have escalated the New York-Cleveland battle between American and Continental. American Eagle now offers service from both JFK and LaGuardia, while Continental Express flies from JFK, Islip and White Plains, N.Y.

ASA, after building more feed for Delta in Atlanta, then will begin adding frequencies in and out of Dallas, which of course, is AA country. Chusid acknowledged that competitors are moving into several markets and RJs need to be deployed in response.

"The biggest impediment a new carrier would have to overcome in a fortress hub situation is the adding of frequency on any city pair," Garback said. "With RJs, those new carriers can afford to build their business by offering three or four flights each day with 50-seat jet aircraft." Garback said that can lead to 70-seaters, then 100-seaters and upward. "Think of RJs as the development of the light cavalry," he added. "It will allow lightning strikes into their competitors' deepest and most protected territory."

Travel buyers welcome the increased competition. "I am hoping regional jets do invite the carriers into each other's back yards. They seem to have lowered the barriers to entry on certain lower-revenue routes and by doing so invited competition back into those markets," said Bill Patient, travel buyer at Elf Atochen in Philadelphia. "In several of our city pairs, regional jet service has helped us maintain or better our relationship with our preferred suppliers."

While carriers sieze choice opportunities to strike behind enemy lines or establish a beachhead at an alternate airport, the RJ also can serve to bolster an airline's hub operation. According to Blissit, the "vast majority of deployments have been to extend the reach of the hubs with more economical aircraft."

Smaller carriers, such as Midway Airlines, also look to RJs to pad hub operations. Midway's CFO Steven Westberg said the planes have helped make the carrier the largest competitor at Raleigh-Durham, where it accounts for 23 percent of the market. "There is a very clear and measurable benefit to having RJs bring passengers into the hub," Westberg said. "And from Raleigh-Durham, we have been able to add frequency to pre-existing markets and offer new service to smaller ones that had no nonstop flights." Despite its strength at Raleigh-Durham, Westberg is seeing growing competition. US Airways, for instance, has brought its RJs to markets formerly monopolized by Midway. However, Midway has added RJ service to Delta-dominated Atlanta and United's Washington Dulles hub.

Meanwhile, Midwest Express, through its Skyway Airlines affiliate, became the launch customer for the new 32-seat Dornier 328. Five planes will be added to the fleet by year-end, with 10 more on order (<I>BTN</I>, Oct. 4). The carrier already is using the planes on its newest route, Milwaukee-Pittsburgh. However, US Airways fired back by flying RJs between its Pittsburgh hub and Midwest Express's Milwaukee hub.

Aside from hub battles and spoke skirmishes, airlines are using RJs to replace turboprops in scores of smaller markets."There is a whole range of markets that over the past 10 years could not produce enough passenger demand to fill a 120-seat aircraft, especially not with any frequency, and were therefore relegated to turboprop service," said Blissit. "RJs have basically transformed those markets that heretofore could not support that operation."

Steve Tracas, vice president of sales at US Airways, agreed: "There is a customer cry for them and they let you serve markets that you may not have served before."

Chautauqua and Mesa Airlines operate RJs as United Express affiliates. Chautaqua put its first three ERJ-145s in service this fall, with seven more on the way. Mesa flies 14 CRJs for US Airways, and next month will add the Washington-Toronto route. Mesa also operates 16 of the planes for America West Express, with two on order.