United Ditches More 50 Seat Jets, Mesa Takes Hit

If you think back 15 years ago, the 50 seat regional jet was the hot commodity. People seemed to be willing to pay for jet comfort over a turboprop, and airlines raced to add as many as they could. It’s pretty much been all downhill from there. United is the latest to shed more 50 seaters as it failed to renew a contract with Mesa for the 26 CRJs that they operate in United colors. It’s just going to keep getting worse, and the regional carriers are really going to suffer.

South Park fans know that while you can collect as many underpants as you want, it’s the magical second phase that leads to the third phase of profitability. We’ve now learned that buying 50 seat jets is not the second phase:

Key to Airline Unproftability

Independence Air learned the hard way that those little guys couldn’t just magically make money for them. ExpressJet also had troubles flying under their own name. Now it’s not that every 50 seater is unprofitable. It’s just that there are too many of them out there, so they end up flying in really dumb markets where they don’t make any money. That’s why airlines are racing to get rid of them as fast as they can.

Most passengers are glad to see those things go. While travelers hate the cramped sardine can that they encounter on the 50 seaters, they forget that they were complaining about props just before that. Now, props have become much more comfortable with the Q400 and the newest ATRs. And the 70 seat jets are much more spacious as well. Even the CRJ-700 has a bigger cabin with better aligned windows than the 50 seat version, so it’s a more pleasant flying experience.

Of course, the airlines aren’t too concerned about your flying experience but rather that these things burn money. So why not just ditch them? Well they all signed deals with regional carriers to fly them, and they’re just champing at the bit to get out of those deals.

Last week, SkyWest agreed to fly 50 seaters for AirTran, so it seems like someone is interested in these things right? Not really. Instead of AirTran taking all the risk as they would under a regular regional agreement, SkyWest is doing the flying at its own risk. AirTran simply gets to enjoy the benefits of shared revenue. That’s how bad the 50 seat market is. SkyWest, a fairly well run regional, has to resort to these types of deals just to get them in the air.

And now Mesa will be in the same boat since it will have 26 CRJs that used to fly for United sitting on the ground with nothing to do. Sucks to be them. Actually, it REALLY sucks to be Mesa. Little Mesa is currently sporting a $23 million market cap. That’s right. Sell a brand new 737, buy an entire airline. The airline already agreed with United to pull 10 Dash-8 turboprops out of the United system, so these combined reductions mean about a 25% reduction in aircraft flying and an 18% reduction in revenues. In fact, they say this in their Q2 2009 quarterly statement regarding the possible termination of United’s Dash-8 and CRJ leases:

In the absence of obtaining additional capital to fund our operations through equity or debt financings, asset sales, consensual restructuring of the aircraft leases, extend United CRJ-200 and Dash-8 flying, or placing the aircraft with another carrier pursuant to a revenue guarantee contract, our cash flows from operations and available working capital will be insufficient to meet our future capital requirements.

In other words, if we can’t find anyone to take these planes, it we can’t renegotiate with lessors, or if we can’t raise more cash, we’re in trouble. As if that’s not enough, they’ve also been trying to fight off Delta’s attempts to pull out airplanes for quite awhile now as well. Things are not looking rosy for Mesa at all.

This is just going to get worse for the 50 seat operators, and Mesa appears to be feeling it worse than anyone else right now.

30 Responses to United Ditches More 50 Seat Jets, Mesa Takes Hit

  1. Dan Webb says:

    OK, this makes sense now. Those 16 ASA CRJs that are coming online next year will probably be replacing that Mesa flying.

  2. @ Dan Webb:
    Are you referring to the larger RJs ASA will start flying?

    I am glad to see Skywest has enough business sense and wherewithal to get the additional flying for their airlines.

    From a pilot’s perspective, that this flying is moving away from Mesa is a good thing. We absolutely do not want to see people without jobs. However, whenever airline managers proclaim ‘industry standard wages’ as their reasoning that employees should be paid sub-poverty wages, they use Mesa as their example.

  3. A says:

    All those 50 seaters weren’t just to get rid of the props. I thought a lot of if was for added frequency and sometimes reduced capacity on what was historically a mainline route. For example, over the past 5 years or so I’ve seen a lot of routes where NW used to fly DC-9’s being replaced with a CRJ of some size or sort. Also, more recently I’ve had to weed through schedules to find the mainline aircraft flying the route in lieu of the CRJ’s. Recently when I was at YYC all I saw was CRJ’s from the major US carriers. A few years ago they all were flying nothing but mainline aircraft there. So…aren’t those 50 seaters filling in where demand has dropped, but still allow the frequency that business travelers demand?

  4. Andrew says:

    I wonder if long-term we’ll see SkyWest and/or Republic start buying up the remaining few regional carriers just to scuttle them and stabilize that market for themselves (are there any other medium to large regionals?) I don’t know what SkyWest’s balance sheet is like, but assuming Frontier continues to do well for Republic, I could see them waiting a little longer for Mesa to drop to its knees then snapping it up for peanuts.

  5. Dan Webb says:

    @ Greg Thomson:
    Yes and no. :P

    ASA has received 10 CR9s to fly for DL, and as part of that agreement, 20 CR2s leave DL service, so some of those are heading over to UA.

  6. David SFeastbay says:

    Wasn’t the switch from props to small jets because it was thought the public would rather fly on a jet no matter the size then a prop? And airlines switching to regional jets assumed people would fly their ‘jet’ airline over the prop airline.

    Didn’t anyone crunch the numbers or was it because fuel was lower and back then it made sense to have small jets and they would make money?

    I guess it all depends on the plane itself. Years ago I flew TWE (Trans World Express) BOS-JFK-DCA on two different type 50ish seaters they had and one was really roomy that it surprised me. The other I looked down at the seat and wondered where my legs were going to go. Come to think of it, I did/thought that the first time I flew on one of UA’s 50 seat CRJ’s also.

    What goes around comes around as the saying goes, so we are heading back to props for the small flight segments and markets and jets for the longer haul markets.

  7. @ Andrew:
    I would think consolidation would help stabilize the regional side of the industry too.

    Other medium to large regionals- ExpressJet, American Eagle, Pinnacle/Colgan. Of these, I am not sure if ExpressJet would be able to go after other carriers. Don’t think AMR would be interested either. Pinnacle might be in a position though.

    I was in recurrent training about a month ago. The CEO of our airline came in and spoke with us for a couple hours. He mentioned that capacity purchase agreements are becoming less likely and that majors are looking at risk sharing with regional partners now. He specifically mentioned Republic changing their business model. It seems like they will eventually make a go of it completely on their own. I am not sure if they would be in a position to acquire more carriers though as they digest their two recent large acquisitions.

  8. Chuck says:

    From working at a regional, I know the cost pressure the majors put on their regional partners is enormous. At one of my previous (regional) airlines, the former major partner seemed shocked that we were not willing to sign a deal which would have guaranteed we’d be losing money on every flight…but it seems right now nobody is very happy about 50-seat aircraft and is looking actively to replace them. Mesa does have very low costs but they also have reliability issues (cancellation rates, etc.) or at least used to and I imagine this was a factor in United not renewing the contract as well…or perhaps United just wants fewer 50-seat jets flying under its colors.

  9. From 1993 to 2001 I was the editor of Commuter/Regional Airline News, a now-defunct newsletter that was the publication of record for the industry. When I started, Lufthansa and Cincinnati-based Comair were the launch customers for the 50-seat Canadair Regional Jet, an aircraft that at the time everyone thought was a real gamble. I went down to Brazil for the rollout, first flight and first delivery of Embraer’s ERJ-145. Once Comair started showing real success with the CRJ filling in gaps that Delta mainline planes couldn’t do profitably, or doing some hub bypass flying, the race was on to get as many RJs as you could get. The feeding frenzy was nuts, and there were waits up to 2 years for deliveries at one point. So it’s amazing to me to see how far down 50-seat RJs have fallen and how quickly it happened. It dovetails with how the regional airlines are morphing into the haves, the have-nots and the niche players.

  10. David SFeastbay says:

    Chuck wrote:

    At one of my previous (regional) airlines, the former major partner seemed shocked that we were not willing to sign a deal which would have guaranteed we’d be losing money on every flight….

    The majors are turning into flying Walmarts. They want the suppliers (regional airlines) to make almost no money, so they can make more money when selling the service to the traveler.

  11. CF says:

    A wrote:

    All those 50 seaters weren’t just to get rid of the props. I thought a lot of if was for added frequency and sometimes reduced capacity on what was historically a mainline route. For example, over the past 5 years or so I’ve seen a lot of routes where NW used to fly DC-9’s being replaced with a CRJ of some size or sort.

    Certainly that is what has happened over time, but the 50 seaters are not good replacements because the costs are so high. You’re seeing 100 seat DC-9s being replaced by 76 seat Embraer 175s and CRJ-900s. It’s the larger regional jets that are now really the replacements of choice.

    Andrew wrote:

    I wonder if long-term we’ll see SkyWest and/or Republic start buying up the remaining few regional carriers just to scuttle them and stabilize that market for themselves (are there any other medium to large regionals?) I don’t know what SkyWest’s balance sheet is like, but assuming Frontier continues to do well for Republic, I could see them waiting a little longer for Mesa to drop to its knees then snapping it up for peanuts.

    The best thing that could happen to the regional industry is if Mesa and all its excess capacity just goes away. Of course, then there will be a bunch of excess RJs lying around that someone will snap up for cheap. Until those things get turned into beer cans, there will always be someone trying to make it work. SkyWest has a strong balance sheet, so if they wanted to consolidate, they could.

    David SFeastbay wrote:

    Wasn’t the switch from props to small jets because it was thought the public would rather fly on a jet no matter the size then a prop?

    Yeah, Chicago was a really interesting case study. American went all jet in Chicago and United ended up following. Did it make sense? Probably not. A lot of those places could be better served by props, but American already had a black eye from the ATR crash in Indiana in 1994 so it really wanted to get rid of those props.

  12. Dirk says:

    United isn’t parking 50-seaters. They’re simply replacing Mesa. There is an RFP out for the remaining flying which some expect either ASA or XJT to win (some even speculate that the ASA flying is an incremental addition of 50-seat flying to United).

  13. Hmm. I wonder if one of the stronger operators could go in with a company from a developing country to try to pick off Mesa or one of the weak operators. Th US operator gets contracts etc and the foreign company gets the planes which now need to ge out of the US market. Or do they just need to get completely out of the world market?

  14. Craig says:

    Part of the reason for the rapid rise and quick fall of the 50-seat jet is that they offered the major airlines two core applications:

    First, as Benet Wilson notes, the 50 seaters were effective ways to fill out a hub-based network with routes that were too thin for a 737 or to overfly hubs entirely in markets that could command a fare premium. These are still valid uses of a small jet, and I think you’ll continue to see 50 seaters serve these routes (albeit as part of a much smaller overall fleet).

    Second, the 50 seaters allowed the majors to replace mainline capacity with outsourced providers that paid their workers far less than mainline wages. As major airline employees have seen their wages drop such that the cost of operating a 737 is not orders of magnitude greater than that of a CRJ, this second application becomes far less compelling for the majors, and you’ll see the small jets dedicated to these functions culled from the herd.

    Overlaying all of this are fuel prices — it’s easier to justify marginal applications when oil prices are low.

    Going forward, I think you’ll see the retirement of 50 seat jets continue with 85-99 seat jets being the new sweet spot for “regional” service.

    None of this leaves Mesa in a good position. They’ve already got 39 “excess” aircraft, according to the most recent quarterly report (7 CRJ, 12 ERJ, and 20 B1900). None of those are coming back into service anytime soon, and adding the 26 CRJ and 10 Dash 8 that United is dropping to the 22 ERJs that Delta is trying to drop will leave Mesa with 97 of its 178 aircraft without homes (and without revenue).

  15. Dirk says:

    Craig wrote:

    Going forward, I think you’ll see the retirement of 50 seat jets continue with 85-99 seat jets being the new sweet spot for “regional” service.

    I’m not sure how big of a sweet spot that’s going to be. There are no scope clauses that allow flying in that seat range, and latest word is there is no movement on scope from the current round of contract negotiations.

    It’s a gap that certainly needs to be filled, but with 50-seaters at depressed lease rates, they’re becoming cheaper on a seat-mile cost than a new 70-seater. That changes the landscape significantly.

  16. Ouch, their stock took a pretty good hit when the news came out. However when I heard some of the pilots talk at RNO when I used to work for UA they commented on how they needed to have larger aircraft for a better profit margin, and 50 seaters would someday be eliminated, didn’t think it would be this soon.

  17. Randy says:

    Scope clauses prevent 85-99 seats being operating by almost any US carrier in their regional fleet. The only exception is USAirways with 86 seat CRJ-900’s. They are selling some of the 99 seat E-190’s because of scope issues.

    Interesting point that because regional and major salaries have narrowed, that has lessened the drive to outsource aircraft to regionals, but there is still remains a big gap in wages.

  18. jordan says:

    There will ALWAYS be a market for 50 seat jets. Most prefer them over props any day. But of course. Americans have very short memories. They all complained about props back in the 90s. I was at AA when the prop crashed in Indiana! ..and now some are saying they wish to return to them….OR could it be the new mean bean counters forcing it? LOL

    Regardless. Operators like Mesa and others, need to figure out a way to utilise these aircraft. How DUMB can they be! Many smaller airports are crying out for cheap flights! Adopt some type of Southwest operation, get into a town like COS and make a go for it! HP and now US is leaving COS. What? Are the people no longer flying from there? lol

  19. CF says:

    Dirk wrote:

    United isn’t parking 50-seaters. They’re simply replacing Mesa. There is an RFP out for the remaining flying which some expect either ASA or XJT to win (some even speculate that the ASA flying is an incremental addition of 50-seat flying to United).

    Just because United puts out an RFP doesn’t mean it will come to anything. But if it does, I’m sure it will either require at-risk flying (like SkyWest is doing for AirTran) or an upfront cash dump (like ASA is doing for United). In either of those cases, the risk to United is slim if any so they might as well try to bleed the regionals for what they can.

    Nicholas Barnard wrote:

    Hmm. I wonder if one of the stronger operators could go in with a company from a developing country to try to pick off Mesa or one of the weak operators. Th US operator gets contracts etc and the foreign company gets the planes which now need to ge out of the US market. Or do they just need to get completely out of the world market?

    As far as I know, it’s the entire world market. Remember, Mesa went into China in a joint venture with Kunpeng. That was supposed to be a place for Mesa to puts CRJs, but now Kunpeng is flying Embraer 190s instead.

    Randy wrote:

    Scope clauses prevent 85-99 seats being operating by almost any US carrier in their regional fleet. The only exception is USAirways with 86 seat CRJ-900’s. They are selling some of the 99 seat E-190’s because of scope issues.
    Interesting point that because regional and major salaries have narrowed, that has lessened the drive to outsource aircraft to regionals, but there is still remains a big gap in wages.

    The unions are right to focus on scope clauses as the most important piece of the next contract negotiation. That’s clearly where they stand to lose the most if they cave, BUT they also need to realize that wages to fly those airplanes need to fall. This has been a battle between management and labor since the dawn of time, but if they want growth, they’re going to have to accept that those smaller airplanes need to be flown for less.

  20. Oliver says:

    > they’re going to have to accept that those smaller airplanes need to be flown for less.

    I thought those regional pilots already make about the same as your average school bus driver (okay, I didn’t research that, but the numbers thrown around are pretty scary).

  21. CF says:

    Oliver wrote:

    I thought those regional pilots already make about the same as your average school bus driver (okay, I didn’t research that, but the numbers thrown around are pretty scary).

    I meant if the mainline pilots wanted to bring the small jet flying in-house instead of having it outsourced, they would need to be willing to fly for less than they’ve been willing to do it so far.

  22. Wonko Beeblebrox says:

    CF wrote:

    A lot of those places could be better served by props, but American already had a black eye from the ATR crash in Indiana in 1994 so it really wanted to get rid of those props.

    I don’t think AA actually got rid of those ATRs… they just moved them down to San Juan, where they were unlikely to encounter the cold weather that those ATRs faired poorly in. Then AA later downsized the San Juan hub… and didn’t those ATRs end up in DFW and LAX?

  23. CF says:

    Wonko Beeblebrox wrote:

    I don’t think AA actually got rid of those ATRs… they just moved them down to San Juan, where they were unlikely to encounter the cold weather that those ATRs faired poorly in. Then AA later downsized the San Juan hub… and didn’t those ATRs end up in DFW and LAX?

    That’s right. The ATR was criticized for its inability to shed ice adequately in cold winter weather, so American moved them down to where it doesn’t matter – San Juan and Miami to fly around the Caribbean. They did send some back to DFW when they retired the Saabs, but they never came to LAX. The Saabs at LAX were replaced by regional jets.

  24. Andrew says:

    @ jordan:
    Mesa isn’t going to be able to compete on convenience alone when there’s a cheaper option so near by; COS is not even a two hour drive from DEN. With three major airlines using DEN as a significant base, along with the rest of the mainlines that offer some level of service there, it’s unlikely flying from COS (which almost always requires going through DEN anyway) is going to be cheaper. And the flying public loves chasing discount fares; I did it myself all the time when I lived near MSN, but MKE was only a 90 minute drive away. Sometimes I could save $200 or more.

    And if you read the rest of the comments in this thread, the consensus is that it’s difficult to fly a 50 seat jet profitably to begin with — if you’ve got downward pressure on your ticket prices, and you can’t even fill those 50 measly seats because your customers are running to a nearby super-regional or hub airport to hop aboard real planes, you’re screwed.

  25. frank says:

    Mesa Air Group, Inc. Announces Update on CRJ-200s Operating at United Airlines

    http://money.cnn.com/news/newsfeeds/articles/prnewswire/200911061913PR_NEWS_USPR_____LA07280.htm

    Mesa’s security is trading at 16 cents per share. On November 3, US Airways’ CEO indicated Mesa was in “serious trouble”. In addition, Doug indicated US Airways would get out of its “fee for service” agreements once the contracts expired. In my opinion, Mesa is close to a default and a bankruptcy filing, which could cause the Express carrier to lose its US Airways Express contract too.

  26. Ed Casper says:

    I read part of Republic’s latest 10-Q and it seems their new joint venture in Hawaii may very well provide the vehicle for Republic to take over Mesa (in much the same way as they aquired Frontier and Midwest). While I may be reading more into this than what’s there, when all is said and done, there may not be much left of Mesa to take over.

  27. BigSix says:

    The CR2 is a poorly designed A/C from a PAX comfort standpoint. Most FFs loved the jets as they replaced the props but comfort was lacking on the CR2. Bad seats (my butt is sore after a long taxi and I am not a big person – 5’9″, 200lbs) poor sight lines through the windows and no leg or head room on the CR2. Bombardier even saw this coming with the production of the CR9 and the new C series. I still prefer a S340 over a CR2 and will avoid a CR2 if possible and I believe others do the same and the airlines know it. The CR9 is a great improvement as is the E175. Good riddance to the CR2!

  28. dan powers says:

    the crj-200 was not designed from scratch….it was a corporate business jet= the challenger adapted to regional passenger jet. the economics of bizjets is way different than commuter airlines, this is why horizon airlines discoverd the hard way and mainly due to laws of physics…that it was well worth their effort to sell all their CRJ-700 jets and stick with turboprops. it basically fly’s the same weight, and speed at a much lower cost.and with more head and leg room.

  29. Jeffrey says:

    There is no doubt that the CRJ200 has many faults. Low head room, small overhead bins, poor climb performance, and many more; however, it is now the workhorse of the regional airlines. Yes, the majors could improve their bottom line by going to turboprops, but it is hard to move something that is already in place regardless of whether it makes sense or not. The CRJ700 was a step in the right direction, especially with the NextGen series and the CRJ900 is an able airplane as well. I don’t believe that they are going to away anytime soon. As pilots, we have to become more “fuel conscious,” “customer service oriented,” and do the best we can to make it work for the flying public and the companies that hire us to fly until a fitting solution is discovered.

    Regards,

    Jeff
    FlyCRJ.com

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