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:
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.
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30 Comments on "United Ditches More 50 Seat Jets, Mesa Takes Hit"
OK, this makes sense now. Those 16 ASA CRJs that are coming online next year will probably be replacing that Mesa flying.
@ 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.
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.
@ 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.
Chuck wrote:
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.
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).
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?
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.
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.
> 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).
Oliver wrote:
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.
CF 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?
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.
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.
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.
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