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.