Delta’s New Pilot Contract Kicks Off the Great Regional Feeding Frenzy of 2012

Last week, Delta’s pilots easily approved a new contract with management that will see a lot more insourcing of flying as well as an upgauging of existing regional airplanes. As I wrote before, this is great for travelers. But if you’re a regional airline, whoa, it’s going to get ugly. The Great Regional Feeding Frenzy of 2012 can now begin. I expect to see some carcasses.

At the end of last quarter, Delta had contracts with regional airlines to fly 353 of the 50 seat jets. (All but 26 are Bombardier CRJ-100/200s. The balance are Embraer ERJ-145s.) This new contract? It has a cap of 125 of those airplanes. Holy shnikes. That’s a lot of airplanes that are going to be collecting dust in the desert.

But this only tells half the story. While the 50-seaters will be slashed, there will be some growth at the top end. The number of 65-69 seat aircraft will stay flat at 102, but the number of 76 seat aircraft will climb from 153 to 223. So these guys will end up fighting for a piece of that business. Here’s how this looks in a fancy chart.

50 seats 65-69 seats 76 seats
Operator CRJ-100/200 ERJ-145 CRJ-700 Embraer 170 CRJ-900 Embraer 175 Total

Chautauqua/
Shuttle America
26 14 16 56

Comair 30 15 13 58

Compass/
GoJet
6 6 36 48

ExpressJet/
SkyWest
156 61 31 248

Pinnacle 141 57 198

Current Total 353 102 153 608

New Target 125 102 223 450

So, let the bloodbath begin! You know these airlines are all going to be crawling all over each other to win that new business, especially since it might be losing a big chunk of the old business. Let’s take a look at each regional, starting with the ones with the most dire futures.

Comair
Cincinnati-based Comair was very early to jump on the regional jet bandwagon and it has paid the price. The airline, though owned wholly by Delta, has seen cut after cut in its fleet. There’s no question that all the 50 seaters here will be gone (and Cincinnati will lose service). The only question is whether the airline will lose its larger aircraft as well and simply disappear. That’s where my money is these days. Delta can likely place the larger aircraft with another operator for less money anyway. There’s no reason to keep Comair flying.

Pinnacle
Memphis-based Pinnacle is currently sitting in the middle of its Chapter 11 bankruptcy reorganization and things don’t look good. Though Delta gave the airline debtor in possession financing to help get out of bankruptcy, the airline is looking at potential doom. It no longer flies for any other airline, so it relies on Delta for life. Delta did reaffirm the airline’s contracts recently, but I wouldn’t bet on that sticking, especially since it alone has more of the 50-seaters with Delta than Delta can have in total. Pinnacle’s current CEO John Spanjers made it clear that existing labor rates aren’t going to win the airline any business. If things don’t change dramatically, I wouldn’t be surprise to see Pinnacle disappear (along with a lot of flights in Memphis). At the very least, it’s going to be a lot smaller.

ExpressJet/SkyWest
I can’t imagine a world where a relationship between SkyWest and Delta doesn’t exist. SkyWest’s relationship with Delta goes way back to the days of Western. When Delta bought Western more than 25 years ago, it inherited the relationship and SkyWest has been the dominant provider for Delta in the West ever since. When SkyWest acquired Atlantic Southeast (now merged with ExpressJet), a long time legacy operator for Delta in Atlanta, the relationship grew further. But the combined airline has a lot of 50-seaters, 156 to be exact, so it is going to lose out to some extent. If I were a betting man, I’d say that SkyWest will get some of that bigger jet flying one way or another. The airline will be a part of Delta’s future, but exactly how many airplanes it will have with the airline when the dust settles remains unclear.

Chautauqua/Shuttle America
Today, Republic-owned Chautauqua and Shuttle America have a fairly small presence at Delta with only 56 airplanes, but I wouldn’t be surprised to see that grow. With only 26 of the 50-seaters at the airline, it doesn’t have much to lose. But it does have a fair bit to gain with the possibility of additional Embraer 170/175 flying. Republic is a good operator that can get aggressive. I would assume it would like to get a bigger chunk of the flying if it could, and I would think it probably has a good chance.

Compass/GoJet
These Trans States-owned airlines are in a nice spot these days. They fly none of the 50-seaters for Delta but Compass (formerly owned by Northwest) has 36 of the big Embraers flying along with 6 CRJ-700s at GoJet. I honestly don’t know a ton about this airline, but it seems like it has nothing to lose here. If anything, it can possibly pick up some more flying as Delta doles out new airplanes.

To me there seems to be a very clear line. Comair and Pinnacle will be lucky to still exist after the dust settles while the rest all can gain something. Of course, this is just the beginning if other airlines try to replicate the Delta contract in some way. There will be blood, oh yes. Oh, and if you ever wanted to buy a 50 seat regional jet, they’re going to be really, really cheap.


42 Responses to Delta’s New Pilot Contract Kicks Off the Great Regional Feeding Frenzy of 2012

  1. Shane says:

    It seems like regional jet manufacturing would have been a good business to be in. Your customers dump their equipment every 5-10 years for various reasons and purchase slightly different version to replace and solve all of their problems. I know the margin on these aircraft must be too small for a large company like Boeing (or Airbus), but perhaps they missed the boat by not manufacturing RJ’s as a volume product, especially since they are now approaching the size of the 717. Boeing could have been a provider for all of its customer needs.

    • CF says:

      Shane – I dunno. They’re dumping a lot more than they’re ordering. So if you still own older aircraft as a manufacturer, then you’re in trouble. But it’s definitely better to be a manufacturer than an operator, that’s for sure.

  2. Maybe Comair and Pinnacle will try to go it alone like Express Jet did, but learn from Express Jets failed attempt and not try and hop-skip-and-jump their way from west coast to east coast and just stick to one area. Or are 50 seat RJ’s just a bad idea these days period?

    • Hunter says:

      Their niche has disappeared with higher fuel costs. Short stages make no sense for a cost perspective, and they simply don’t have the range (nor comfort) for the longer stages that make RJs economically viable. When fuel was cheaper and everyone was excited to get on the RJ bandwagon to ditch propellers they made sense. Now…not so much. It’s just really, really difficult to make them work, and when you do you better believe those margins are razor-thin.

  3. Could there be an opportunity for Comair to completely revise their business model? Maybe reconfigure all of their aircraft into business jets (Challenger 800s) and set up operations throughout the US or even Asia/Latin America?

    • Felix says:

      I don’t think Delta wants or even has to commit the time and resources to craft a new business model for Comair. The capital necessary to reconfigure is expensive and Netjets and others already have the base and marketing experience.

    • CF says:

      I’m with Felix. Delta owns Comair and isn’t going to want to try to do anything fancy. It doesn’t need to lose any more money. Besides, Delta already has Delta Private Jets.

  4. Fred says:

    Any idea on where the smaller-sized RJs will be pulled from or where the new large ones should be based? It would make sense to just add/remove them from whatever carrier operates from the airport they are/were based at (SkyWest for SLC, Comair for CVG, Compass for MSP etc…) rather than move carriers around.

    • Hunter says:

      DL will care less about which carrier is located where, and more about placing the new aircraft where they make the most sense. Simply removing a 50 and putting in a 70 won’t always make sense depending on the market, etc. Really, while regional presence makes sense for the contracter carrier based on infrastructure, etc., DL doesn’t really care as long as the contract terms are favorable to them.

    • CF says:

      I’m with Hunter on this. Delta learned long ago not to place all its eggs in one basket. The Comair strike in Cincinnati shut the place down so it’s better to diversify. Still, I’m sure Memphis and Cincinnati are in trouble here.

  5. Sanjeev M says:

    Yes, may the 50 seat regional jet die. At least DL has a sensible policy of no 50 seaters over 750 miles.

    DL is making all the right moves and they’re doing things fast. UA and AA better watch out.

  6. Daninstl says:

    Seems to me that markets that use the smaller jets will have less flights to choose from. It will also be interesting to see how the other airlines compete for those small passenger routes.

  7. Things are going to get pretty ugly in the whole regional airline space. One saving grace for pilots and airlines could be the alleged shortage of young pilots I’ve read about.

    • CF says:

      DesertGhost – shortage of pilots, yes. But there will be a lot fewer pilots needed in a scenario like this.

      • Greg says:

        CF – there will be fewer pilots needed at the regional level – however, the capacity simply isn’t going to just disappear – at least some of these jobs will be shuffling to major level.

        That being said, I don’t put much weight behind the ‘pending pilot shortage.’

        • CF says:

          Greg – You have Delta shedding a net of 158 regional aircraft and only adding 88 mainline. So you are definitely needing a lot fewer pilots for that. Sure, there will be some opportunity on the mainline but a lot more will lose their jobs on the regional level.

  8. George says:

    Actually if you look at all the hubs except ATL, almost half the flights are on the 50 seaters. Indeed the ratio at all the hubs except ATL, is about 25 per cent mainline and 75 percent regional. ATL is just the opposite. I’m still willing to bet that Pinnacle will become the only 50 seat flier for DL. Doing some quick math with the addition of the 717’s and the new 76 seaters there is still about 200 airframes down. MEM and CVG cut-how about a radical system wide re-work on the entire schedule, and try to stop trying to connect everyone and his brother thru ATL. Come on DL, you’ve got 5 other hubs plus the weird NYC 2 airport model, plus big ops in BOS and RDU plus is LAX going up or down? DL can’t seem to make up its mind on that.

    • Hunter says:

      I can’t see OO giving up all their 50 seaters, even if they do snag some additional 900s out of the deal. The 50 seat operation in SLC is pretty big.

  9. Mike says:

    these 50 seat contracts are still running till ~2020 right?
    so delta wont just pull them. (would assume there are penalties if they choose to walk away from the planes)
    so im guessing its more like adjusting a current contract as opposed to bidding on new flying –> that would mean the new planes would go to ones that operates 200s at the moment? (besides poor comair)

    • CF says:

      Mike – I’m not sure what kind of flexibility Delta has with its contracts. But Pinnacle is in bankruptcy so there’s a lot that can happen there in particular. Others may have the option to swap out from smaller to larger airplanes.

  10. Fred says:

    I agree with Cranky on Comair. The carrier will simply disappear. The pilots’ strike in 2001 may have achieved short-term gains, but it put Comair at a cost disadvantage that was simply too great to overcome.

  11. Lucky777 says:

    Pinnacle and ComAir will both be casualties of this.

    MEM and CVG will continue to lose Delta flights and should be officially named focus cities for DL.

    Memphis will be hurt even more with about 600 headquarters staff out of a job, and vacant downtown office space the company just relocated to last year with large tax breaks! No, things don’t look good for Pinnacle or for the city of Memphis.

  12. Ace says:

    I am surprised no one is looking at large turboprops such as the Q400 to replace the smaller RJ’s. They are much more economical for short/mid haul and are just as fast. The noise reduction technology is advanced and these aircraft can be as much or more comfortable than the RJs they could replace. After all, turboprops are just higher bypass, unshrouded turbofans. They are actually safer in the event of a go-around as thrust is available at once.

    Or is it that the travelling public sees anything with a propeller as a WW II relic?

    • Fred says:

      In this case, I’d think that having a simple/common fleet (only CRJ900s or E175s) is more beneficial than adding a few Q400s here and there. The E175 is also quite efficient, which helps.
      Then again, if they somehow got a carrier to fly only the Q400 like Horizon it would be interesting…

      • Mike says:

        Ace,
        seems likely the looked at them. so why turn them down? maintenance seems to be a continuing issue with the Q400, possibly also high price.
        that would be in line with lack of large orders in other regions (except for canada…).
        if thats true, what stops US carriers from picking up the ATR which seems to have had a good run internationally…?

        • DL’s regionals used to fly a bunch of ATR72s out of ATL about 10 yrs ago, I would guess ASA but am not sure.

          Doesn’t UA (not sure which regional carrier) fly a fair amount of Q400s (legacy CO from EWR)?

          • CF says:

            Yes, it was ASA out of Atlanta, but those were earlier generation ATRs. The newest versions (ATR72-600 and ATR42-500) are much better airplanes. United has a small subfleet of Q400s that are currently flown by Pinnacle. Those are now going to be flown by Republic.

  13. George says:

    Me again. Did a little more digging and looked at Detroit. 550 total departures of which about 140 are mainline, 100 are CR-700’s and above and a huge 310 are the 50 seaters. It’s not just MEM and CVG going to shrink-all the hubs will shrink except ATL, which has about 700 mainline a day, and fewer than 50 50 seaters. When this is all over, there will be between 600-800 fewer flights per day system wide. Divide that by 5 hubs (Exclude ATL) that comes out to 120-160 less flights per day per hub. If that’s the case MEM and CVG are completly closed, SLC is a focus city, and DTW and MSP have a good haircut, except DL has a contract with MSP and the state of MN stating a minimum 0f 400 daily flights at MSP of which 200 have to be 70 seaters or above. With that being the case, DTW ends up being the new CVG-shrunk big time. That’s the simple, quick explanation. Do I think that’s what is going to happen-no. Do I have a clue on what will really happen-not really. DL has been very surprising lately-I’m sure there is more to come.

    • Ben says:

      What about the 88 Boeing 717s from AirTran/Southwest? Shouldn’t that plus a higher ratio of larger RJ’s equate to roughly the same capacity as today (at the cost of fewer flights).

      Personally, It would be great to see a balancing between all of DL’s hubs…is that going to happen…no. I think MEM is going to end up with next to nothing and CVG will be dwindled to a focus city by 2015. DTW will end up with roughly 450 flights a day, and ATL, SLC and MSP will be largely untouched.

    • Larry says:

      DL minimum number of flights at MSP under their lease is 360, not 400. Also, they ended their employment obligations with the state when paid off the old NWA loans last year.

  14. CF, do you expect this to result in legal battles between DL and the regional operators? I can’t see the regionals giving up their contracts easily.

    • CF says:

      Nick – I expect creative negotiation. It would be one thing if it just wanted to slash and burn, but it has a carrot to dangle in the form of new 76 seat jets. So it is undoubtedly going to try to get SkyWest to drop a bunch of those 50 seaters in exchange for getting some of the 76 seat business.

      The Pinnacle stuff is even more interesting since I believe Delta owns those 50 seaters itself. Not sure how to work through that web.

  15. dan powers says:

    It appears the new 76 seaters will be CRJ-900 not emb-170 or -175…there are are few companys in canada that convert crj-200 to corporate jets…

    • CF says:

      Where did you see they will be CRJ-900s? They couldn’t be Embraer 170s but the 175s are what they use today on many routes.

  16. dan powers says:

    because the deal to return the massive amount of CRJ-200´s to Bombardier is based on purchasing 70 brand new CRJ-900´s

    • CF says:

      Again, where are you hearing this from? I’m sure Embraer would be happy to take the CRJ-200s as well, just as Boeing has done with A340s to win new 777 business. I’m not suggesting what you’re saying can’t happen, but I’m curious if this is just a rumor or speculation or if you have access to insider info.

  17. Eric says:

    At some point a DCI carrier that leases its own 50 seaters will be required to break a contract early. I don’t think any of the contracts expire soon enough for Delta to meet the cap otherwise. That’s going to require bribery on the part of Delta, no doubt trading 76 seat aircraft on long-term contract for removal of 50 seaters.

    I’m wondering if this won’t be a replay of the Atlantic Coast debacle of 2003. United wanted major fee cuts on 50 seat aircraft from ACA (despite the contract having nearly a decade left on it) and offered 70 seat aircraft as the carrot. ACA balked, the planes went elsewhere, and ACA was left holding a bag of futureless tin cans.

    SkyWest doesn’t have a lot of room to cut fees, and they’re getting to be one of the more expensive players, especially as they face longevity disparity against GoJet and Compass. In a low-bidder war for the remaining 50 flying SkyWest might not beat a desperate, bankrupt Pinnacle, especially if Pinnacle counts in its favor the cost of breaking leases on planes which Delta owns. If SkyWest wins, Delta eats those costs. What SkyWest does have in its favor is the ability to finance new planes without touching Delta’s capital, and the only CF-34 engine shop not owned by GE.

    I wonder how Delta views the E-175 compared to the CRJ-900. They put such an emphasis on passenger experience and having DCI->mainline commonality that I wonder if the E-jet and its higher costs will be preferred over the CRJ and its narrow seats and valet bags.

  18. RLH says:

    GoJet Airlines operates 12 CRJ 700’s for Delta, not 6.

    • CF says:

      RLH – I am going from the last Delta quarterly filing with the SEC. In there, it says there are 6 CRJ 700s operating for Delta by GoJet. If it increased to 12, it must have happened after March 31.

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