Can a potential premium product service be profitable for the airline? This guest post by René Armas Maes assesses the challenges and opportunities of this smaller aircraft.
While many airlines continue upgrading their cabins and replacing smaller planes with larger ones to increase seats per departure to lower CASMs (cost-per-available-seat-mile), United Airlines is trying a very different strategy when it comes to its branded regional jet fleet – at least a portion of it for now.
When Bombardier launched its redefined CRJ550 aircraft (a 50-seater regional jet, three cabin product and a new variant of Bombardier’s CRJ-700 series aircraft) in February 2019, it claimed that airlines can lower seat cost by up to 10 percent when compared to competitors in the same category. In addition, the CRJ550s promise to lower costs due to improved maintenance intervals. Moreover, at 225 lbs. per passenger and about 2 hr. flight time at maximum cruise speed of 0.78Mach, it provides a range of 1,000 nm.
But is there an opportunity to extract premium revenue and make money in the low-density cabin configuration, thin, Point-to-Point (P2P), and high yield market segment?
At least, United Airlines, and its branded affiliate GoJet Airlines, think it is.
In past years, increasing the numbers of seats-per-plane have assisted airlines to overall lower operating cost while being able to compete head-to-head with ULCC/LCC (and even Low-Haul-Low-Cost).
Under-Configured Aircraft’s Under-Performance History
On the other hand, and following a premium-revenue focused strategy to maximize profitability and margins, other airlines have opted not only to upgrading their coach cabins and reducing their seat pitch but also to reconfigure their narrow and widebodies fleets to expand premium economy and business cabins in a number of high yield and strategic markets
But due to past failures in the under-configured cabin strategies, especially for aircraft with less than 100 seats, we have not seen many successful airline operations in regional jet segment. Besides regional jet aircraft operators that target sports teams and the entertainment industry with VIP configurations under charter and semi-scheduled operations, not that many stand-alone airline or airline branded affiliate regional jet operators have explored this side of the business due to its inherited financial risks.
Typically, thin routes with moderately dense-to-low passenger volumes are usually served by smaller regional jets and turboprops. Turboprops being the preferred options below 450 nautical miles due to cost efficiencies.
But thin and under-configured cabin in a high yield P2P regional market bring a number of extra challenges in terms of higher cost per-seat-mile (or kilometer) operations. While smaller regional jets have a lower upfront price point than, say, narrow-body jets, their higher cost of operation is a key route economic factor.
If premium market selection is inaccurate, and revenue and schedule strategies are not properly executed, routes might not be able to sustain on their own, let alone contribute to an airline network. Therefore, and in order to turn a profit, a deployment of an overall higher CASK regional jet product in a thin route is indeed a risky move.
Besides, the ability to capture sufficient premium revenue using a lower density cabin (rather than a narrow-body jets) to balance higher operation costs, have always being a headache for airlines.
On the other side, one can observe what are the benefits of operating a high yield, short haul, P2P service for United Airlines.
1. Combining a direct flight with shorter travel times (when compared to a hub-and-spoke model) with the right schedule in a moderately densified thin and high yield market, one then can observe that United Airlines regional jet strategy work. Not only that, if United Airlines and its branded affiliate have in place a well-focused cost structure, improved labor productivity and fine-tuned CASK route numbers, they might provide the airline an edge and the opportunity to make a route profit and network contribution.
For example, when International Airlines Group (IAG) decided to enter the Long-Haul Low-Cost (“LHLC”) market, it quickly understood that in order to compete head-to-head with other LHLCs and to make a profit, it needed to enter the market with a more streamlined cost structure than current British Airways and Iberia cost structure. In United Airlines regional jet case, it probably found out early on that it was impossible to turn a profit in the regional jet segment with its higher mainline operation cost structure like Delta’s, and American’s did.
2. Operating this type of regional jet in three cabin classes is providing United Airline an opportunity to compete in a more leveled field related to key restrictions on the number of large regional jets it can operate under the current contract and scope clause fleet allowance. In addition, the opportunity to offer a real premium cabin product to put the airline at a competitive advantage to its main regional service competitor - American Airlines and Delta Air Lines, both of which have larger fleets of the aircraft.
3. Furthermore, this could be the right opportunity for United Airlines to align a true premium door-to-door first/business class connecting service product if segmented, targeted, priced, and executed accordingly.
A True First Class Experience
It is no surprise to any airline business traveler that, most of the time, there is an important travel experience disconnect when flying a transcontinental or transatlantic flight with two-to-three cabin class products, versus flying short routes in a branded regional jet affiliate typically operating aircraft with less than 76 seats.
This is due to the fact that mainline operators can typically offer a "true" first/business class experience while other connecting services might offer some sort of business class like experience in a narrow body aircraft or mostly none at all when flying a less than 76 seat regional jets and turboprop services.
Therefore, UA’s three cabin regional jet product (10 First seats, 20 Economy Plus seats and 20 Economy seats) strategy might be a solid one that can finally provide a true and seamless first and business class passenger experience to targeted passengers.
To be successful, UA’s regional jet revenue management, corporate travel agency sales and ancillary revenue strategies aimed at economy plus and economy cabins among others, will need to be exceptionally well executed, watched and fine-tuned carefully to make a profit. However and in order to be profitable, a good portion of the route revenue should come from the first seat cabin where the goal must be to collect between 75% to 85% of the total revenue.
Ultimately, it is going to be very interesting to closely observe what competitors’ reaction might be in terms of pricing, product offering and scheduling among others concerning the first 25 CRJ550 regional jet batch that are and will operate out of Chicago O'Hare and Newark airports.
Time and numbers will tell us United CRJ550 regional jet route economic performance and product sustainability as well as what the overall route and network contributions for the airline are.
About René Armas Maes
René is an International Consultant and Advisory Board Member and Chairman of the Aviation Festival Americas Miami event held each year in Miami, FL. with more than 1,000+ air transportation professionals. He manages a number of global consulting projects with key focus on revenue optimization, cost reduction, business restructuring, strategic planning, and commercial strategy. He is an IATA and Airport Council International instructor. In addition, he is a regular contributor to a number of air transportation magazines in Canada, USA, Europe and Latin America. He can be reached through his LinkedIn page.